\1098\ See also ARA August 2018 Letter; EPI Letter; Better
Markets August 2018 Letter; St. John's U. Letter; Charney Letter;
Agerbak Letter; CFA August 2018 Letter.
    \1099\ See Bergstresser et al. (2009), supra footnote 1048; Del
Guercio & Reuter (2014), supra footnote 1081; Christoffersen et al.
(2013), supra footnote 1081. A number of commenters, regarding the
DOL RIA, indicated that both the CEA Study, supra footnote 1081, and
the DOL RIA, supra footnote 1002, misinterpreted estimated effects
described in the Christoffersen et al. (2013) paper, and overstated
the potential harm associated with funds with high excess loads by
more than double the actual estimate had the interpretation been
correct. See Craig M. Lewis, The Flawed Cost-Benefit Analysis
Underlying the Department of Labor's Fiduciary Rule (White Paper,
Aug. 2017), available at https://www.sec.gov/comments/ia-bd-conduct-standards/cll4-2268185-160965.pdf; Public Interest Comment from Mark
Warshawsky & Hester Peirce, George Mason University Mercatus Center
(Apr. 17, 2017), available at https://www.mercatus.org/system/files/warshawsky-dol-fiduciary-rule-pic-v1.pdf. See also Curtis (2018),
supra footnote 1054.
    \1100\ See CEA Study, supra footnote 1081, and DOL RIA, supra
footnote 1002.
    \1101\ See CEA Study, supra footnote 1081.
---------------------------------------------------------------------------

    The level of underperformance due to fund selection is highly
sensitive to the data sample, including the sample period, as well as
the methodology employed to calculate performance. Many of the studies
used to support the analyses underlying the CEA Study and the DOL RIA
rely on data obtained prior to 2011. However, since 2011 there have
been a number of advances in the market for mutual funds (e.g., shifts
from load to no-load funds and increase in no-load funds without 12b-1
fees), likely leading some of the inferences drawn from those studies
to be dated and not reflective of the current market environment.\1102\
A number of commenters indicated potential flaws associated with the
approach and interpretation of the analyses used by the CEA Study and
the DOL RIA.\1103\ One study updates the Del Guercio and Reuter (2014)
sample using data from between 2003 and 2012 and tests the robustness
of the methodology by examining the underperformance of broker-sold
funds relative to direct-sold funds.\1104\ While underperformance of
broker-sold funds still existed, depending on the methodology and
empirical approach used, the underperformance of these funds was
reduced to between 20 bps and 70 bps, with the majority of the
estimation approaches falling to between 20 bps and 50 bps, indicating
a reduction in the underperformance of broker-sold funds relative to
earlier studies.\1105\ Another study replicates the Christoffersen et
al. (2013) analysis of excess loads on underperformance using data from
between 2010 and 2017, and finds that after 2010, funds with high
excess loads did not underperform funds with low excess loads, which
the authors interpret as evidence that financial professionals have
improved their recommendations over time.\1106\ Taken together, these
recent studies on fund selection suggest that the magnitude of
potential investor harm likely is not as large as that estimated by the
CEA Study and the DOL RIA when more recent data is used to compute the
underperformance of broker-sold mutual funds.
---------------------------------------------------------------------------

    \1102\ See ICI Letter and Section III.B.2.e.ii, supra.
    \1103\ See Lewis (2017), supra footnote 1099; Warshawsky &
Peirce (2017), supra footnote 1099. See also Curtis (2018), supra
footnote 1054. To date, only one academic study of which we are
aware (Curtis (2018)) has analyzed the DOL Fiduciary Rule and the
DOL RIA, and discusses issues with the approach taken by the DOL RIA
in estimating the benefits and costs of the DOL Fiduciary Rule,
noting that the DOL RIA likely underestimates the potential costs of
the rule. This study also indicates that the net benefits of the DOL
Fiduciary Rule are expected to be close to zero because the DOL
Fiduciary Rule may not completely eliminate conflicts of interest
and the actual cost of investment advice at the intermediary-level
was excluded from the DOL RIA computation of benefit. Once the
calculation accounted for costs of advice, Curtis (2018) estimates
that the total costs attributed to conflicts of interest, including
underperformance of some securities, is only slightly higher than
the costs associated with advice that is free of conflicts.
    \1104\ See Reuter (2015), supra footnote 1095.
    \1105\ Reuter (2015), supra footnote 1095, states that ``[t]hese
changes suggest that the average broker-sold fund has become more
competitive with the average direct-sold fund''; however additional
research would be required to determine if these changes are driven
by existing fund families, new fund families, or some combination of
factors. When performance is value-weighted, Reuter (2015) discusses
that brokers appear to direct clients toward funds that pay
``higher-than-average distribution costs.''
    \1106\ See Sethi et al. (2019), supra footnote 1093. The authors
note that the underperformance of high excess load funds becomes
statistically insignificant in the analysis only with the inclusion
of prior-year performance of the fund (which Christoffersen et al.
(2013), supra footnote 1081, include in one of their models). The
authors suggest that the reduction in flows to funds with excess
loads could be due in part to the DOL Fiduciary Rule; however, they
also note that their analysis does not reveal a clear association
between the DOL Fiduciary Rule and returns. The authors further cite
to Holden et al. (2018), supra footnote 955, which discusses the
shift away from load mutual funds to no-load funds over time. See
also ICI Letter; Morningstar Letter; Morningstar Letter Supplement.
---------------------------------------------------------------------------

    Another recent study replicates and extends the Friesen and Sapp
(2007) and Bullard et al. (2008) analyses of market timing ability by
investors in mutual fund sales and purchases to newer data (2007
through 2016).\1107\ The study shows that the difference between dollar
returns and buy-and-hold returns (``performance gap'') declined from
1.56% between 1991 and 2004 to 1.01% between 2007 and 2016 for a
combined sample of load and no-load funds, suggesting a moderation in
market timing errors in the most recent period. However, the excess
performance gap (the difference between the performance gap on load
funds and no load funds) has slightly increased between 2007 and 2016,
from approximately 1% to 1.12%, indicating that, to the extent that
load funds are sold by financial professionals and that all inflows and
outflows are due solely to market timing motivations, investors who
hold load funds are more prone to market timing errors than investors
in no-load funds, and these errors are not being corrected by financial
professionals. The studies discussed above acknowledge that
interpretation of the empirical result that broker-sold funds
underperform direct-sold funds is subject to another caveat because
there is likely to be a selection bias in the type of investor that
utilizes the direct-sold fund channel relative to those investors who
rely on financial professionals for advice and recommendations about
which funds to purchase. A similar selection bias is likely to exist
for investors who purchase no-load funds versus those that purchase
load funds from financial professionals. For example, although numerous
studies discussed above suggest that financial advice is more likely to
be obtained by older, more financially sophisticated, and wealthier
investors,\1108\ Chalmers and Reuter (2015) observe that younger, less
financially experienced, and less wealthy investors are more likely to
buy broker-sold funds.\1109\
---------------------------------------------------------------------------

    \1107\ See Karthik Padmanabhan, Constantijn Panis, & Timothy
Tardiff, The Ability of Investors to Time Purchases and Sales of
Mutual Funds (Working Paper, Nov. 1, 2017) (see also Department of
Labor April 2019 memo). See, e.g., Bullard et al. (2008), supra
footnote 1089; Friesen & Sapp (2007), supra footnote 1089.
    \1108\ See supra Section III.B.3.a.
    \1109\ See supra footnote 1042.
---------------------------------------------------------------------------

    Beyond mutual funds, a nascent literature is emerging on other
securities that may be prone to conflicts of interest by financial
professionals.\1110\ Recent

studies have examined potential conflicts of interest in markets for
more complex investments, including reverse convertible corporate bonds
and non-traded REITs. One study uses a sample of reverse convertible
corporate bonds that differ only in the financial incentives provided
to financial professionals and the coupon rate, and finds that
investors are more likely to purchase--based on the advice given--the
inferior bond (lower coupon, all else equal) with the higher ``kick-
back'' to the broker-dealer, which appears to be driven by conflicts of
interest between the financial professional and the investors.\1111\ In
an examination of non-traded REITs, one study documents that retail
investors in non-traded REITs underperformed by over $45 billion
relative to a portfolio of traded REITs, and that nearly one-third of
that underperformance was driven by upfront fees used to compensate
broker-dealers.\1112\
---------------------------------------------------------------------------

    \1110\ Some commenters (see, e.g., CFA August 2018 Letter; AARP
August 2018 Letter; EPI Letter) also provided studies about
conflicts of interest in 401(k) plans which have shown that (i) plan
sponsors tilt securities toward high-cost securities (see Ian Ayres
& Quinn Curtis, Beyond Diversification: The Pervasive Problem of
Excessive Fees and ``Dominated Funds'' in 401(k) Plans, 124 Yale
L.J. 1476 (2015)); (ii) plans have inadequate or excessive
investment choices (see Edwin J. Elton, Martin J. Gruber, &
Christopher R. Blake, The Adequacy of Investment Choices Offered by
401(K) Plans, 90 J. Pub. Econ. 1299 (2006); Sheena Sethi-Iyengar,
Gur Huberman, & Wei Jiang, How Much Choice is Too Much?
Contributions to 401(k) Retirement Plans, in Pension Design and
Structure: New Lessons from Behavioral Finance (Olivia S. Mitchell &
Stephen P. Utkuss eds., 2004)); (iii) plans may include proprietary
funds even when other funds perform better (see Veronika K. Pool,
Clemens Sialm, & Irina Stefanescu, It Pays to Set the Menu: Mutual
Fund Investment Options in 401(K) Plans, 71 J. Fin. 1779 (2016));
and (iv) funds included in 401(k) plans underperform passive
benchmarks by approximately 31 bps annually (see Edwin J. Elton,
Martin J. Gruber, & Christopher T. Blake, How do Employer's 401(K)
Mutual Fund Selections Affect Performance?, Ctr. for Retirement
Research at Bos. Coll., Issue in Brief No. 13-1 (Jan. 2013),
available at https://crr.bc.edu/wp-content/uploads/2013/01/IB_13-1-508.pdf).
    \1111\ See Egan (2019), supra footnote 1068.
    \1112\ See Craig McCann, Fiduciary Duty and Non-Traded REITs,
Investments & Wealth Monitor, July/Aug. 2015, at 39, available at
https://www.slcg.com/pdf/workingpapers/Fiduciary%20duty%20and%20Non-traded%20REITs.pdf. See CFA August 2018 Letter.
---------------------------------------------------------------------------

    Finally, although a significant amount of empirical evidence
suggests that there may be investor harm due to conflicts of interest
between financial professionals and investors, because of changes to
the mutual fund industry (e.g., shifts from load to no-load funds and
the introduction of new share classes),\1113\ increased
competition,\1114\ and the anticipation of regulation designed to
ameliorate potential conflicts of interest, several new studies
indicate that potential harm to investors arising from conflicts of
interest may be declining.\1115\ One survey paper concludes that
although the empirical evidence is consistent with financial
professionals having conflicts of interest that may harm consumers,
``none of the articles concludes that clients would have been better
off by foregoing advice. Even if people receive lower returns . . .
consulting with an advisor may provide intangible benefits that
consumers value,'' and ``it is important to bear in mind that these
studies may have data limitations and in general cannot account for
selection issues and the intangible benefits that investors receive
from financial advisors.'' \1116\
---------------------------------------------------------------------------

    \1113\ See ICI Letter and Holden et al. (2018), supra footnote
951. See also Capital Group Letter; Money Management Institute
Letter; FPC Letter at footnote 73. As noted above, innovations,
including the introduction of T and clean share classes of funds may
reduce the expected fund underperformance net of costs for retail
investors relative to A shares by nearly 50 basis points annually.
See supra footnote 1021 and accompanying text. See also supra
footnote 1020 and accompanying text.
    \1114\ See LPL December 2018 Letter; Morgan Stanley Letter
(which discuss the migration to open architecture platforms).
    \1115\ See Reuter (2015), supra footnote 1042; Sethi et al.
(2019), supra footnote 1093. See also CFA August 2018 Letter; EPI
Letter; Morningstar Letter; Morningstar Letter Supplement. We
include recent studies provided by commenters to present the current
baseline of empirical findings on potential investor harm stemming
from conflicts of interest.
    \1116\ See Burke et al. (2015), supra footnote 1059. The DOL
RIA, supra footnote 1002, and some commenters, however, have stated
that no advice is a better alternative to advice subject to
conflicts of interest. See also EPI Letter; Betterment Letter; PIABA
Letter; CFA August 2018 Letter. The DOL RIA suggests that investors
who obtain advice subject to conflicts of interest are worse off due
to the costs associated with obtaining such advice (e.g.,
underperformance) than had they not sought or received advice at
all.
---------------------------------------------------------------------------

4. Trust, Financial Literacy, and the Effectiveness of Disclosure
    A number of commenters stated that the Proposing Release did not
sufficiently address how issues related to trust in financial
professionals, investors' level of financial literacy or
sophistication, and limitations on the effectiveness of disclosure
likely exacerbate the problems of information asymmetry and potential
conflicts of interest between retail investors and financial
professionals.\1117\ In order to address commenters' concerns, we
examined and discuss below both academic and industry research on how
trust and financial literacy could affect the recommendations provided
by financial professionals to retail investors, as well as the
effectiveness and limitations of disclosure in ameliorating potential
conflicts of interest.
---------------------------------------------------------------------------

    \1117\ See AARP August 2018 Letter; CFA August 2018 Letter; FPC
Letter; Rhoades December 2018 Letter; EPI Letter.
---------------------------------------------------------------------------

a. Trust in Investment Advice
    In seeking financial advice, a retail investor places not only
money but also trust in a financial professional. Commenters stated
that retail investors will follow the advice of their ``trusted
advisors,'' because they believe ``financial professional[s] will place
the investor's financial interest before his or her own.'' \1118\
Moreover, one industry study of over 800 investors notes that ``96% of
U.S. investors report that they trust their financial professional and
97% believe their financial professional has their best interest in
mind.'' \1119\ Academic studies have explored the issue of trust and
how it affects financial decisions of investors. Studies in this strand
of academic literature find that higher levels of trust increase
investors' propensity to seek investment advice and hire financial
professionals,\1120\ increase levels of stock market
participation,\1121\ and increase willingness to take on higher-risk
investments.\1122\ Regarding the importance of trust in established
advice relationships, some studies find that trust in financial
professionals is greater when investors have lower financial literacy
or when purchasing complex products, such as insurance products.\1123\
Further, as trust in

financial professionals grows, investors may be more likely to delegate
all investment decisions to the financial professional, irrespective of
their level of financial education.\1124\
---------------------------------------------------------------------------

    \1118\ See Letter from Christine Lazaro, President, PIABA (Dec.
7, 2018) (``PIABA December 2018 Letter''). See also, e.g., Rhoades
December 2018 Letter; Gross Letter; Letter from William W. McGinnis,
W. McGinnis Advisors (Aug. 7, 2018) (``McGinnis Letter''); EPI
Letter; Betterment Letter; State Attorneys General Letter; Better
Markets August 2018 Letter; OIAD/RAND (providing a survey on
academic literature on trust). One survey notes, however, that
approximately 15% of survey participants do not consult with
financial professionals because they ``don't trust them.'' See
Cetera November 2018 Letter.
    \1119\ See CCMC Letters. See also Center for Capital Markets
Competitiveness, Working with Financial Professionals: Opinions of
American Investors (2018), available at https://www.centerforcapitalmarkets.com/wp-content/uploads/2018/04/CCMC_InvestorPolling_v5-1.pdf.
    \1120\ See Jeremy Burke & Angela A. Hung, Trust and Financial
Advice (RAND Labor & Population, Working Paper No. WR-1075, Jan.
2015), available at https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-regulations/proposed-regulations/1210-AB32-2/trust-and-financial-advice.pdf. This study indicates
that increased financial trust is associated with higher levels of
both seeking and following investment advice. See also AARP August
2018 Letter; FPC Letter; CFA August 2018 Letter.
    \1121\ See Luigi Guiso, Paola Sapienza, & Luigi Zingales,
Trusting in the Stock Market, 63 J. Fin. 2557 (2008). Guiso et al.
(2008) find that higher levels of trust in financial professionals
by investors is associated with a 50% increase in the probability of
buying stocks and a 3.4% increase in the proportion of equity
investments in the aggregate portfolio. See Rhoades December 2018
Letter.
    \1122\ See Nicola Gennaioli, Andrei Shleifer, & Robert Vishny,
Money Doctors, 70 J. Fin. 91 (2015). This study suggests that
increased trust in financial professionals by investors alleviates
anxiety in undertaking higher-risk investments (e.g., equities)
(included because they capture aspects of the benefits of higher
levels of trust in financial professionals by retail investors that
are not captured by the studies suggested by the commenters).
    \1123\ See Thomas Pauls, Oscar Stolper, & Adreas Walter, Broad-
Scope Trust and Financial Advice (Working Paper, Nov. 17, 2016),
available at https://www.researchgate.net/publication/314235638_Broad-scope_trust_and_financial_advice; David de Meza,
Bernd Irlenbusch, & Diane Reyniers, Disclosure, Trust and Persuasion
in Insurance Markets (IZA Discussion Paper Series, No. 5060, July
2010), available at http://repec.iza.org/dp5060.pdf. See also OIAD/
RAND, which shows that investors most likely in need of investor
protection (e.g., financially unsophisticated) are most likely to
place their trust in financial professionals. See also Letter from
AFL-CIO et al. (Dec. 7, 2018) (``AFL-CIO December 2018 Letter'').
    \1124\ See Riccardo Calcagno, Maela Giofre, & Maria Cesira Urzi-
Brancati, To Trust is Good, but to Control is Better: How Investors
Discipline Financial Advisors' Activity, 140 J. Econ. Behav. & Org.
287 (2017). See OIAD/RAND.
---------------------------------------------------------------------------

    Several commenters stated that some financial professionals respond
to the trust that retail investors place in them by acting on their
conflicts of interest, which could benefit the financial professional
at the expense of the investor.\1125\ In addition, some studies have
shown that higher levels of trust by retail investors can provide
incentives for financial professionals to provide conflicted investment
advice or undertake actions that benefit themselves at the expense of
their customers. For example, one study found that because investors
trust their financial professionals to provide higher ex ante expected
returns on their risky investments, firms employing those professionals
increased fees above levels that, in the author's view, were consistent
with a competitive equilibrium, resulting in lower ex post net returns
to investors.\1126\ Further, this study documents that, although a
relationship with a trusted professional can encourage investors to
invest in financial markets when it is efficient for them to do so, in
some cases financial professionals may instead provide more conflicted
investment advice or inefficient advice in order to satisfy the desires
of investors who trust them (e.g., undertaking lottery-like behavior by
investing in the riskiest securities).\1127\ Although trust in
financial professionals can help alleviate certain behavioral biases
and encourage participation in the securities markets, one commenter
stated that ``[r]etail customers who place their trust in salespeople
that market services as acting in their best interest can end up paying
excessively high costs for higher risk or underperforming investments
that only satisfy a suitability standard, not a fiduciary standard.''
\1128\
---------------------------------------------------------------------------

    \1125\ See, e.g., Rhoades December 2018 Letter; EPI Letter;
Better Markets August 2018 Letter.
    \1126\ See Calcagno et al. (2017), supra footnote 1124.
    \1127\ See id.
    \1128\ See AARP August 2018 Letter. See also PIABA Letter; St.
John's U. Letter. See also Joseph C. Peiffer & Christine Lazaro,
Major Investor Losses Due to Conflicted Advice: Brokerage Industry
Advertising Creates the Illusion of a Fiduciary Duty, PIABA Report
(Mar. 25, 2015), available at https://piaba.org/sites/default/files/newsroom/2015-03/PIABA%20Conflicted%20Advice%20Report.pdf.
---------------------------------------------------------------------------

b. Financial Literacy and Investment Advice
    As discussed above, financial literacy affects those who seek
investment advice from financial professionals. One commenter noted
that ``[a]s consumers move closer to retirement, they may be more
vulnerable to the negative impact of advice that is not in their best
interest for three reasons: (1) The assets they have to invest are
larger; (2) they may lack strong financial literacy skills; and (3)
reduced cognition may affect financial decision making.'' \1129\ A
number of studies have shown that financial literacy is significantly
related to retirement planning and wealth accumulation by retail
investors.\1130\ Generally, studies find that investors who are more
financially literate or sophisticated are more likely to seek
investment advice and are more likely to follow that advice than less
financially sophisticated investors.\1131\ Further, one study shows
that investors with lower financial literacy who do not seek investment
advice underperform investors with higher financial literacy who seek
investment advice by more than 50 bps on average, and these losses are
predominantly driven by under-diversification of their
portfolios.\1132\
---------------------------------------------------------------------------

    \1129\ See AARP August 2018 Letter.
    \1130\ See, e.g., Jere R. Behrman et al., Financial Literacy,
Schooling, and Wealth Accumulation (Nat'l Bureau of Econ. Research,
Working Paper No. 16452, Oct. 2010), available at https://www.nber.org/papers/w16452.pdf; Hans-Martin von Gaudecker, How Does
Household Portfolio Diversification Vary with Financial Literacy and
Financial Advice?, 70 J. Fin. 489 (2015) (included in response to
comment letters that expressed views about limited financial
literacy by some retail investors).
    \1131\ See supra Section III.B.3. See also Riccardo Calcagno &
Chiara Monticone, Financial Literacy and the Demand for Financial
Advice, 50 J. Banking & Fin. 363 (2015), who observe that investors
with lower levels of financial literacy are less likely to consult
advisers and avoid risky assets; however, when they do seek advice,
they generally delegate investment decisions to their financial
professionals. Lusardi & Mitchell (2011) indicate that investors who
are more financially sophisticated are more likely to plan for
wealth accumulation and be successful in their planning. See
Annamaria Lusardi & Olivia S. Mitchell, Financial Literacy and
Planning: Implications for Retirement Wellbeing (Nat'l Bureau of
Econ. Research, Working Paper No. 17078, May 2011), available at
https://www.nber.org/papers/w17078.pdf. See AARP August 2018 Letter.
    \1132\ See von Gaudecker (2015), supra footnote 1130. This study
finds that losses borne by investors with lower financial literacy
are predominantly driven by under-diversification of their
portfolios.
---------------------------------------------------------------------------

    A number of studies link retail investor demographic
characteristics to financial literacy and document that financial
illiteracy, although widespread, is most significant among investors
with lower levels of educational attainment, women, and
minorities.\1133\ Moreover, many studies have examined the relationship
between age, cognition, and financial literacy, and have shown that
older investors, on average, are the least likely to be financially
literate, and that financial literacy degrades as investors age.\1134\
A number of these studies show, however, that investors with low levels
of financial literacy are likely to be over-confident in their
financial abilities. For example, several studies that explore the
relationship between age and financial literacy show that confidence in
financial decision making does not decline with age, and potentially
leads to poor decisions (e.g., paying higher mortgage rates).\1135\
Although over-confident investors with low levels of financial literacy
could potentially benefit most from seeking and following investment
advice, one study shows that over-confident investors are less likely
to seek advice and perceive it as less valuable.\1136\
---------------------------------------------------------------------------

    \1133\ See Lusardi & Mitchell (NBER 2011), supra footnote 1131.
See also Annamaria Lusardi & Olivia S. Mitchell, Financial Literacy
and Retirement Planning in the United States, 10 J. Pension Econ. &
Fin. 509 (2011). See AARP August 2018 Letter.
    \1134\ See Michael S. Finke, John Howe & Sandra J. Huston, Old
Age and Decline in Financial Literacy (Working Paper, Aug. 24,
2011), who document that financial literacy scores decline by
approximately 1% each year over the age of 60. See also Annamaria
Lusardi, Olivia S. Mitchell, & Vilsa Curto, Financial Literacy and
Financial Sophistication Among Older Americans (Nat'l Bureau of
Econ. Research, Working Paper No. 15469, Nov. 2009), available at
https://www.nber.org/papers/w15469.pdf; Keith Gamble et al., Aging
and Financial Decision Making, 61 Mgmt. Sci. 2603 (2015). See AARP
August 2018 Letter.
    \1135\ See Finke et al. (2011) and Gamble et al. (2015), supra
footnote 1134.
    \1136\ See Marc M. Kramer, Financial Literacy, Overconfidence
and Financial Advice Seeking (Working Paper, Dec. 19, 2014),
available at https://efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2015-Amsterdam/papers/EFMA2015_0067_fullpaper.pdf.
---------------------------------------------------------------------------

    One potential problem, however, for investors with lower financial
literacy is that they may not be able to distinguish the quality of
their financial professional or the advice that they receive.\1137\ One
study documents that small traders, relative to large institutional
investors, are unable to recognize biases in recommendations

provided by securities analysts, and therefore follow analyst
recommendations to buy and sell securities without considering other
information produced by the analyst.\1138\ Additionally, financial
literacy may influence the quality of advice that financial
professionals are willing to provide their clients. Some financial
professionals appear to be more likely to provide superior information
to more financially literate investors, who may be able to discern the
quality of the advice, and more likely to provide inferior and
potentially more conflicted information to investors who are less
financially literate.\1139\
---------------------------------------------------------------------------

    \1137\ See Lauren E. Willis, Against Financial-Literacy
Education, 94 Iowa L. Rev. 197 (2008). See AARP August 2018 Letter.
    \1138\ See Ulrike Malmendier & Devin Shanthikumar, Are Small
Investors Naive About Incentives?, 85 J. Fin. Econ. 457 (2007). See
AARP August 2018 Letter.
    \1139\ See Willis (2008), supra footnote 1137, and Calcagno &
Monticone (2015), supra footnote 1131. See also John A. Turner,
Bruce W. Klein, & Norman P. Stein, Financial Illiteracy Meets
Conflicted Advice: The Case of Thrift Savings Plan Rollovers
(Working Paper, Apr. 2015), available at https://gflec.org/wp-content/uploads/2015/04/Turner-0408Assessing-the-Standard-for-Financial-Advice.pdf, which documents that financial professionals
often suggest rolling over from thrift savings plans to more
expensive plans (e.g., IRAs), and that such behavior is pervasive
among both broker-dealers and investment advisers. See AARP August
2018 Letter.
---------------------------------------------------------------------------

c. Evidence on the Effectiveness and Limitations of Disclosure
    Regulation Best Interest relies in part on disclosure of certain
material facts to retail customers.\1140\ A number of commenters,
however, stated that we failed to sufficiently account for limitations
of disclosure in the Proposing Release of Regulation Best
Interest.\1141\ One commenter stated that ``studies show that
regulation by disclosure alone can actually undermine investor
protection by emboldening advisers to ignore the client's best interest
once they have `checked the disclosure box,' and by rendering investors
even more vulnerable to conflicted advice once they receive
disclosures.'' \1142\ Another commenter asserted that the
ineffectiveness of disclosure arises because of investors' failure to
understand the disclosure, inadequate time to read and process the
information, cognitive dissonance, and trust in financial
professionals' oral representations over written disclosures, among
others.\1143\ Below, we discuss studies that have identified
characteristics that make disclosure effective as well as limitations
to the effectiveness of disclosure to investors, in particular focusing
on issues related to disclosure of conflicts of interest and how
disclosure could inflate potential conflicts between financial
professionals and investors.
---------------------------------------------------------------------------

    \1140\ See supra Section II.C.1.
    \1141\ See AARP August 2018 Letter; Better Markets August 2018
Letter; State Attorneys General Letter; EPI Letter; Morningstar
Letter; Warren Letter; UVA Letter.
    \1142\ See Better Markets August 2018 Letter. See infra footnote
1148 for studies submitted by this commenter.
    \1143\ See State Attorneys General Letter. See also EPI Letter.
---------------------------------------------------------------------------

    Characteristics of effective disclosures include saliency of
information, clear and concise information delivered in a transparent
manner, and increased use of visual and interactive design, among
others.\1144\ One study, examining the effect of disclosure of fees and
costs for mutual funds, observes that disclosures that prominently
feature fees are more effective than others, but do not appear to
reduce the importance that investors place on other fund
characteristics, such as performance or risk.\1145\ Other studies,
however, have found that disclosures may be ineffective, particularly
if the intended audience does not read the disclosure documents or does
not understand the material presented to them. One study, for example,
notes that as the length and complexity of the disclosure document
increases, so does the time that it takes for investors to read and
understand the material contained within; therefore, investors are more
likely to prefer shorter, simpler, and more straightforward language in
disclosures.\1146\
---------------------------------------------------------------------------

    \1144\ See Relationship Summary Adopting Release at Section IV,
which also discusses the benefits and limitation of disclosure. See
also Margaret Hagan, Designing 21st Century Disclosure Methods for
Financial Decision Making, Stanford Law School Policy Lab (2016),
available at https://law.stanford.edu/publications/designing-21st-century-disclosures-for-financial-decision-making/. One study finds
that when fund expenses are bundled with brokerage commissions,
reducing the transparency of various fees and costs, investors
experience larger degrees of underperformance than when the fees are
more transparent. See Roger M. Edelen, Richard B. Evans, & Gregory
B. Kadlec, Disclosure and Agency Conflict: Evidence from Mutual Fund
Commission Bundling, 103 J. Fin. Econ. 308 (2012). See AARP August
2018 Letter.
    \1145\ See Lucy Hayes, William Lee, & Anish Thakrar, Now You See
It: Drawing Attention to Charges in the Asset Management Industry
(Fin. Conduct Auth., Occasional Paper No. 32, Apr. 2018), available
at https://www.fca.org.uk/publication/occasional-papers/occasional-paper-32.pdf. See Morningstar Letter. See also Anagol et al. (2015),
supra footnote 1075.
    \1146\ See Tamar Frankel, The Failure of Investor Protection by
Disclosure, 81 U. Cin. L. Rev. 421 (2013). See FPC. See also Omri
Ben-Shahar & Carl E. Schneider, The Failure of Mandated Disclosure,
159 U. Pa. L. Rev. 647 (2011), which also questions the
effectiveness of disclosures and finds mandated disclosures
ineffective substitutes for more direct regulation. See AARP August
2018 Letter; Better Markets August 2018 Letter; State Attorneys
General Letter.
---------------------------------------------------------------------------

    Many studies have explored the effect of revealing conflicts of
interest to consumers and note that disclosure of conflicts may produce
undesirable behavior by the disclosing party, or that receivers of the
information provided by disclosures may fail to appropriately account
for the implications.\1147\ A series of studies documents that
consumers do not account for conflicts of interest revealed through
disclosures, and that such disclosures of conflicts can have the
perverse effect of increasing bias and moral licensing in the provision
of advice.\1148\ Moral licensing arises when the discloser of
information ``take[s] an ethical action that validates [her] self-image
as a good person'' so she feels as though she ``may well give [herself]
permission to play fast and loose with the rules for a while.'' \1149\
Disclosure may also lead to a decrease in trust of biased advice
because consumers feel pressured to satisfy the discloser's self-
interest (``panhandler effect''); \1150\ however, the panhandler effect
can be mitigated if the disclosure is provided from an external source,
the disclosure is not common knowledge between the discloser and the
receiver of the information, the receiver can change his or her mind at
a later date, and the receiver can change his or her mind in
private.\1151\ One

study notes that, beyond conflicts disclosures, disclosures of actual
bias lead to an improvement in performance of portfolios relative to
investors who only receive conflict disclosures.\1152\
---------------------------------------------------------------------------

    \1147\ See also Relationship Summary Adopting Release.
    \1148\ See Daylian M. Cain, George Loewenstein, & Don A. Moore,
When Sunlight Fails to Disinfect: Understanding the Perverse Effects
of Disclosing Conflicts of Interest, 37 J. Consumer Res. 836 (2011);
Daylian M. Cain, George Loewenstein, & Don A. Moore, The Dirt on
Coming Clean: Perverse Effects of Disclosing Conflicts of Interest,
34 J. Legal Stud. 1 (2005); George Loewenstein, Daylian M. Cain &
Sunita Sah, The Limits of Transparency: Pitfalls and Potential of
Disclosing Conflicts of Interest, 101 Am. Econ. Rev. (Papers &
Proc.) 423 (2011). These studies also note that, although disclosure
is intended to help financially unsophisticated consumers,
disclosure is most likely to be beneficial to sophisticated users of
the information. One study, however, notes that disclosure can
reduce biased advice if the disclosure acts as a deterrent against
entering into conflicts, and may improve trust in advisers. See
Sunita Sah & George Loewenstein, Nothing to Declare: Mandatory and
Voluntary Disclosure Leads Advisors to Avoid Conflicts of Interest,
25 PSYCH. SCI. 575 (2014). See also Morningstar Letter; EPI Letter;
Better Markets August 2018 Letter; Warren Letter; UVA Letter; AARP
August 2018 Letter; Johnsen Letter.
    \1149\ See Robert A. Prentice, Moral Equilibrium: Stock Brokers
and the Limits of Disclosure, 2011 Wis. L. Rev. 1059 (2011). See
AARP August 2018 Letter; Better Markets August 2018 Letter; State
Attorneys General Letter.
    \1150\ See Cain et al. (2011), supra footnote 1148; Sunita Sah,
Prashant Malaviya, & Debora Thompson, Conflict of Interest
Disclosure as an Expertise Cue: Differential Effects of Automatic
and Deliberative Processing, 147 Organizational Behav. & Hum.
Decision Processes 127 (2018), whereby disclosures of conflicts of
interest act ``as a heuristic cue to infer greater trust in
advisors' expertise.''
    \1151\ See Sunita Sah, George Loewenstein, & Daylian M. Cain,
The Burden of Disclosure: Increased Compliance With Distrusted
Advice, 104 J. Personality & Soc. Psychol. 289 (2013). See
Morningstar Letter; Better Markets August 2018 Letter; EPI Letter.
    \1152\ See Christopher Tarver Robertson, Biased Advice, 60 Emory
L.J. 653 (2011). This study also suggests that obtaining an opinion
from an unbiased adviser ``is a much better remedy for biased advice
than disclosure.'' See AARP August 2018 Letter.
---------------------------------------------------------------------------

    From the perspective of the investor, conflicts disclosures may
lead to under- or over-reaction by investors. According to one study,
investors may not know how to appropriately respond to information
about conflicts (e.g., estimating the effects on the quality of advice
or knowing how to search for an unbiased second opinion) and therefore
may fail to adequately adjust their behaviors when conflicts are
disclosed.\1153\ Alternatively, some investors may overreact to
disclosures of conflicts of interest, and may instead forgo valuable
investment advice.\1154\
---------------------------------------------------------------------------

    \1153\ See Angela A. Hung, Min Gong, & Jeremy Burke, Effective
Disclosures in Financial Decisionmaking, RAND Labor and Population
Report Prepared for the Department of Labor (2015), available at
https://www.rand.org/content/dam/rand/pubs/research_reports/RR1200/RR1270/RAND_RR1270.pdf. See also AARP August 2018 Letter; Better
Markets August 2018 Letter; Warren Letter. See also James M. Lacko &
Janis K. Pappalardo, The Effect of Mortgage Broker Compensation
Disclosures on Consumers and Competition: A Controlled Experiment,
Federal Trade Commission, Bureau of Economics Staff Report (Feb.
2004), available at https://www.ftc.gov/sites/default/files/documents/reports/effect-mortgage-broker-compensation-disclosures-consumers-and-competition-controlled-experiment/030123mortgagefullrpt.pdf, which documents that when mortgage
customers receive information about mortgage broker compensation
through disclosures, such disclosures lead to an increase in more
expensive loans and create a bias against broker-sold loans, even
when the broker-sold loans are the more cost effective option. See
EPI Letter.
    \1154\ See George Loewenstein, Cass R. Sunstein, & Russell
Golman, Disclosure: Psychology Changes Everything, 6 Ann. Rev. Econ.
391 (2014). See IRI Letter.
---------------------------------------------------------------------------

C. Benefits and Costs

1. General
    In formulating Regulation Best Interest, the Commission has
considered the potential benefits of establishing a best interest
standard of conduct for broker-dealers, as well as the potential costs.
    Regulation Best Interest enhances the broker-dealer standard of
conduct beyond existing suitability obligations, and aligns the
standard of conduct with retail customers' reasonable expectations.
Under Regulation Best Interest, broker-dealers and their associated
persons will be required, among other things, to: (1) Act in the best
interest of the retail customer at the time the recommendation is made,
without placing the financial or other interest of the broker-dealer
ahead of the interests of the retail customer; and (2) address
conflicts of interest by establishing, maintaining, and enforcing
policies and procedures reasonably designed to identify and fully and
fairly disclose material facts about conflicts of interest, and in
instances where we have determined that disclosure is insufficient to
reasonably address the conflict, to mitigate or, in certain instances,
eliminate the conflict. As a result, Regulation Best Interest should
enhance the efficiency of recommendations that broker-dealers provide
to retail customers, help retail customers evaluate the recommendations
received, and improve retail customer protection when receiving
recommendations from broker-dealers. The four component obligations of
Regulation Best Interest's work together to enhance the current
standard of conduct for broker-dealers and improve disclosure of
material facts relating to the scope and terms of the relationship and
conflicts of interest. Both on its own and together with the other new
rules and forms we are adopting,\1155\ we anticipate that Regulation
Best Interest will reduce the agency costs of the relationship between
the associated persons of the broker-dealer and their retail customers,
while preserving access to financial advice and choice in the scope of
services and how to pay for them.
---------------------------------------------------------------------------

    \1155\ See, e.g., Relationship Summary Adopting Release.
---------------------------------------------------------------------------

    In this section, we discuss broader themes associated with the
costs and benefits of Regulation Best Interest, including general
comments we received on our analysis of the costs and benefits in the
Proposing Release. Following this more general discussion, we discuss
the specific costs and benefits associated with Regulation Best
Interest's four component obligations.
    While the Commission has considered the potential benefits and
costs of Regulation Best Interest, the Commission notes that generally
it is difficult to quantify such benefits and costs with meaningful
precision.\1156\ Where possible, the Commission has provided an
estimate of specific costs; however, several factors make the
quantification of many of the effects of Regulation Best Interest
difficult. With respect to costs to broker-dealers, there is a lack of
data on the extent to which broker-dealers with different business
practices engage in disclosure and conflict mitigation activities to
comply with existing requirements, and therefore how costly it would be
to comply with the proposed requirements. Also, the final rule will
provide broker-dealers flexibility in complying with Regulation Best
Interest, and, as a result, there could be multiple ways in which
broker-dealers will satisfy this obligation, although broker-dealers
must comply with each of the elements of the obligation. In addition,
Regulation Best Interest may affect broker-dealers differently
depending on their business model (e.g., full service broker-dealer,
broker-dealer that uses independent contractors, insurance-affiliated
broker-dealer) and size. More generally, estimates of the magnitude of
such benefits and costs depend on assumptions about (1) the extent to
which broker-dealers currently engage in disclosure and conflict
mitigation activities, (2) how broker-dealers currently develop
recommendations for their customers, (3) how broker-dealers choose to
comply with Regulation Best Interest, (4) whether and how broker-
dealers change investments and share classes offered as a result of
Regulation Best Interest, (5) whether and how product manufacturers
change their investment offerings as a result of Regulation Best
Interest, (6) whether broker-dealers restrict access to brokerage
accounts by raising minimum account sizes or adding additional
qualification requirements, (7) whether broker-dealers try to shift
customers to advisory accounts as a result of Regulation Best Interest,
(8) how retail customers perceive the risk and return of their
portfolios, (9) how likely retail investors are to act on a
recommendation that complies with Regulation Best Interest, (10) how
the risk and return of retail customer portfolios change as a result of
how they act on the recommendation, and (11) how investment advisers,
including dually registered advisers, react to the adoption of
Regulation Best Interest and the other regulatory developments,
including the rules we are adopting and interpretations we are issuing
simultaneously with Regulation Best Interest. Because many of these
factors are firm-specific and thus inherently difficult to quantify,
even if it were possible to calculate a range of potential quantitative
estimates, that range would be so wide as to not be informative about
the magnitude of the

benefits or costs associated with Regulation Best Interest.
---------------------------------------------------------------------------

    \1156\ See supra Section III.B.3.c for discussion of the wide
range of estimates of the potential benefits of Regulation Best
Interest stemming from a reduction in investor harm, and discussion
surrounding infra footnotes 1165-1182 for other issues associated
with these estimates.
---------------------------------------------------------------------------

    Broader economic forces, beyond broker-dealer and retail customer
behavioral responses to Regulation Best Interest, also make meaningful
estimates of economic impacts difficult to develop. The market for
investment advice and services is complex and vast, and as history
demonstrates, is dynamic and affected by market-specific facts
(including product developments and regulatory changes) as well as
macroeconomic factors (including general economic conditions). For
example, the introduction of indexation to the retail investment market
and the subsequent increase in index products (and providers) and
reduction in the costs of indexing for retail investors have had
substantial effects on the market for retail investment advice and
services. The more recent introduction of ETFs has had similar
unanticipated and underestimated effects, including, in general,
reducing investor costs and increasing tax efficiency, as well as
increasing the array of product offerings. Developments such as the
employer-driven shift from defined benefit plans to defined
contribution plans also have had significant effects on the market for
investment advice. We expect these and other factors, including factors
not currently identified, will continue to affect the market and,
accordingly, may change the economic effects of the rule. These sources
of uncertainty and complexity make meaningfully quantifying many of the
costs and benefits of the rule difficult and, particularly over long
time periods, inherently speculative.
a. Broad Commenter Concerns With Respect to Costs and Benefits
    We received many comments regarding our analysis in the Proposing
Release of the benefits and costs. In this section, we discuss comments
that address broader aspects of our analysis. Comments that address
costs and benefits of more specific components of Regulation Best
Interest are discussed in the corresponding sections for each rule
component that follows.
    Some commenters stated that our analysis in the Proposing Release
did not properly incorporate current market practices into the
baseline.\1157\ As discussed above, we have revised the discussion to
include those practices, which may reflect guidance by SROs such as
FINRA, requirements and obligations under state laws, practices
implemented by broker-dealers in response to the (now vacated) DOL
Fiduciary Rule that have not been reversed, and any practices
implemented by broker-dealers to fulfill their obligations under
existing federal securities laws.\1158\ While we acknowledged in the
Proposing Release that variation in the extent to which broker-dealers
with different business practices already engage in disclosure and
conflict mitigation activities makes quantifying Regulation Best
Interest's costs and benefits with meaningful precision difficult, we
more explicitly emphasize how this variation in current market
practices affects the costs and benefits of Regulation Best Interest in
the discussion that follows.\1159\ In general, to the extent that
broker-dealer practices are already aligned with the requirements of
Regulation Best Interest, the anticipated magnitude of both the costs
and the benefits associated with a given component of Regulation Best
Interest will be correspondingly reduced, and vice versa.
---------------------------------------------------------------------------

    \1157\ See, e.g., CFA August 2018 Letter; CCMC Letters.
    \1158\ See supra Section III.B.2.
    \1159\ See Proposing Release at 21643.
---------------------------------------------------------------------------

    As discussed above,\1160\ commenters noted the existence of
fiduciary standards in various states. One commenter provided an
overview of the fiduciary obligations of state-registered investment
advisers, ``typified by an expectation of undivided loyalty where the
adviser acts primarily for the benefit of its clients.'' \1161\ This
commenter also stated that ``[s]ome states also extend these fiduciary
obligations beyond investment advisers to brokers, especially in dual-
hatted scenarios,'' and that these fiduciary obligations were extended
even when broker-dealers handled non-discretionary accounts.\1162\ We
recognize that there is substantial variation in the sources, scope,
and application of state fiduciary law. And we acknowledge that such
state-level obligations for broker-dealers mean that they may already
engage in practices under the baseline that overlap with certain
requirements under Regulation Best Interest. To the extent that state-
level law incorporates fiduciary principles similar to those reflected
in Regulation Best Interest, the magnitude of the costs and benefits
discussed below that stem from the application of those principles to
broker-dealers will be correspondingly reduced. However, costs and
benefits that arise from obligations under Regulation Best Interest
that differ from obligations under state law, such as the Conflict of
Interest Obligation, will be maintained.\1163\
---------------------------------------------------------------------------

    \1160\ See supra Section III.B.2.
    \1161\ See NASAA February 2019 Letter at 22 and footnote 40.
    \1162\ Id. at 23-24.
    \1163\ Whether Regulation Best Interest would have a preemptive
effect on any state law would be determined in future judicial
proceedings, and would depend on the language and operation of the
particular state law at issue. We considered whether we could
determine the economic impact of possible, future state-law
preemption on retail customers, but concluded that we cannot analyze
the economic effects of the possible preemption of state law at this
point because the factors that will shape those judicial
determinations are too speculative. Among the unknown factors are:
(1) The final language in any proposed state legislation or
regulation adopting a fiduciary or other standard for broker-
dealers; (2) whether that language would constitute the type of law,
rule, or regulation that is expressly preempted by the securities
law or impliedly preempted under principles applied by courts; and
(3) whether, if there was preemption, that preclusion of state law
would have any positive or negative effects on investors when
compared with the economic effects of Regulation Best Interest.
---------------------------------------------------------------------------

    Some commenters suggested that certain types of costs should remain
outside the scope of our analysis. Some stated that our analysis should
not consider, for example, costs to broker-dealers resulting from lost
revenues on securities they cease offering or costs associated with any
potential increase in arbitration claims as a result of Regulation Best
Interest, except to the extent that they are passed on to investors in
the form of higher fees.\1164\ These commenters suggested that because
these types of costs are a direct result of policies that make
investors better off, they should not factor into an assessment of
Regulation Best Interest. The Commission has an obligation to consider
the economic effect of Regulation Best Interest on affected parties,
including broker-dealers, even when those costs are associated with
benefits to investors. However, in the specific discussion of each rule
component that follows, we highlight instances where a given cost is
directly associated with a benefit to investors.
---------------------------------------------------------------------------

    \1164\ See AARP August 2018 Letter; EPI Letter; Better Markets
August 2018 Letter; Cetera August 2018 Letter.
---------------------------------------------------------------------------

    Commenters raised several issues related to the quantification of
costs and benefits, or lack thereof, in the Proposing Release. They
asserted that our analysis focused too much on Regulation Best
Interest's costs and did not quantify any of the benefits, such as the
reduction in investor harm.\1165\ As discussed above, some studies
present anecdotal evidence of behavior by certain broker-dealers, such
as recommending investments that are inferior to available
alternatives, that is harmful to investors.\1166\ A potential

benefit of Regulation Best Interest is therefore a reduction in that
harm, as asserted by commenters. However, the anecdotal evidence of
investor harm in these studies does not lend itself to aggregation.
---------------------------------------------------------------------------

    \1165\ See AARP August 2018 Letter; Better Markets August 2018
Letter; CFA August 2018 Letter.
    \1166\ See supra footnotes 1068 and 1075.
---------------------------------------------------------------------------

    Commenters also stated that we should have incorporated the
approach used by the DOL RIA and the CEA to quantify aggregate investor
harm.\1167\ While both of these analyses surveyed a broad literature on
the relative performance of broker-sold versus direct-sold mutual
funds, they both relied on a particular study to estimate aggregate
investor harm, extrapolating the effect of ``excess loads'' on the
performance of broker-sold funds to total industry-wide AUM.\1168\ We
disagree with this approach because, as noted by commenters, we believe
these analyses misapplied the particular study's results.\1169\ When
the results of the study are correctly applied, the aggregate estimate
of investor harm obtained using this approach is negligible.\1170\
---------------------------------------------------------------------------

    \1167\ See Better Markets August 2018 Letter.
    \1168\ See supra footnotes 1081 and 1099.
    \1169\ See, e.g., Lewis (2017), supra footnote 1099.
    \1170\ See id.
---------------------------------------------------------------------------

    Another commenter advocated a similar approach, claiming that risk-
adjusted returns net of fees, which calculate the excess return of an
investment above a benchmark that matches the risk of the investment,
are the only appropriate measure of whether a recommendation is in a
retail customer's best interest.\1171\ While there are studies showing
that broker-sold mutual funds underperform direct-sold funds to varying
degrees,\1172\ we do not believe, for the reasons explained below, that
applying estimates of this under-performance to industry-wide AUM
produces a meaningful estimate of the aggregate investor harm
attributable to recommendations made by broker-dealers that is
sufficiently precise to inform our policy choices. First, as discussed
above, these studies do not necessarily cleanly distinguish under-
performance attributable to broker-dealers from under-performance
attributable to investment advisers.\1173\
---------------------------------------------------------------------------

    \1171\ See EPI Letter. See also Former SEC Senior Economists
Letter, stating that risk-adjusted returns are an appropriate
measure of investor harm.
    \1172\ See, e.g., Bergstresser et al. (2009), supra footnote
1048; Del Guercio & Reuter (2014), supra footnote 1081.
    \1173\ See supra footnote 1097.
---------------------------------------------------------------------------

    Second, interpreting the relative underperformance of broker-sold
funds as a measure of investor harm due to conflicts of interest
implicitly evaluates investor harm against a benchmark that does not
include financial advice. However, that benchmark does not necessarily
reflect the appropriate alternative available to investors in broker-
sold funds. Extrapolating from these studies leads to the conclusion
that investors would do better investing on their own, yet there are
other studies showing that is not the case, at least not for all
investors.\1174\ We further note that calculating the investor harm
against a benchmark that includes the fees retail customers would pay
for equivalent advice could significantly reduce the magnitude of these
estimates.\1175\
---------------------------------------------------------------------------

    \1174\ See supra footnotes 1045-1048.
    \1175\ See also supra footnote 1103.
---------------------------------------------------------------------------

    Finally, while risk-adjusted returns may be useful in comparing the
performance of particular mutual funds, particularly when trying to
evaluate fund manager skill, they do not necessarily reflect the
utility that investors achieve from their investments.\1176\
Heterogeneous investors value investments and the services provided by
financial professionals differently depending on their investment
profile and preferences, and risk-adjusted returns do not necessarily
represent aggregate utility across all investors in a way that permits
us to arrive at an aggregate measure of investor harm. For example,
consumers invest in various forms of insurance products in order to
hedge their exposure to bad outcomes (e.g., home insurance policies),
even though the expected returns on such investments are generally
negative. The relative underperformance of broker-sold mutual funds
also may not capture any intangible benefits investors derive from
receiving tailored financial advice.\1177\ Alternatively, the relative
performance of mutual funds sold through these two channels may reflect
other factors that are unrelated to conflicts of interest.\1178\
Accordingly, while we do not dispute the existence of broker-dealer
behavior under the baseline that is harmful to investors, based on our
analysis, including our analysis of the comments received, we continue
to believe that quantifying that harm, and therefore quantifying the
benefits associated with reducing it, depends on many contingent
factors that would render any estimates insufficiently precise to
inform our policy choices.\1179\
---------------------------------------------------------------------------

    \1176\ Even in the context of evaluating fund manager skill,
there is debate about whether risk-adjusted returns are an
appropriate measure of fund performance. See e.g., Vincent Glode,
Why Mutual Funds ``Under Perform'', 99 J. Fin. Econ. 546 (2011);
Jonathan B. Berk & Jules H. van Binsbergen, Measuring Skill in the
Mutual Fund Industry, 118 J. Fin. Econ. 1 (2015).
    \1177\ See, e.g., Bergstresser et al. (2009), supra footnote
1048, who note that ``[o]ne possibility is that brokers provide
other intangible benefits, which we cannot measure'' when
interpreting the relative performance of broker-sold versus direct-
sold mutual funds.
    \1178\ See, e.g., The DOL RIA, supra footnote 1002, at footnote
473, noting that the relative performance of broker-sold versus
direct-sold funds ``. . . is an imperfect measure of the impact of
conflicts of interest; other factors, aside from conflicts of
interest, affect the relative performance of mutual funds sold
through the two distribution channels.''
    \1179\ See Discussion following footnote 1156 for a discussion
of these factors. See also infra Section III.C.7, where we have
endeavored to estimate some of the potential benefits of Regulation
Best Interest based on many assumptions.
---------------------------------------------------------------------------

    With respect to the magnitude of the costs we assessed in the
Proposing Release, some commenters asserted that our analysis
underestimated the costs of complying with Regulation Best Interest,
though only a few provided estimates of these costs.\1180\ Where
commenters provided estimates for a specific component of Regulation
Best Interest, particularly the Disclosure Obligation, we discuss those
estimates when discussing that component of Regulation Best Interest
below. Based on its experience with the DOL Rule, one commenter
provided a broad estimate of the compliance costs associated with the
entire package of rules we proposed, including Regulation Best Interest
and Form CRS, indicating that the rule package would entail initial
costs of $20 million and ongoing costs of $5 million per year for their
firm, but that these costs would be manageable.\1181\ Another commenter
stated that for a small broker-dealer with $500,000 in net capital, the
compliance costs estimated in the Proposing Release could constitute
12% of that net capital, making compliance with Regulation Best
Interest burdensome for such broker-dealers.\1182\ We acknowledge that
the costs of Regulation Best Interest could be more burdensome for
small broker-dealers and discuss any corresponding competitive effects
in Section III.D.1.
---------------------------------------------------------------------------

    \1180\ See Schwab Letter; ICI Letter; Letter from James J.
Angel, Associate Professor of Finance, Georgetown University (Aug.
7, 2018) (``Angel Letter''); LPL August 2018 Letter; NSCP Letter.
    \1181\ See Raymond James Letter.
    \1182\ See NSCP Letter.
---------------------------------------------------------------------------

    Although the majority of the industry studies provided by
commenters focused on the effects of the DOL Fiduciary Rule on broker-
dealers and their customers, one industry survey provided information
about industry beliefs about potential effects of proposed Regulation
Best Interest.\1183\

The survey consisted of approximately 30 individual financial
professionals across a mix of 15 companies providing financial advisory
services and products, including broker-dealers and dually registered
firms, with $23 trillion in AUM and administration and nearly 79
million investment accounts. All of the participants surveyed stated
that it was unlikely that they would reconsider their broker-dealer
registration status, while nearly 40% stated that they may alter their
investment choices and 35% could alter the services that they offer.
With respect to the costs of Regulation Best Interest and Form CRS,
approximately 36% of respondents stated that the implementation costs
could be between 1% and 5% of annual profits; however, nearly 80% of
respondents noted that costs are likely to decline over time.\1184\ We
note that one of the cost estimates provided by a commenter above is
consistent with this range.\1185\ One commenter suggested that for
firms that offer access to thousands of unique securities, many of
which likely have similar strategies (e.g., index mutual funds or
ETFs), requiring broker-dealers to ``consider reasonably available
alternatives offered by the broker-dealer as part of having a
reasonable basis for making the recommendation'' would make it cost
prohibitive for broker-dealers and financial professionals to evaluate
the costs associated with ``every similar investment product available
through the broker-dealer's platform.'' \1186\ Many survey
participants, although they believed that the Commission underestimated
the aggregate costs of Regulation Best Interest and Form CRS, agreed
that the benefits to investors were likely to justify the costs.
---------------------------------------------------------------------------

    \1183\ See Center for Capital Markets Competitiveness, SEC
Regulation Best Interest Rule Proposals: Request for Information
Analysis, FTI Consulting Report Presented to the U.S. Chamber of
Commerce (Jul. 25, 2018), available at https://www.centerforcapitalmarkets.com/wp-content/uploads/2018/08/Reg-BI-Rule-Proposal-Research_8.7.18_FTI-Updated_final.pdf. See CCMC
Letters. Survey participants also addressed questions related to
beliefs regarding investor protection, choices for retail customers,
and the standard of conduct for broker-dealers.
    \1184\ One commenter stated that the ``costly'' recordkeeping
requirements described in the Proposing Release ``are unnecessary as
self-interest will lead firms to keep proof of compliance'' and
should be eliminated. See Angel Letter.
    \1185\ See supra footnote 1181. Relative to this commenter's
2018 fiscal year profits, its initial cost estimate of $20 million
would represent approximately 2% of annual profits for this firm.
See https://www.sec.gov/Archives/edgar/data/720005/000072000518000083/rjf-20180930x10k.htm.
    \1186\ See LPL December 2018 Letter.
---------------------------------------------------------------------------

    Other commenters stated that a number of elements of the Proposing
Release potentially could increase litigation exposure for some broker-
dealers. For example, one commenter discussed that, because proposed
Regulation Best Interest did not ``expressly define `financial
incentive''' for purposes of the proposed requirement of policies and
procedures designed to disclose and mitigate, or eliminate, conflicts
arising from financial incentives, broker-dealers could face challenges
to ``design and maintain effective compliance programs that
appropriately address the conflicts inherent in their particular
business models'' thereby potentially increasing litigation
risks.\1187\ Another commenter indicated that, with respect to
proprietary products, ``[s]tate courts in enforcement actions and in
review of such actions'' may find it difficult to distinguish the best
interest standard for broker-dealers from a fiduciary standard for
investment advisers, and may cause certain associated persons of
broker-dealers to ``shy away from the risks of litigation in this
regulatory environment, causing a substantial market contraction away
from middle class investors.'' \1188\
---------------------------------------------------------------------------

    \1187\ See Primerica Letter.
    \1188\ See Letter from Douglas M. Ommen, Iowa Insurance
Commissioner (Aug. 6, 2018) (``Iowa Insurance Commissioner
Letter'').
---------------------------------------------------------------------------

    In the Proposing Release, we were able to quantify costs for
limited portions of Regulation Best Interest, particularly those
stemming from requirements related to document creation for purposes of
the Paperwork Reduction Act. While we have updated these estimates in
Section IV.B, we continue to believe that it is not possible to
meaningfully quantify the full costs and benefits of Regulation Best
Interest because such analysis would depend on many contingent factors
that render any estimate insufficiently precise to inform our policy
choices.\1189\ So while we acknowledge, for example, that Regulation
Best Interest may impose costs that are a significant portion of the
estimate of initial and ongoing costs of $20 million and $5 million by
the commenter cited above, we cannot anticipate the associated costs
for all firms because of the wide variation in size and scope of
business practices across firms as well as the many unknown factors
associated with the principles-based nature of Regulation Best
Interest. In discussing Regulation Best Interest's component
obligations below, we address any estimates provided by commenters
where we can and otherwise explain the specific factors that preclude
quantifying the costs of Regulation Best Interest with meaningful
precision beyond our Paperwork Reduction Act estimates.
---------------------------------------------------------------------------

    \1189\ See Discussion following footnote 1156 for a discussion
of these factors. See also infra Section III.C.7, where we have
endeavored to estimate some of the potential benefits of Regulation
Best Interest based on many assumptions.
---------------------------------------------------------------------------

b. Broad Investor Protection Benefits
    As discussed above, in addition to any enhancements provided above
and beyond current requirements and market practices, each of the
component obligations of Regulation Best Interest share features with
market best practices under the baseline, as shaped by FINRA's guidance
on relevant rules or as described in its Report on Conflicts of
Interest. Given this overlap, FINRA, in response to a congressional
request, enumerated the ways it believes Regulation Best Interest
enhances existing broker-dealer obligations under current FINRA
rules.\1190\
---------------------------------------------------------------------------

    \1190\ See FINRA 2018 Letter.
---------------------------------------------------------------------------

    In addition to the enhancements that each of Regulation Best
Interest's component obligations provide above and beyond existing
broker-dealer obligations under the baseline, which we discuss below,
Regulation Best Interest increases retail customer protections by
establishing these obligations under the Exchange Act so that the
Commission may enforce them directly and examine for compliance.
Additionally, to the extent that market best practices may reflect some
FINRA guidance that is not required by FINRA's rules, some broker-
dealers may not currently implement these practices. To the extent that
broker-dealers and their associated persons do not currently implement
existing best practices that will be codified in Regulation Best
Interest, retail customers will benefit because it will increase the
implementation of these best practices throughout the industry.
2. Disclosure Obligation
    As adopted, the Disclosure Obligation of Regulation Best Interest's
requires a broker-dealer, prior to or at the time of the
recommendation, to provide to the retail customer, in writing, full and
fair disclosure of all material facts relating to the scope and terms
of the relationship and all material facts relating to conflicts of
interest that are associated with the recommendation. Regulation Best
Interest explicitly requires disclosure of ``all material facts
relating to the scope and terms of the relationship with the retail
customer'' including: (i) That the broker, dealer, or such natural
person is acting as a broker, dealer, or an associated person of a
broker or dealer with respect to the recommendation; (ii) the material
fees and costs that apply to the retail customer's transactions,
holdings, and accounts; and (iii) the type and scope of

services provided to the retail customer, including any material
limitations on the securities or investment strategies involving
securities that may be recommended to the retail customer; and all
material facts relating to conflicts of interest that are associated
with the recommendation.
    Under the baseline, some disclosure obligations already exist, as
do an array of market practices with respect to the disclosure of
capacity, fees, services, and conflicts of interest.\1191\ The
Disclosure Obligation will enhance disclosure obligations that exist
under the baseline and bring greater alignment to market practices by
establishing an explicit and broad disclosure requirement under the
Exchange Act that applies to all broker-dealers when they make a
recommendation to a retail customer. We expect this change to improve
the quality and consistency of disclosures and thus (1) reduce the
information asymmetry that may exist between a retail customer and her
broker-dealer, and (2) facilitate customer comparisons of different
broker-dealers which we expect will, in turn, increase competition
among broker-dealers, including with respect to fees and costs, as
discussed below.\1192\
---------------------------------------------------------------------------

    \1191\ For instance, broker-dealers are subject to a number of
disclosure obligations under the Exchange Act when they effect
certain customer transactions. These disclosure obligations include
written disclosure about capacity, compensation, and third-party
remuneration related to the transaction, and disclosures about
whether the broker-dealer has any control, affiliation, or interest
in the security or the issuer of the security being offered. Broker-
dealers also face liability under the antifraud provisions of the
federal securities laws for failure to provide disclosure, such as
disclosure of ``honest and complete information'' or any material
adverse facts or materials conflicts of interest, including any
economic self-interest, when recommending a security (see supra
footnote 988). In addition, broker-dealers must comply with a number
of SRO disclosure obligations--such as FINRA Rule 2124 (Net
Transactions with Customers), FINRA Rule 2262 (Disclosure of Control
Relationship with Issuer), and FINRA Rule 2269 (Disclosure of
Participation or Interest in Primary or Secondary Distribution).
Finally, broker-dealers may also adjust their practices consistent
with existing SRO guidance on specific disclosures--such as FINRA
Regulatory Notice 13-23, Brokerage and Individual Retirement Account
Fees (July 2013) on fee disclosure. See Proposing Release at
footnotes 175, 176, 177, and 192; supra footnotes 303 and 985-988
for a more detailed discussion on existing disclosure practices.
    \1192\ See supra footnote 1072 for a discussion of potential
information asymmetries between broker-dealers and retail customers.
---------------------------------------------------------------------------

    Relative to the baseline, the Disclosure Obligation will change how
broker-dealers disclose information to their retail customers in
several specific ways. First, under the baseline, a broker-dealer and
its associated persons are not explicitly required to disclose that
they are acting in a broker-dealer capacity when making a
recommendation. We also clarify above that the use of the terms
``adviser'' or ``advisor'' in a name or title by (i) a broker-dealer
that is not also registered as an investment adviser, or (ii) a
financial professional that is not also a supervised person of an
investment adviser would presumptively violate this particular
disclosure requirement. Second, Regulation Best Interest requires that
any disclosure made by a broker-dealer be ``full and fair,'' meaning
that the broker-dealer is required to provide sufficient information to
enable a retail investor to make an informed decision with regard to
the recommendation, even where this information is about aspects of the
relationship between a retail customer and a broker-dealer that may
already require disclosure, implicitly or explicitly, under the
baseline. We expect the ``full and fair'' requirement to benefit retail
customers in cases where it results in disclosures that are not
currently required under broker-dealer antifraud provisions. Finally,
Regulation Best Interest requires that broker-dealers provide these
disclosures to retail customers in writing at or before the time of a
recommendation. However, we are permitting oral disclosures prior to or
at the time of a recommendation and written disclosures after a
recommendation under the circumstances outlined in Section II.C.1, Oral
Disclosure or Disclosure After a Recommendation.\1193\ We focus our
discussion of both the benefits and costs of the Disclosure Obligation
on these changes relative to the baseline.\1194\
---------------------------------------------------------------------------

    \1193\ For example, when oral disclosures are used prior to or
at the time of a recommendation, broker-dealers must maintain a
record of the fact that oral disclosure was provided. See supra
footnotes 301 and 507-508 and surrounding discussion for more detail
on when oral disclosure prior to or at the time of a recommendation
and disclosure in writing after a recommendation are permitted.
    \1194\ See supra footnotes 1157-1159.
---------------------------------------------------------------------------

    Regulation Best Interest's Disclosure Obligation is different from
the Proposing Release's Disclosure Obligation in two ways. First, while
the Proposing Release required that a broker-dealer ``reasonably
disclose'' material facts to retail customers, Regulation Best Interest
requires that a broker-dealer provide retail customers with ``full and
fair'' disclosure of material facts. As discussed above, this change
from the Proposing Release does not have a substantive effect on the
expected economic effect of the Disclosure Obligation. Specifically, in
both the Proposing Release and Regulation Best Interest, the
formulation of the Disclosure Obligation, as described in the release
text, required that a broker-dealer provide sufficient information to
enable a retail investor to make an informed decision with regard to a
recommendation.\1195\ Therefore, we do not expect this change to affect
our assessment of Regulation Best Interest's costs and benefits.
Second, whereas the Proposing Release's Disclosure Obligation did not
explicitly require a broker-dealer to disclose particular types of
material facts relating to the scope and terms of its relationship with
a retail customer, Regulation Best Interest explicitly requires that
these material facts include the capacity in which the broker-dealer is
acting, fees and costs, and the type and scope of services provided,
including material limitations on the securities or investment
strategies that may be recommended. We include any economic effects
associated with this change in our discussion of Regulation Best
Interest's benefits and costs. Finally, while we discuss the direct
benefits and costs of the Disclosure Obligation in this section, retail
customers, broker-dealers, investment advisers, and their financial
professionals may experience indirect benefits or costs due to
competitive effects caused by the Disclosure Obligation. We discuss any
competitive effects below in Section III.D.1.
---------------------------------------------------------------------------

    \1195\ See Proposing Release at Section II.D.1.c.
---------------------------------------------------------------------------

a. Benefits
    Regulation Best Interest requires that brokers, dealers, or natural
persons associated with a broker-dealer disclose that they are acting
as a broker, dealer, or an associated person of a broker-dealer prior
to or at the time of a recommendation to a retail customer. Broker-
dealers are not explicitly required to disclose this information prior
to or at the time of a recommendation under the baseline, though they
may disclose it to comply with other federal securities laws and SRO
rules, or because they consider it to be a market best practice.\1196\
This requirement is most likely to have economic effects when retail
customers have both brokerage and advisory accounts with the same
financial professional, as may be the case if the financial
professional is dually-registered. It is designed to make all

retail customers aware of the capacity in which their broker-dealer is
acting when a recommendation is made, which may help the retail
customer better evaluate the advice they receive. For instance, the
cost to the retail customer of acting on such advice will typically
depend on whether the advice is tied to the retail customer's brokerage
or advisory account. In addition, understanding the capacity in which a
financial professional is acting may provide the retail customer with
context for, and facilitate review of, other relevant disclosures by
the broker-dealer. Knowing that she is receiving advice from a broker-
dealer, or an associated person of a broker-dealer, may focus the
retail customer's attention on any potential conflicts of interest
specifically associated with receiving a recommendation from a broker-
dealer. For example, a disclosure that a firm is acting in the capacity
of a broker-dealer may encourage a retail customer to seek additional
information about commissions, which could give the firm or its
financial professional an incentive to recommend transactions that may
be inconsistent with the client's most efficient investment strategy,
such as a buy-and-hold strategy.
---------------------------------------------------------------------------

    \1196\ For example, under the baseline, broker-dealers may
decide that disclosing the capacity in which it is acting is
necessary in order to meet its duty of fair dealing under the
antifraud provisions of the federal securities laws. In addition,
broker-dealers must disclose whether they effected the transaction
as a principal or agent in the customer confirmation statement
pursuant to Exchange Act Rule 10b-10, which a retail customer
generally receives after the trade is completed.
---------------------------------------------------------------------------

    While the capacity disclosure requirement and the disclosures
investors will receive in Form CRS will increase the likelihood that
retail customers understand the nature of their relationship with a
broker-dealer or financial professional, and hence how this
relationship might affect the recommendations retail customers receive,
some investors may form beliefs about the nature of their relationship
with a broker-dealer or financial professional based on their use of
particular names and titles such as ``adviser'' or ``advisor,'' as well
as how their services are marketed. In cases where these terms are used
by (i) a broker-dealer that is not also registered as an investment
adviser, or (ii) a financial professional that is not also a supervised
person of an investment adviser, some retail customers may not fully
understand that their broker-dealer or financial professional is not
acting in the capacity of an investment adviser, even though investors
receive some information about the capacity their broker-dealer or
financial professional is acting in on Form CRS or other
disclosures.\1197\
---------------------------------------------------------------------------

    \1197\ Investors may not fully understand this capacity
disclosure because, for example, their financial professional is not
a supervised person of an investment adviser but works for a dual-
registrant, and they interpret Form CRS as suggesting the financial
professional also provides both types of services. Alternatively,
even if an investor's broker-dealer or financial professional solely
offers services in a broker-dealer capacity, the use of the titles
``adviser'' or ``advisor'' may leave her confused about the nature
of the services provided, despite the capacity disclosure on Form
CRS. See Relationship Summary Proposal at footnotes 411-412.
---------------------------------------------------------------------------

    To the extent that, despite the disclosures provided on Form CRS,
the use of the titles ``adviser'' and ``advisor'' causes investor
confusion about the nature of the relationship retail investors have,
or will have, with a broker-dealer or financial professional, the
presumption that the use of these titles by (i) a broker-dealer that is
not also registered as an investment adviser, or (ii) a financial
professional that is not also a supervised person of an investment
adviser would violate the capacity disclosure requirement will
potentially benefit investors in two ways.\1198\ First, certain
investors may seek an advisory relationship and would be better off
receiving advice from an investment adviser. In situations where
confusion associated with titles might cause such an investor to
mistakenly engage in a relationship with a broker-dealer or an
associated person of a broker-dealer, the presumption should mitigate
costs the investor might incur associated with receiving and,
potentially, acting on recommendations from a broker-dealer, as well as
costs associated with correcting this mismatch by switching to an
investment adviser.\1199\ Second, to the extent that, as a result of
the use of the titles ``advisor'' or ``adviser,'' any confusion might
remain about the capacity in which a broker-dealer or its associated
person is acting, the presumption should alleviate that confusion and
thus increase the likelihood that retail customers focus their
attention on any potential conflicts of interest specifically
associated with receiving a recommendation from a broker-dealer. Any
benefits associated with the presumption will apply for current and
potential retail customers of the approximately 100 broker-dealers with
retail customers that are not also investment advisers and use the
terms ``adviser'' or ``advisor'' in their names, and for current and
potential retail customers of the approximately 16% of all registered
representatives that use these titles and are not dually
registered.\1200\ These benefits will be limited to the extent that
broker-dealers and their financial professionals choose other names or
titles that may indicate that they provide advisory services or use
marketing materials that hold them out as providing advisory services
but do not trigger the presumption or preclude application of the
solely incidental prong of the broker-dealer exception to the
definition of investment adviser.\1201\
---------------------------------------------------------------------------

    \1198\ Several commenters generally ascribed benefits to
restricting the usage of the terms ``adviser'' and ``advisor.'' See
supra footnotes 326-330.
    \1199\ See Relationship Summary Proposal at footnote 674 for
further discussion of the costs associated with a mismatch between
an investor and their preferred type of investment advice provider.
    \1200\ Staff analysis found that 100 retail-facing broker-
dealers as of December 2018 use either ``adviser'' or ``advisor'' in
their firm names. See Relationship Summary Proposal at footnote 685
for more discussion of the estimate that approximately 16% of all
registered representatives use these titles and are not dually
registered.
    \1201\ See supra footnotes 336-340.
---------------------------------------------------------------------------

    As discussed above, under the baseline, broker-dealers may, in
practice, already disclose information about the fees they charge, the
type and scope of services they provide, and any conflicts of interest
associated with their recommendations.\1202\ However, Regulation Best
Interest's explicit requirement that broker-dealers disclose all
material facts related to the scope and terms of their relationship
with a retail customer and all material facts relating to conflicts of
interest that are associated with a recommendation may provide retail
customers with useful information that they may not currently receive,
enabling them to make more informed investment decisions. The magnitude
and nature of this benefit will depend on the extent to which a broker-
dealer already discloses these material facts and how broker-dealers
choose to disclose this information. For example, if broker-dealers
choose to disclose all material facts in one consolidated document, the
disclosure may, depending on the facts and circumstances of the
disclosure, be more informative to some retail customers than
disclosures that are provided across many documents. In other cases,
layered disclosures may allow broker-dealers to target their
disclosures to their particular retail customer base at the relevant
point in time, increasing

the likelihood that investors read these disclosures.\1203\
---------------------------------------------------------------------------

    \1202\ These disclosures may stem from implicit or explicit
requirements under federal securities laws. For example, broker-
dealers are explicitly required to disclose certain aspects of the
fees their retail customers pay, directly and indirectly, under
Exchange Act Rule 10b-10 (see, e.g., 913 Study at footnotes 256-
259). In other cases, courts have found that broker-dealers may
implicitly be required to disclose conflicts of interest or other
material facts related to the scope and terms of their relationship
with retail customers (see, e.g., 913 Study at footnotes 249-255).
See also NASD Notice to Members 92-11.
    \1203\ See the discussion of layered disclosure in supra Section
II.C.1.c. See also supra footnote 540 on the potential benefits of
layered disclosure.
---------------------------------------------------------------------------

    While the Proposing Release's Disclosure Obligation did not
explicitly require a broker-dealer to disclose particular types of
material facts relating to the scope and terms of its relationship with
a retail customer, Regulation Best Interest explicitly requires that
these material facts include: (1) The capacity in which the broker-
dealer is acting; (2) fees and costs; and (3) the type and scope of
services provided, including material limitations on the securities or
investment strategies that may be recommended. We generally anticipate
greater benefits under Regulation Best Interest than under the
Proposing Release. Specifically, to the extent that broker-dealers may
not have disclosed the types of information we are requiring under
Regulation Best Interest, Regulation Best Interest should increase the
consistency of disclosure practices across broker-dealers, which may
make it easier for investors to compare disclosures from and services
offered by different broker-dealers or other firms. In addition, if
some broker-dealers would not have disclosed the specific types of
information required under Regulation Best Interest, and retail
customers find that information useful, Regulation Best Interest may
facilitate more informed decisions by retail customers when they are
deciding whether or not to open an account or use a recommendation. For
example, disclosures about the scope and terms of services offered by a
broker-dealer or about their fees and costs may facilitate more
informed decisions by retail customers as to which type of account is
appropriate for them and whether they should open an account with a
given broker-dealer. Alternatively, disclosures about conflicts of
interest or fees and costs may facilitate more informed decisions by
retail customers as to whether or not they should use a recommendation
of a securities transaction or investment strategy.
    Regulation Best Interest also explicitly requires that disclosures
be ``full and fair,'' and thus that a broker-dealer must provide
sufficient information to enable a retail customer to make an informed
decision with regard to a recommendation.\1204\ Broker-dealers may
disclose, for example, certain conflicts of interest associated with
their recommendations under the baseline. However, under existing
federal securities laws and SRO rules, they are not expressly required
to provide full and fair disclosure in the manner required under
Regulation Best Interest. As a result, existing disclosure practices
may not be designed to specifically help retail customers make informed
decisions about the recommendations they receive. By explicitly
requiring that broker-dealers provide sufficient information to enable
retail investors to make an informed decision with regard to a
recommendation, Regulation Best Interest imposes a minimum standard on
disclosures that may increase the consistency of disclosure practices
across broker-dealers relative to the baseline. This may also cause
such disclosures to be more useful to retail customers in evaluating
the advice they receive, thereby enabling them to make more informed
decisions about the recommendations they receive. To the extent that
disclosure obligations under the baseline already result in broker-
dealers providing sufficient information to enable a retail customer to
make an informed decision with regard to a recommendation, the
magnitude of the benefits from this component of the Disclosure
Obligation is likely to be correspondingly reduced.\1205\
---------------------------------------------------------------------------

    \1204\ See discussion at supra footnotes 463-469.
    \1205\ See supra footnote 1191 for more on disclosure
obligations and requirements under the baseline.
---------------------------------------------------------------------------

    Regulation Best Interest's Disclosure Obligation also establishes a
standard for the form and timing of disclosures by requiring that they
be made in writing prior to or at the time of a recommendation. While
broker-dealers may already disclose information on the fees they
charge, the type and scope of services they provide, and any conflicts
of interest associated with their recommendations under the baseline,
federal securities laws and SRO rules may not explicitly specify the
form and timing of such disclosures. In cases where these requirements
are explicit, they may not require delivery at or prior to a retail
customer's evaluation of the recommendations they receive and any
corresponding investment decision. In contrast, while broker-dealers
will have some flexibility regarding the form and timing of their
disclosures under Regulation Best Interest, retail customers will
receive standardized disclosures about the fees and costs, as well as
any conflicts of interest, associated with a recommendation prior to or
at the time of receiving the recommendation. The Disclosure Obligation
should increase the consistency of disclosure practices across broker-
dealers and across different types of information relative to the
baseline, thereby increasing the likelihood that retail customers have
the information they need to make a more informed and efficient
investment decision at the time they receive a recommendation.
    As noted above, we are permitting oral disclosure prior to or at
the time of a recommendation and written disclosure after a
recommendation has been made under the circumstances outlined in
Section II.C.1, Oral Disclosure or Disclosure After a
Recommendation.\1206\ Because oral disclosure is permitted in cases
where written disclosure prior to or at the time of recommendation is
not feasible or practical, investors may benefit by receiving
information that otherwise may not have been available to them at the
time they make an investment decision. In contrast, because written
disclosure is permitted in instances where existing regulations permit
disclosure after a recommendation, the benefits associated with the
form and timing of disclosures under Regulation Best Interest may be
reduced if the information in such disclosures would have been useful
to investors in making an investment decision. However, for both oral
disclosure prior to or at the time of a recommendation and written
disclosure after a recommendation has been made as permitted under the
circumstances outlined in Section II.C.1, Oral Disclosure or Disclosure
After a Recommendation, retail customers will still receive disclosures
in writing prior to a recommendation regarding the circumstances under
which oral disclosure or disclosure after a recommendation will occur
and the material facts that will be disclosed under these
circumstances.\1207\
---------------------------------------------------------------------------

    \1206\ See supra footnote 1193.
    \1207\ See discussion following supra footnote 301.
---------------------------------------------------------------------------

    Several commenters stated that there are limits to the
effectiveness of disclosure and cited a number of studies suggesting
that disclosure alone is unlikely to solve the issues surrounding, for
example, the conflicts of interest between a broker-dealer or the
associated person of a broker-dealer and a retail customer.\1208\
Another commenter cited the 2008 RAND Study, concluding that investors
do not have the education or background to understand financial
disclosures and do not read long, formulaic documents.\1209\ Other
commenters claimed that

numerous academic studies demonstrate that disclosing conflicts of
interest does not adequately address the potential harm they cause to
investors.\1210\ Another commenter provided studies showing that
disclosure can encourage better behavior by broker-dealers, improving
investor welfare.\1211\
---------------------------------------------------------------------------

    \1208\ See Morningstar Letter; EPI Letter; Better Markets August
2018 Letter; St. John's U. Letter; Letter from Tom C.W. Lin,
Professor of Law, Temple University Beasley School of Law (Jul. 11,
2018) (``Lin Letter'').
    \1209\ See Galvin Letter and discussion of 2008 RAND Study.
    \1210\ See State Treasurers Letter; Better Markets August 2018
Letter; PIABA Letter.
    \1211\ See Morningstar Letter.
---------------------------------------------------------------------------

    As discussed above, we acknowledge studies showing disclosure can
vary in its effectiveness depending on the issue it is intended to
address, its intended audience, and the format in which it is
delivered.\1212\ To the extent some retail customers are not able to
understand the information disclosed by a broker-dealer regarding the
scope of services it provides and the conflicts of interest associated
with the recommendations it makes, the benefits of the Disclosure
Obligation will not directly affect those investors, and may not
increase the efficiency of their investment decisions. However,
Regulation Best Interest is not limited to disclosure; rather, the
Disclosure Obligation is just one component of Regulation Best Interest
that as a whole will enhance the efficiency of recommendations that
broker-dealers provide to retail customers, help retail customers
evaluate the recommendations received, and improve retail customer
protection when receiving recommendations from broker-dealers. In
particular, in addition to the Disclosure Obligation, both the Care
Obligation and the Conflict of Interest Obligation, discussed below,
are designed to promote more efficient investment decisions by imposing
affirmative obligations on the broker-dealer that cannot be fulfilled
through disclosure alone, regardless of whether the retail customer
fully incorporates disclosed information into its investment decisions.
---------------------------------------------------------------------------

    \1212\ See supra Section III.B.4.c.
---------------------------------------------------------------------------

    Additionally, to the extent that the information disclosed by
broker-dealers as a result of Regulation Best Interest increases the
comparability of the securities and services offered by different
broker-dealers, it may foster competition between broker-dealers that
benefits even those retail customers who are not able to understand the
information disclosed by broker-dealers.\1213\ For example, if an
increase in comparability promotes competition on the basis of
recommendation quality, it may cause broker-dealers to mitigate or
eliminate conflicts even in cases where the Conflict of Interest
Obligation does not expressly require policies and procedures to
mitigate or eliminate such conflicts. Because the Disclosure Obligation
provides broker-dealers with some flexibility as to the form and timing
of their disclosures, the magnitude of this benefit will depend on the
extent to which these disclosures are comparable across broker-dealers
or to which the disclosures made by one broker-dealer draw attention to
practices at other broker-dealers that may not be in the best interest
of retail customers.
---------------------------------------------------------------------------

    \1213\ See Relationship Summary Adopting Release at footnote
1035 for similar discussion of the potential benefits comparability
can have on competition.
---------------------------------------------------------------------------

    The magnitude of the Disclosure Obligation's benefits will depend
on a number of factors, including which facts about the scope and terms
of their relationship with retail customers are material, the extent to
which broker-dealers already disclose information in a manner that is
consistent with the Disclosure Obligation under the baseline, the
manner in which they choose to disclose this information, the extent to
which retail customers understand such disclosures and would use them
in making investment decisions, and the extent to which such
disclosures would improve the efficiency of retail customers'
investment decisions, which varies with the specific circumstances of
each retail customer.
b. Costs
    We expect broker-dealers and their financial professionals to incur
costs as a result of Regulation Best Interest's Disclosure Obligation,
and retail customers may incur indirect costs as well. In this section,
we analyze these costs in terms of how Regulation Best Interest changes
disclosure requirements for broker-dealers relative to the baseline.
    The requirement that broker-dealers or their associated persons
disclose the capacity in which they or their associated persons are
acting prior to or at the time of making a recommendation may be
fulfilled by delivering the Relationship Summary, depending on the
facts and circumstances.\1214\ For example, a standalone broker-dealer
may satisfy this requirement of the Disclosure Obligation by delivering
the Relationship Summary to the retail customer, as required pursuant
to Form CRS. In contrast, for broker-dealers who are dually registered,
and associated persons who are either dually registered or who are not
dually registered but only offer broker-dealer services through a firm
that is dually registered, delivering the Relationship Summary will not
be sufficient to disclose the capacity in which they are acting. Thus,
while standalone broker-dealers that deliver the Relationship Summary
generally will not incur additional costs to comply with this
requirement of the Disclosure Obligation, dual-registrants will incur
additional costs, which could include the creation of disclosure
materials as well as policies and procedures to assist their associated
persons in determining when they are acting in a broker-dealer
capacity. However, dual-registrants and their associated persons will
have some flexibility with respect to the form, timing, or method of
satisfying this requirement of the Disclosure Obligation when they or
their associated persons make recommendations acting as brokers,
dealers, or associated persons of a broker or dealer.\1215\
---------------------------------------------------------------------------

    \1214\ See supra footnotes 320-321 and surrounding discussion.
    \1215\ See supra footnote 306.
---------------------------------------------------------------------------

    The presumption that the use of the titles ``adviser'' and
``advisor'' would violate the capacity disclosure requirement may
impose costs on certain broker-dealers and their financial
professionals, investors, and other affected parties. Broker-dealers
and their associated persons currently using names and titles
containing the terms ``adviser'' and ``advisor'' will incur direct
costs, including those associated with changing firm names, written
and/or electronic marketing materials, advertisements, and personal
communication tools that use these titles, among other items, as well
as any costs associated with voluntary outreach to customers to inform
them of these changes.\1216\ While commenters did not provide specific
estimates of these costs, they described them as ``very real costs,''
\1217\ ``significant costs and disruption,'' \1218\ and ``burdensome
and

costly.'' \1219\ To the extent that a broker-dealer's company name that
includes ``adviser'' or ``advisor'' is recognized as a brand in the
market and therefore represents a valuable intangible asset to the
broker-dealer, the broker-dealer may also incur indirect costs if some
of its ``brand value'' is lost following a company name change.\1220\
Additionally to the extent that investors who have a preference for
receiving advice from a broker-dealer or an associated person of a
broker-dealer search exclusively for such advice using the terms
``adviser'' or ``advisor,'' they may experience a reduction in the
choice of service providers available to them (e.g., they might only
find dual-registrants).\1221\ Finally, organizations that award
credentials or certifications to broker-dealers and financial
professionals that include the terms ``adviser'' or ``advisor'' may
lose revenues associated with a reduction in future demand for these
credentials and certifications, or lose revenues associated with the
maintenance of current credentials or certifications by awardees.\1222\
Relatedly, affected financial professionals may experience a loss
associated with any value they currently derive from the use of these
credentials or certifications.\1223\ Rather than incur any of the costs
associated with changing names and titles discussed above, some broker-
dealers may choose to register as investment advisers if they determine
it will be less costly, in which case these broker-dealers will incur
any costs associated with dual registration. The potential costs
associated with the presumption apply for the approximately 100 broker-
dealers, as of December 2018, with retail customers that are not also
investment advisers and use either ``adviser'' or ``advisor'' in their
firm names, and for the approximately 16% of all registered
representatives that use these titles and might be affected by the
presumption.\1224\
---------------------------------------------------------------------------

    \1216\ See e.g., HD Vest Letter (stating that ``[t]he term
`Advisor' permeates nearly every HD Vest disclosure, representative
agreement, selling agreement, client agreement, client
communication, marketing piece, and website'' and noting that
broker-dealers would need to develop compliance policies to ensure
oversight of the names and titles used by their financial
professionals); LPL August 2018 Letter (stating that ``legal
entities with so-called `doing business as' (d/b/a) names containing
the term `advisor' or `adviser'--through which many securities
professionals operate their business practices--will be required to
rename their businesses and incur significant costs and disruption
in updating all marketing materials with the prior name.''); SIFMA
August 2018 Letter; Morgan Stanley Letter.
    \1217\ See HD Vest Letter.
    \1218\ See LPL August 2018 Letter. See also NAIFA Letter (noting
the ``significant costs to update all materials, marketing, signage,
legally-required disclosure documents, etc. . . .''); SIFMA August
2018 Letter (noting the ``significant costs and burdens'' that would
be involved with ``[e]xtensive repapering.'').
    \1219\ See Morgan Stanley Letter.
    \1220\ Academic evidence suggest corporate brands are valuable
intangible assets to firms. See, e.g., Mary E. Barth et al., Brand
Values and Capital Market Valuation, 3 Rev. Acct. Stud. 41 (1998).
    \1221\ The extent of this potential cost depends on how likely
it is that investors rely on the titles ``adviser'' and ``advisor''
in finding a broker-dealer. For example, one survey suggests that
40-50% of investors find their financial professionals through
personal recommendations, not via searches for these titles (see
supra footnote 946 and discussion in Relationship Summary Adopting
Release at Section IV.B.2.a).
    \1222\ See IWI Letter (noting that ``Title Restrictions, as
proposed, have a potential to impact the long-term growth of two of
the Institute's registered marks.''). This commenter did not provide
specific data or estimates on the potential magnitude of this
effect.
    \1223\ See NAIFA Letter. This commenter did not provide specific
data or estimates on the potential magnitude of this effect.
    \1224\ See supra footnote 1200.
---------------------------------------------------------------------------

    The requirement that broker-dealers disclose material facts
relating to the material fees and costs that apply to a retail
customer's transactions, holdings, and accounts may also be partially
fulfilled by delivering the Relationship Summary. Form CRS will require
broker-dealers to provide retail investors a high-level summary of
principal fees and costs, including transaction-based fees, as well as
a narrative discussion of other fees that retail investors will pay
directly or indirectly. However, while providing such high-level
summaries partially complies with the Disclosure Obligation, the
Relationship Summary is unlikely to provide retail customers with all
of the material facts about the fees and costs that apply to a
particular recommendation.\1225\ As a result, Regulation Best Interest
will impose costs on broker-dealers associated with assessing whether
facts about the fees and costs that apply to a retail customer's
transactions, holdings, and accounts are material and delivering those
material facts to retail customers.
---------------------------------------------------------------------------

    \1225\ See the discussion following supra footnote 368.
---------------------------------------------------------------------------

    Broker-dealers will have some flexibility in how they comply with
this requirement, which will allow them to tailor these disclosures to
the needs of their retail customers and to implement them in a manner
that is as cost efficient as possible, given their business models. In
addition, the Disclosure Obligation may be satisfied by providing
documents that broker-dealers are already required to produce or
voluntarily produce under the baseline, such as prospectuses, in which
case they may only incur costs associated with determining the timing
and method by which they deliver these disclosures.\1226\ For example,
under the baseline, broker-dealers may currently deliver prospectuses
to retail customers after the completion of a transaction under the
baseline, but would need to deliver them prior to or at the time of a
recommendation under Regulation Best Interest, unless made under the
circumstances outlined in Section II.C.1, Oral Disclosure or Disclosure
After a Recommendation, allowing them to rely on delivery of
information after the fact. In cases where required disclosures are
already produced under the baseline, broker-dealers and their
associated persons may still incur costs associated with delivering
these disclosures prior to or at the time of a recommendation if they
are not delivered by that time under the baseline.
---------------------------------------------------------------------------

    \1226\ See discussion at supra footnotes 495-496.
---------------------------------------------------------------------------

    Broker-dealers may also incur costs as a result of Regulation Best
Interest's requirement that they disclose material facts about the type
and scope of services provided to a retail customer, including any
material limitations on the securities or investment strategies
involving securities that may be recommended to the retail customer. As
discussed above, some broker-dealers may be able to fulfill their
obligation to disclose these material facts, such as those related to
account monitoring, account minimums, or material limitations on the
securities or investment strategies that may be recommended, by
complying with Form CRS or by using disclosures included in account
opening agreements or other customer disclosures.\1227\ For these
broker-dealers, this requirement of the Disclosure Obligation should
not cause them to incur additional costs beyond an initial assessment
of whether they can comply with the Disclosure Obligation using Form
CRS or pre-existing disclosures. In cases where a broker-dealer is not
able to disclose all material facts relating to the type and scope of
services they provide by complying with Form CRS or in combination with
existing disclosures, broker-dealers will incur costs associated with
assessing which facts about the type and scope of services provided to
retail customers are material and delivering written disclosure of
those material facts to retail customers. As discussed above, broker-
dealers will have some flexibility in how they comply with this
requirement, allowing them to tailor these disclosures to the needs of
their retail customers and to their business models and to implement
these disclosures in a cost efficient manner.
---------------------------------------------------------------------------

    \1227\ See supra footnote 1203.
---------------------------------------------------------------------------

    While the Proposing Release's Disclosure Obligation did not
explicitly require broker-dealers or their associated persons to
disclose particular types of material facts relating to the scope and
terms of their relationship with a retail customer, Regulation Best
Interest explicitly requires that these material facts include the
capacity in which the broker-dealer or its associated person is acting;
material fees and costs; the type and scope of services provided,
including material limitations on the securities or investment
strategies that may be recommended; and all material facts relating to
conflicts of interest that are associated with a recommendation. To the
extent that broker-dealers are not disclosing this information or are
not

disclosing it by the time of a recommendation, broker-dealers may incur
higher costs associated with disclosing these material facts under
Regulation Best Interest compared to the baseline.
    In general, for any material facts relating to the scope and terms
of its relationship with retail customers, a broker-dealer may have to
determine how to disclose those facts in a manner that is ``full and
fair,'' as required by Regulation Best Interest, which will cause it to
incur costs. Similarly, the requirement that broker-dealers disclose
all material facts in writing prior to or at the time of a
recommendation may also impose costs on broker-dealers. For example,
even if a broker-dealer currently discloses some information about its
fees under the baseline, it may not currently disclose that information
prior to the time of a recommendation, and may incur costs updating
systems and processes to ensure the information is disclosed in a
manner that complies with Regulation Best Interest's requirements,
including any costs associated with delivery of the information to
retail customers.
    Broker-dealers may incur costs associated with the full and fair
disclosure of all material facts relating to conflicts of interest that
are associated with a recommendation. As discussed below in our
analysis of the Conflict of Interest Obligation, broker-dealers
currently have obligations to disclose certain material conflicts of
interest under the baseline.\1228\ To the extent that broker-dealers
will be required to disclose material facts about conflicts of interest
that they do not currently disclose to retail customers under the
baseline, broker-dealers will incur costs associated with assessing
whether facts about these conflicts are material and delivering those
facts to retail customers. They also may incur costs associated with
identifying particular conflicts of interest to disclose.\1229\
---------------------------------------------------------------------------

    \1228\ See infra footnote 1261. See also supra footnotes 985-
988.
    \1229\ See infra Section III.C.4 for a discussion of costs
associated with identifying conflicts of interest as part of the
Conflict of Interest Obligation.
---------------------------------------------------------------------------

    As discussed above, there are circumstances where broker-dealers
and their associated persons may make oral disclosures or written
disclosures after the time of a recommendation under the circumstances
outlined in Section II.C.1, Oral Disclosure or Disclosure After a
Recommendation. Where oral disclosures are made, broker-dealers and
their associated persons may incur costs associated with subsequently
documenting such disclosures. These costs may include the time spent
documenting such disclosures, the development of systems and processes
necessary to document such disclosures, training associated persons to
use these systems and processes, and supervising the compliance by
associated persons with this obligation. For both oral disclosures and
written disclosures made after a recommendation, broker-dealers and
their associated persons may incur costs associated with developing
initial disclosures about the material facts subject to oral
disclosures and written disclosures after a recommendation, the
circumstances under which such disclosures will be made, as well as
costs associated with training financial professionals to make such
disclosures in a manner that complies with Regulation Best Interest.
    While most of the costs associated with preparing and delivering
disclosures are likely to be incurred by broker-dealers, their
associated persons may incur costs as well. For example, when a
financial professional is aware that the broker-dealer's disclosure is
insufficient to describe ``all material facts,'' the associated person
must supplement that disclosure, and may incur costs in developing such
disclosure on their own to ensure they are in compliance with the
Disclosure Obligation.\1230\ The magnitude of this cost will depend on
the extent to which the financial professional cannot rely on the
disclosure made by the broker-dealer.
---------------------------------------------------------------------------

    \1230\ See discussion following supra footnote 307 for an
example of a case where an associated person of a broker-dealer may
be required to provide her own disclosures in order to comply with
the Disclosure Obligation.
---------------------------------------------------------------------------

    As discussed above, while we are unable to quantify the full costs
of Regulation Best Interest, including the Disclosure Obligation, we
are able to estimate some of the costs associated with the Disclosure
Obligation, specifically the costs related to information collection
requirements as defined by the Paperwork Reduction Act. As discussed
further below in Section IV.B.1, the Commission estimates that the
preparation and delivery of standardized language, fee schedules, and
standardized conflict disclosures that broker-dealers are required to
provide to retail customers to comply with the Disclosure Obligation
will impose on broker-dealers an initial aggregate burden of 6,216,125
hours and an additional initial aggregate cost of $42.84 million as
well as an ongoing aggregate burden of 2,101,493 hours.\1231\ Thus, the
Disclosure Obligation will impose an estimated initial aggregate cost
of at least $1,508.88 million and an ongoing aggregate annual cost of
at least $499.59 million on broker-dealers.\1232\ We note

that these estimates assume broker-dealers are not currently producing
and delivering documents associated with the Disclosure Obligation. To
the extent that broker-dealers are already doing so, these estimates
may overstate the costs associated with the information collection
requirements as defined by the Paperwork Reduction Act.
---------------------------------------------------------------------------

    \1231\ The estimate of the initial aggregate burden is based on
the following calculation: 5,630 hours + 7,560 hours + 40,200 hours
+ 2,040,000 hours + 3,780 hours + 20,100 hours + 2,040,000 hours +
3,780 hours + 15,075 hours + 2,040,000 hours = 6,216,125 hours. As
discussed in more detail in infra Section IV.B.1, 5,630, 7,560, and
40,200 hours are estimates of the initial aggregate burden for the
preparation of disclosure of capacity, type, and scope, for dual-
registrants and small and large broker-dealers, respectively.
2,040,000 hours is the estimate of the initial aggregate burden for
the delivery of the disclosure of capacity, type, and scope to
retail customers. 3,780 and 20,100 hours are estimates of the
initial aggregate burden for the preparation of disclosure of fees
for small and large broker-dealers, respectively. 2,040,000 hours is
the estimate of the initial aggregate burden for the delivery of the
disclosure of fees to retail customers. 3,780 and 15,075 hours are
estimates of the initial aggregate burden for the preparation of
disclosure of material conflicts of interest for small and large
broker-dealers, respectively. 2,040,000 hours is the estimate of the
initial aggregate burden for the delivery of the disclosure of
material conflicts of interest to retail customers. The estimate of
the initial aggregate cost is based on the following calculation:
$2.80 million + $3.80 million + $15.00 million + $1.88 million +
$9.99 million + $1.88 million + $7.49 million = $42.84 million. As
discussed in more detail in supra Section V.D, $2.80 million, $3.80
million, and $15.00 million are estimates of the initial aggregate
cost for the preparation of disclosure of capacity, type, and scope,
for dual-registrants and small and large broker-dealers,
respectively. $1.88 million and $9.99 million are estimates of the
initial aggregate cost for the preparation of disclosure of fees for
small and large broker-dealers, respectively. $1.88 million and
$7.49 million are estimates of the initial aggregate cost for the
preparation of disclosure of material conflicts of interest for
small and large broker-dealers, respectively. The estimate of the
ongoing aggregate burden is based on the following calculation:
3,941 hours + 3,024 hours + 40,200 hours + 408,000 hours + 1,512
hours + 8,040 hours + 816,000 hours + 756 hours + 4,020 hours +
816,000 hours = 2,101,493 hours. As discussed in more detail in
supra Section V.D, 3,941, 3,024, and 40,200 hours are estimates of
the ongoing aggregate burden for the preparation of disclosure of
capacity, type, and scope, for dual-registrants and small and large
broker-dealers, respectively. 408,000 hours is the estimate of the
ongoing aggregate burden for the delivery of the disclosure of
capacity, type, and scope to retail customers. 1,512 and 8,040 hours
are estimates of the ongoing aggregate burden for the preparation of
disclosure of fees for small and large broker-dealers, respectively.
816,000 hours is the estimate of the ongoing aggregate burden for
the delivery of the disclosure of fees to retail customers. 756 and
4,020 hours are estimates of the ongoing aggregate burden for the
preparation of disclosure of material conflicts of interest for
small and large broker-dealers, respectively. 816,000 hours is the
estimate of the ongoing aggregate burden for the delivery of the
disclosure of material conflicts of interest to retail customers.
    \1232\ These estimates are calculated as follows: (96,125 hours
of in-house legal counsel) x ($415.72/hour for in-house counsel) +
(6,120,000 hours for delivery for each customer account) x ($233.02/
hour for registered representative) + (90,763 hours for outside
legal counsel) x ($497/hour for outside legal counsel) = $1,508.88
million, and (35,056 hours of in-house legal counsel) x ($415.72/
hour for in-house counsel) + (2,040,000 hours for delivery for each
customer account) x ($233.02/hour for registered representative) +
(26,437 hours for in-house compliance counsel) x ($365.39/hour for
outside legal counsel) = $499.59 million. The hourly wages for in-
house legal and compliance counsel and registered representatives