Prior commenters noted that the average excess load, by definition,
is zero and would likely yield a much lower estimate of aggregate
harm, than the estimate published by the CEA and include in the DOL
RIA. See, e.g., Lewis (2017), supra footnote 1099. See also supra
footnotes 1169 and 1170.
    \1325\ Brokers may still be compensated for selling no-load
funds by 12b-1 fees, revenue sharing, or other arrangements.
    \1326\ See supra footnote 1102 for discussion of how trends in
the relative performance of load funds may have changed in more
recent years.
---------------------------------------------------------------------------

    Reuter (2015) employs a variety of methods in computing the
difference in net returns between broker-sold and direct-sold actively
managed funds, including different ways of computing net returns (e.g.,
net return, net return plus 12b-1 fees, net alphas, and ordinary least-
squares and weighted least-squares regression methods), different
samples (e.g. ``non-specialized domestic equity''), and different
weighting schemes (e.g. equally weighted or value weighted returns).
Reuter concludes by noting that the performance difference between
broker-sold and direct-sold actively managed mutual funds is likely to
fall between 0.20% and 0.47%, depending whether or not 12b-1 fees are
included in the estimation. Given that the underperformance only
affects broker-sold funds, and applying these underperformance
estimates to load funds, the estimated monetized underperformance of
broker-sold funds

ranges from $4.1 billion per year to $9.7 billion per year.
    As discussed elsewhere in this release, we expect Regulation Best
Interest will reduce the severity of conflicts of interest that may
contribute to the underperformance between broker-sold and direct-sold
mutual funds. However, the range noted above most likely overestimates
the expected reduction in harm associated with broker-sold mutual funds
due to Regulation Best Interest for a number of reasons. First, as
discussed by Bergstresser et al. (2009), broker-sold funds can be sold
by both broker-dealers and investment advisers (e.g., dually registered
investment advisers), and the data these studies relied upon is not
sufficiently granular to identify the fraction of broker-sold funds
sold by each type of financial professional.\1327\ Because Regulation
Best Interest applies to registered broker-dealers, this range would
need to be narrowed to reflect the proportion of broker-sold funds sold
by registered broker-dealers.
---------------------------------------------------------------------------

    \1327\ See Bergstresser et al. (2009), supra footnote 1048.
---------------------------------------------------------------------------

    Second, the estimated range fully attributes the differences
between direct-sold funds and broker-sold funds to conflicts of
interest between retail customers and broker-dealers. This might over-
estimate the benefits of Regulation Best Interest because there might
be other unobservable systematic differences between investors who
choose direct-sold funds versus those who choose to employ a financial
professional. For example, retail customers that buy broker-sold funds
might be willing to pay more for those funds if they receive intangible
benefits from a broker-dealer's recommendation that are not reflected
in the relative performance between funds sold through these two
channels. Furthermore, not all sales in the broker-sold channel are
triggered by recommendations provided by broker-dealers or their
associated persons. For example, customer-directed transactions may not
involve a recommendation at all.
    Third, measuring a fund's performance using its net return relative
to a benchmark might not be the most accurate measure of a fund
manager's skill or the value created by a fund to an investor.\1328\
Therefore, estimating investor harm assuming this definition of the
value created by a fund might potentially overstate or understate this
harm.
---------------------------------------------------------------------------

    \1328\ See supra footnote 1176.
---------------------------------------------------------------------------

    Taking into account these caveats,\1329\ to the extent that
Regulation Best Interest mitigates, and in the limit, eliminates the
adverse effects of conflicts of interest on broker-dealers'
recommendations, we estimate that the benefits attributable to
Regulation Best Interest could be as large as $4.1 billion per year to
$9.7 billion per year when estimated assuming that the relative
underperformance of broker-sold mutual funds estimated in the academic
literature reflects conflicts of interest that will eventually be
eliminated.
---------------------------------------------------------------------------

    \1329\ See supra footnotes 1172-1178 for further discussion of
the limitations that apply in using the relative underperformance of
broker-sold mutual funds as an estimate of investor harm and,
therefore, the benefits of Regulation Best Interest.
---------------------------------------------------------------------------

    As with our other estimates of the benefits above, we assume that
there is already a decreasing trend in the underperformance gap under
the baseline that is consistent with the decreasing trend in mutual
fund expense ratios of 3%, and that Regulation Best Interest will
accelerate this trend to a decay rate under three scenarios: (1)
Moderate decay at 6%; (2) accelerated decay at 9%; and (3) rapid decay
at 12%. Similarly, we assume a discount rate of 9.76% as above to value
these cash flows. Under these assumptions, the present value of the
potential benefits of Regulation Best Interest in the mutual fund
sector, relative to the baseline, from limiting or eliminating the
adverse effects of conflicts of interest could be as large as
approximately $6.8 to $16 billion in the moderate decay scenario, $11.4
to $26.7 billion in the accelerated decay scenario, and $14.7 to $34.5
billion in the rapid decay scenario.
    Finally, we can obtain an approximate estimate of the present value
of the costs associated with Regulation Best Interest using the costs
estimated in Section IV for purposes of the Paperwork Reduction Act,
which imply aggregate initial costs of approximately $5.96 billion and
ongoing costs of $2.37 billion. Assuming the initial costs are incurred
one year from the rule's enactment, and using a discount rate of 9.76%
as above, the present value of these costs is approximately $27.5
billion. Note that this cost estimate cannot be directly compared with
the benefit estimates above as the benefits estimates are with respect
to mutual funds only.

D. Efficiency, Competition, and Capital Formation

    As discussed above, Regulation Best Interest is designed to address
the agency costs that arise when an associated person of the broker-
dealer provides a recommendation to a retail customer that may not be
fully addressed by the regulatory baseline. Regulation Best Interest is
intended to reduce agency costs and other costs by enhancing the
standard of conduct of broker-dealers, increasing the effectiveness of
disclosure to allow retail customers to make a more informed decision
with respect to the recommendation they receive and by requiring
broker-dealers to implement policies and procedures reasonably designed
to reduce the effect of conflicts of interest on recommendations to
retail customers. Specifically, the Disclosure Obligation and Conflict
of Interest Obligation require broker-dealers to disclose information
that, while not necessarily new in all instances, will reach retail
customers more directly and more timely than under the regulatory
baseline. In addition, the disclosed information would raise a retail
customer's salience of fees, scope of the relationship, conflicts of
interest, and limitations of the menu of securities from which the
retail customer receives recommendations as potential factors affecting
the recommendations of a broker-dealer or its associated persons. The
content and form of disclosure may help some retail customers make more
informed decisions with regards to whether to act on a recommendation
provided by an associated person of the broker-dealer. Regulation Best
Interest may also reduce the agency costs faced by these retail
customers.
    The Conflict of Interest Obligation also requires broker-dealers to
implement policies and procedures to reduce the effect of conflicts of
interest and securities menu limitations on recommendations to retail
customers. For broker-dealers that implement more effective policies
and procedures, the obligation may increase the efficiency of the
recommendations for their retail customers. As a result, Regulation
Best Interest may reduce the agency costs faced by these retail
customers.
    The Care Obligation requires a broker-dealer and its associated
persons to have a reasonable basis to believe that a recommendation
provided to a retail customer is in the customer's best interest. This
reasonable basis should include factors similar to those identified by
the Suitability Rule of the current regulatory regime as well as
additional factors. For example, relative to the regulatory baseline,
the Care Obligation requires that a broker-dealer and its associated
persons consider costs, among other factors, and establish a direct
link between the attributes of a security or investment strategy and
the retail customer's best interest. By

requiring consideration of costs and by including an explicit link
between the investment-related factors and the best interest, the
obligation may increase the efficiency of the recommendations for the
retail customer. As a result, Regulation Best Interest may reduce the
agency costs faced by these retail customers.
    Through these effects, as discussed below, Regulation Best Interest
may have an effect on competition, capital formation, and efficiency.
1. Competition
    Regulation Best Interest may have competitive effects for the
market for investment advice and may affect how broker-dealers compete
with each for retail customers. As discussed in Section III.C, the
brokerage industry currently recognizes that broker-dealers and their
associated persons may have conflicts of interest that create
incentives for broker-dealers or their associated persons to make
recommendations that, while suitable for their retail customers, may
not be in the best interest of (and may not be the most efficient
recommendations for) such customers. As noted above in Section
III.B.2.c, a FINRA survey suggested that broker-dealers currently
employ different methods for managing conflicts of interest, with some
methods being more effective than others at reducing the effect of
conflicts of interest on recommendations. These methods generally
depend on the size and complexity of a broker-dealer's business model.
Against this backdrop, the cost of complying with Regulation Best
Interest, scaled by the size and complexity of a broker-dealer's
business activities, may be higher for broker-dealers that currently
employ less effective methods for managing conflicts of interest.
    Relative to broker-dealers that face lower compliance costs,
broker-dealers that face higher compliance costs may be at a
disadvantage when competing for retail customers and may not be able to
fully pass on these costs to their retail customers. For example, the
presumption related to the titles ``adviser'' and ``advisor'' may
impose higher costs on broker-dealers that use these terms in their
names or titles, but that are not dual-registrants.\1330\ The extent to
which broker-dealers are able to pass on costs to their retail
customers depends on a number of factors that include the availability
of close substitutes for the services provided by broker-dealers and
the cost to retail customers of switching accounts to a competing
broker-dealer, investment adviser, or other financial services
provider. If broker-dealers are unable to pass costs through to
customers, it is possible that some of the broker-dealers that face
high compliance costs may decide to exit the market for investment
advice in the capacity of a broker-dealer.
---------------------------------------------------------------------------

    \1330\ See supra footnotes 1216-1220.
---------------------------------------------------------------------------

    The potential competitive effects associated with compliance costs
could be further exacerbated by how broker-dealers choose to comply
with the component obligations of Regulation Best Interest. As
discussed in Section III.C.4, broker-dealers are given flexibility when
addressing conflicts of interest through policies and procedures.
Because Regulation Best Interest and the component obligations are
generally principles-based, a broker-dealer would have to determine
what constitutes effective means of addressing a given conflict of
interest, and how it should relate to the size and complexity of a
broker-dealer's business model. For a broker-dealer that is dually
registered or for a broker-dealer that is affiliated with an investment
adviser, the overall costs of complying with Regulation Best Interest
may encourage the broker-dealer to exit the market for providing
investment advice in the capacity of a broker-dealer and, instead,
provide advice only in the capacity of an investment adviser. Whereas
broker-dealers have explicit requirements to establish written policies
and procedures reasonably designed to disclose, mitigate or eliminate
identified conflicts of interest that create an incentive for the
associated persons to place their interest ahead of the retail
customer, the fiduciary standard for investment advisers relies on full
and fair disclosure and informed consent to address conflicts of
interest.\1331\ Investment advisers must also adopt and implement
written policies and procedures reasonably designed to prevent
violations of the Advisers Act, including violations related to
undisclosed conflicts of interest.\1332\ More generally, compliance
costs may drive such firms to no longer offer advice in the capacity of
a broker-dealer if firms anticipate the profitability of their broker-
dealer business under Regulation Best Interest to be lower than the
profitability of their advisory business.
---------------------------------------------------------------------------

    \1331\ As discussed in supra Section I.C, some broker-dealer
commenters also expressed the view that by requiring mitigation of
financial incentives, Regulation Best Interest would require more of
broker-dealers than what is required of investment advisers under
their fiduciary duty, which could create a competitive issue for
broker-dealers that could further encourage migration from the
broker-dealer to investment adviser model and result in a loss of
choice for retail customers. Because of this competitive issue,
dually registered financial professionals could be incentivized to
recommend advisory accounts through compensation.
    \1332\ See Advisers Act Rule 206(4)-7.
---------------------------------------------------------------------------

    Similar concern over costs of complying with Regulation Best
Interest may deter some broker-dealers from entering the market for
investment advice. Higher entry costs may have long-run competitive
effects on prices paid by retail customers, as incumbents adjust their
strategic behavior to reflect a lower threat of competition from new
entrants, relative to the baseline.\1333\ Regulation Best Interest may
also encourage competition for retail customers to the extent that the
Disclosure Obligation increases the retail customers' salience to
variables such as fees and conflicts of interest that would facilitate
comparability across broker-dealers. For example, retail customers may
form preferences over some or all of the disclosed variables, such as
fees, securities or service offerings, and range of conflicts of
interest, and may choose one broker-dealer over another or over an
investment adviser based on these preferences. In turn, if firms
anticipate that there is a possibility that retail customers may use
the disclosed variables for comparability purposes, broker-dealers may
compete over some or all of these variables to attract more retail
customers. This potential competition may result in greater securities
or service offerings, or lower fees for retail customers.
---------------------------------------------------------------------------

    \1333\ See, e.g., Mas-Colell et al. (1995).
---------------------------------------------------------------------------

    Regulation Best Interest may also affect how broker-dealers compete
with each other when negotiating with investment sponsors for access to
securities. The findings of the aforementioned FINRA survey suggest
that broker-dealers may face different degrees of competition when
negotiating with product sponsors for access to certain securities. For
instance, the survey observed that some product sponsors rate the
broker-dealers that are interested in distributing their securities
based on criteria such as product expertise and experience, the quality
of the control environment, and the strength of their sales practices.
Broker-dealers that have higher ratings, based on these criteria may be
given access to a broader range of securities, including more complex
securities. In contrast, broker-dealers that have lower ratings may be
given access to a narrower range of securities. To the extent
Regulation Best Interest has the effect of increasing and homogenizing
the product expertise and experience (e.g., the Care Obligation) and
the quality of the

control environment (e.g., the Conflict of Interest Obligation) across
the complying broker-dealers, the final rule may increase the
competition across firms when negotiating with product sponsors. This
increased competition may allow product sponsors to economize on the
distribution costs, and may result in lower fees for retail customers.
    Regulation Best Interest may also have competitive effects for the
market for investment advice, more generally. Regulation Best Interest
may affect how broker-dealers compete with firms that provide advice in
a capacity other than as a broker-dealer, such as an investment
adviser. Under the regulatory baseline, investment advisers owe a
fiduciary duty to their clients. Some commenters describe this standard
of conduct as a ``higher'' standard compared to the standard of conduct
applies to broker-dealers under the regulatory baseline.\1334\
---------------------------------------------------------------------------

    \1334\ See Letter from Ken Fisher, Fisher Investments (Jul. 31,
2018) (``Fisher Letter''); PIABA Letter; FPC Letter; NASAA August
2018 Letter; U. of Miami Letter; Rhoades August 2018 Letter.
---------------------------------------------------------------------------

    For some retail customers the duty owed to them by their firm or
financial professional may be a determining factor when deciding which
type of firm or financial professional they want to use. As previously
noted, key elements of the standard of conduct that applies to broker-
dealers, at the time a recommendation is made, under Regulation Best
Interest will be substantially similar to key elements of the standard
of conduct that applies to investment advisers pursuant to their
fiduciary duty under the Advisers Act. As such, the standard of conduct
under Regulation Best Interest may make broker-dealers more attractive
to certain retail customers who seek recommendations for securities
transactions or investment strategies in a more cost effective manner,
but worry about the duties owed to them by their financial
professional. As a result, Regulation Best Interest may increase the
competition between broker-dealers and investment advisers for retail
customers interested in obtaining investment advice. In competing for
business, broker-dealers and investment advisers may lower their fees,
resulting in retail customers paying less for obtaining investment
advice. To the extent that this potential lower cost causes an increase
in the demand for investment advice in the capacity of a broker-dealer,
this positive competitive effect may offset some of the negative
potential competitive effects of Regulation Best Interest, such as
higher cost of entry in the market for investment advice in the
capacity of a broker-dealer relative to the baseline, as discussed
above.
    The Disclosure Obligation may also encourage competition for retail
customers across broker-dealers and investment advisers. As noted
above, the Disclosure Obligation would require broker-dealers to make
full and fair disclosure of all material facts relating to the scope
and terms of the relationship with the retail customer and all material
facts relating to conflicts of interest that are associated with a
recommendation. Investment advisers are also required to provide full
and fair disclosure of material facts about similar elements under the
current regulatory regime. To the extent that the Disclosure Obligation
raises the salience of variables that may facilitate comparison across
broker-dealers and investment advisers, Regulation Best Interest may
encourage competition between broker-dealers and investment advisers.
    Regulation Best Interest may also have competitive effects for
financial professionals that offer investment advice in a capacity
other than that of a broker-dealer (e.g., investment advisers and other
financial professionals that are not registered with the Commission,
such as insurance companies, banks, and trust companies). As discussed
above in Section III.C.4, depending on the effectiveness of disclosure
and the effectiveness of policies and procedures that address
securities menu limitations (e.g., the Disclosure Obligation and
Conflict of Interest Obligation), Regulation Best Interest may reduce
the retail customers' aggregate demand for certain securities that are
distributed by broker-dealers and securities on which broker-dealers or
their associated persons provide recommendations. Instead, retail
customers may access some of these or comparable securities from other
financial professionals. For example, a retail customer may access
certain securities offered by broker-dealers through corporate
fiduciaries such as commercial banks or trust companies. Alternatively,
a retail customer may open an advisory account and access securities
that are comparable to those offered by the broker-dealer. To the
extent that Regulation Best Interest causes a potential reduction in
the retail customers' aggregate demand for securities offered by
broker-dealers, retail customers' aggregate demand may increase for
securities offered by non-broker-dealers. Regulation Best Interest may
also affect how product sponsors compete for flows from retail
customers. As discussed above in Section III.C.4, depending on the
effectiveness of disclosure and the effectiveness of policies and
procedures that address limitations of the menu of securities (e.g.,
Disclosure and Conflict of Interest Obligations), Regulation Best
Interest may reduce the aggregate demand for certain sponsors'
securities. To remain competitive, product sponsors that face decreased
demand as a result of Regulation Best Interest may reprice their
securities (e.g., by offering different share classes), lower their
fees, or seek alternative distribution channels that are not affected
by Regulation Best Interest. For example, product sponsors may choose
to distribute their securities through investment advisers or through
commercial banks to the extent that the banks can engage in limited
broker-dealer activity, subject to certain conditions, without having
to register as broker-dealers.\1335\ Finally, product sponsors may
choose to distribute their securities directly to retail investors
rather than indirectly, through broker-dealers. The potential
competitive effect of Regulation Best Interest on product sponsors may
manifest itself in lower product fees for retail customers.
---------------------------------------------------------------------------

    \1335\ See Exchange Act Sections 3(a)(4)(B) and 3(a)(5)(B) and
rules thereunder (providing banks exceptions from ``broker'' and
``dealer'' status for specified securities activities).
---------------------------------------------------------------------------

2. Capital Formation and Efficiency
    Regulation Best Interest is designed to reduce the agency and other
costs to retail customers associated with obtaining recommendations
from broker-dealers. As discussed above, to reduce these costs,
Regulation Best Interest would impose obligations on broker-dealers
that are designed to increase the efficiency of the recommendations to
retail customers relative to the recommendations that broker-dealers
and their associated persons provide to retail customers under the
regulatory baseline.
    To the extent retail customers receive recommendations that are
more efficient relative to the baseline, Regulation Best Interest would
increase the efficiency of the portfolio allocation that a retail
customer makes as a result of the recommendation received. As discussed
above in Sections III.A.2 and III.C, this would occur when a retail
customer increases the allocative efficiency of his or her portfolio
when the recommendation leads to a reallocation of resources across
time and market and economic conditions that generate a higher net
benefit to the retail customer, relative to the baseline. Thus, to the
extent that Regulation Best Interest

increases the efficiency of the associated persons' recommendations to
retail customers, the final rule would have a positive effect on the
retail customers' allocative efficiency.
    Regulation Best Interest may also increase the efficiency of the
recommendations involving rollovers or transfers of assets from
retirement accounts to other taxable or non-taxable accounts, relative
to the baseline. As noted above, the incentives associated with this
type of recommendation are particularly acute because of the size of
the transaction and the importance to the retail customer (e.g., given
that the amount of assets associated with such recommendations can be a
significant portion of a retail customer's net worth). The potential
increase in the efficiency of this type of recommendation may improve
the allocative efficiency of assets held in retirement accounts, and
may encourage retail customers to consider a rollover or transfer of
assets recommendation to potentially increase the efficiency of their
retirement asset allocation.
    Similarly, Regulation Best Interest may increase the efficiency of
the recommendations regarding account types. As discussed above,
currently, a dual-registrant may have an incentive to recommend the
account type that benefits the dual-registrant at the expense of the
retail customer. The potential increase in the efficiency of this type
of recommendation under Regulation Best Interest relative to a similar
recommendation that the dual-registrant may provide under the baseline
may improve the allocative efficiency of the retail customer's assets
held in this account.
    The possibility that Regulation Best Interest may increase the
efficiency of the recommendations provided by the associated persons of
the broker-dealer may enhance the attractiveness of broker-dealer
services for those investors who currently do not invest through
broker-dealers. Although there are costs associated with these
requirements, the protections deriving from these requirements may
benefit investors, issuers, and intermediaries by helping to create a
marketplace where a higher number of retail customers invest through
broker-dealers, relative to the current regulatory regime. If retail
customers are more willing to participate in the securities markets
through broker-dealers, Regulation Best Interest would have a positive
effect on capital formation.

E. Reasonable Alternatives

    Regulation Best Interest establishes a new standard of conduct for
broker-dealers under the Exchange Act that is intended to address the
agency costs that retail customers face when obtaining recommendations
of securities transactions and investment strategies from broker-
dealers and their associated persons. This new standard is intended to
enhance investor protection, while preserving, to the extent possible,
retail investor access (in terms of choice and cost) to differing types
of investment services and securities. As noted above, the Commission
considered several reasonable alternative policy choices, including (1)
applying the fiduciary standard under the Advisers Act to broker-
dealers, and (2) adopting a ``new'' uniform fiduciary standard of
conduct applicable to both broker-dealers and investment advisers, such
as that recommended by the staff in the 913 Study. The Commission also
considered adopting similar standards to those the DOL had provided
under its fiduciary rule to broker-dealers and investment
advisers.\1336\ We examine the effects of these primary alternatives,
as well as several other alternatives that we considered both in the
Proposing Release and in response to comments.
---------------------------------------------------------------------------

    \1336\ We had additionally discussed in the Proposing Release an
alternative of a principles-based best interest standard. See
Proposing Release at 21663. Some of the economic effects of this
alternative would be similar to the economic effects of any of the
fiduciary alternatives, which would also be principles-based.
---------------------------------------------------------------------------

1. Fiduciary Standard for Broker-Dealers
    As discussed in the Proposing Release and as raised by commenters,
instead of adopting our approach in Regulation Best Interest, the
Commission could have alternatively imposed a form of fiduciary
standard on broker-dealers providing recommendations to retail
customers. The Commission recognized that fiduciary standards vary
among investment advisers, banks acting as trustees or fiduciaries, or
ERISA plan providers, but fiduciaries are generally required to act in
the best interest of their clients.\1337\
---------------------------------------------------------------------------

    \1337\ See Proposing Release at footnotes 328-329. For example,
an investment adviser's fiduciary duty under the Advisers Act
comprises a duty of care and a duty of loyalty. This combination of
care and loyalty obligations has been characterized as requiring the
investment adviser to act in the ``best interest'' of its client at
all times. See Fiduciary Interpretation.
---------------------------------------------------------------------------

    Under any of the options considered, the Commission would have to
craft a mechanism to apply a uniform standard of conduct to all
financial professionals regardless of how they engage with their retail
customers. This approach was advocated by certain commenters, many of
whom asserted that it would reduce retail investor confusion as it
would ensure that investors are provided the same standard of care and
loyalty regardless of what type of financial professional they
engage.\1338\ As discussed above and in detail further below we
believe, in practice, that such uniformity would be difficult to
implement and disruptive to pursue as a result of various factors,
including the key differences in the ways broker-dealers and investment
advisers engage with retail clients. Achieving such uniformity could
require narrowing the type and scope of services permitted to be
provided by various types of financial professionals. If we were to
pursue such an approach, it could reduce retail customers' confusion
with respect to the duties owed to them by the broker-dealers and
investment advisers and could reduce potential costs to some investors
associated with choosing a type of relationship that is not well suited
to them, because under a uniform standard, retail customers of each
type of financial professional would be subject to the same standard of
conduct.
---------------------------------------------------------------------------

    \1338\ See, e.g., Better Markets Letter at 24.
---------------------------------------------------------------------------

    However, this uniformity could come at a cost to both investors and
financial service providers. Such an approach could result in a
standard of conduct for broker-dealers that is not appropriately
tailored to the structure and characteristics of the broker-dealer
model (i.e., transaction specific recommendations and compensation),
and might not properly take into account, or build upon, existing
obligations that apply to broker-dealers, including under FINRA
rules.\1339\ A potential implication of this paradigm shift would be
that broker-dealers would face significant compliance costs, at least
in the short run, relative to the regulatory baseline. Potentially
higher compliance costs could increase the incentive to offer
investment advice in the capacity of investment adviser and could
decrease the incentive to offer investment advice in the capacity of
broker-dealer. To the extent broker-dealers act on the increased
incentives and decide to participate in the market for investment
advice only in the capacity of investment advisers, retail customers
could experience an increase in the cost of obtaining investment
advice, relative to the baseline. Furthermore, as noted above, the
potential exit of broker-dealers from the market for investment advice
in the broker-dealer capacity could limit how retail customers would
access certain securities or investment strategies and how they would
pay for investment advice, which, in turn, could increase

their costs of obtaining investment advice, relative to the
baseline.\1340\ To the extent broker-dealers decide to continue to
participate in the market for investment advice in the capacity of
broker-dealers, they could pass on increased compliance costs, in full
or in part, to their retail customers. As a result, retail customers
could experience an increase in the cost of obtaining investment
advice, relative to the baseline. The potential increase in the cost of
accessing investment advice could push some retail customers outside
the market for investment advice from Commission-registered broker-
dealers and investment advisers.\1341\
---------------------------------------------------------------------------

    \1339\ See also 913 Study at 139-143.
    \1340\ See supra Section III.D.1.
    \1341\ See supra Section I.A for a discussion of access to
investment advice in the context of the DOL Fiduciary Rule.
---------------------------------------------------------------------------

    We discuss each of the three options for applying a uniform
fiduciary standard in more detail below. We compare each of the three
alternatives against the regulatory baseline, which is the current
broker-dealer regulatory regime. In addition, we briefly discuss the
differences between the standard of conduct imposed by Regulation Best
Interest and the fiduciary standard under the Advisers Act. As
discussed above in Section I, we believe that our approach in adopting
Regulation Best Interest will best achieve the Commission's important
goals of enhancing retail investor protection and decision making,
while preserving, to the extent possible, retail investor access (in
terms of choice and cost) to differing types of investment services and
securities.
a. Fiduciary Standard Under the Advisers Act Applied to Broker-Dealers
    A number of commenters discussed the viability of this alternative
and stated that it would provide superior investor protection benefits
relative to the standard that the Commission proposed.\1342\ At the
outset, we note that, at the time a recommendation is made, key
elements of the standard of conduct that applies to broker-dealers
under Regulation Best Interest will be substantially similar to key
elements of the standard of conduct that applies to investment advisers
pursuant to their fiduciary duty under the Advisers Act. Both standards
of conduct require that, when making a recommendation or providing
advice, firms and financial professionals act in the best interest of
the retail investor and not place the financial professionals'
interests ahead of the retail investor.\1343\ Both standards provide
methods for addressing conflicts of interest, although the mechanics of
those methods and their outcomes may be different,\1344\ and both
standards require full and fair disclosure of material facts that
affect the relationship, including costs. Both standards allow each
type of financial professional to agree to provide account monitoring
services to retail investor accounts, although continuous monitoring is
embedded in the regulatory regime and market practices for investment
advisers, whereas a broker-dealer may agree to provide account
monitoring services only to the extent that it is solely incidental to
the primary brokerage business.\1345\
---------------------------------------------------------------------------

    \1342\ See Betterment Letter; Warren Letter; Fein Letter; State
Treasurers Letter; AARP August 2018 Letter; ACLI Letter; Schwab
Letter.
    \1343\ See supra Section I.A.
    \1344\ Whereas, pursuant to Regulation Best Interest, broker-
dealers are required to (i) to establish written policies and
procedures reasonably designed to identify and at a minimum,
disclose, or eliminate, all conflicts of interest; and (ii) to
establish written policies and procedures reasonably designed to
mitigate or eliminate identified conflicts of interest, the
fiduciary standard for investment adviser relies on full and fair
disclosure and informed consent.
    \1345\ See Solely Incidental Interpretation. See also supra
Section II.B.2.b.
---------------------------------------------------------------------------

    We recognize that there are certain notable differences between the
Advisers Act fiduciary standard and the Regulation Best Interest
standard we are adopting. In particular, the investment adviser
fiduciary duty is generally principles-based, in keeping with the
regulatory tradition and market practices for advisers,\1346\ whereas
Regulation Best Interest, while also largely principles-based,
establishes minimum, obligations that are generally more prescriptive
than the fiduciary obligations under Advisers Act. Further, advisers
are able to address conflicts of interest through full and fair
disclosure and informed consent,\1347\ while broker-dealers must have
policies and procedures that are reasonably designed to identify and
disclose and mitigate, or eliminate, any conflicts of interest
associated with recommendations that create an incentive for the
broker-dealer or its associated persons to place the interest of the
broker-dealer or its associated persons ahead of the interest of the
retail customer. With regard to the substance of both standards, the
investment adviser fiduciary duty generally is broader and applies to
the entire relationship between adviser and client, including providing
non-securities advice,\1348\ whereas Regulation Best Interest only
applies at the time of a recommendation of any securities transaction
or investment strategy by a broker-dealer to its retail
customers.\1349\ Where application of the Advisers Act fiduciary
standard to broker-dealers would impose on broker-dealers obligations
similar to those of Regulation Best Interest, we anticipate similar
economic effects; in contrast, where this alternative would result in
different obligations, it would generate economic effects distinct from
those of Regulation Best Interest.
---------------------------------------------------------------------------

    \1346\ See Fiduciary Interpretation.
    \1347\ See id.
    \1348\ For example, an investment adviser may consider both
securities annuity products (e.g., variable annuities) and non-
securities annuity products (e.g., fixed annuities) when providing
advice on annuity products to a client with an advisory retirement
account.
    \1349\ However, under the current legal and regulatory regime,
broker-dealers are subject to other rules that apply outside the
context of a recommendation, including rules regarding how broker-
dealers market securities and services (communications with the
public), how they execute trades (best execution), and the fees that
they charge (fair and reasonable compensation obligations).
Moreover, broker-dealers always a have a duty of fair dealing with
their retail customers under SRO rules. In addition, broker-dealers
are subject to a number of obligations that attach when a broker-
dealer makes a recommendation to a customer, as well as general and
specific requirements aimed at addressing certain conflicts of
interest, including requirements to eliminate, mitigate, or disclose
certain conflicts of interest. See Proposing Release Section I.A.1.
---------------------------------------------------------------------------

i. Fiduciary Standard Under the Advisers Act Relative to the Baseline
    Relative to the regulatory baseline, the fiduciary standard of this
alternative applied to broker-dealers could benefit retail customers in
some circumstances by extending the obligations of all firms and
financial professionals to act in the best interest of retail customers
(and to not place the interest of the firm or the interest of the
financial professionals ahead of those of the retail customers) to
aspects of the relationship other than providing personalized
investment advice through recommendations. For example, retail
customers might benefit if broker-dealers were required (as advisers
are under their current fiduciary standard) to disclose any material
conflicts related to their execution of trades for retail customers in
the case when the broker-dealer has not provided a recommendation
regarding the transaction (e.g., self-directed trade). In addition,
under the fiduciary standard that applies to investment advisers, if an
investment adviser cannot fully and fairly disclose a material conflict
of interest to a client such that the client could reasonably be
expected to provide informed consent, the investment adviser would be
expected to either eliminate the conflict or adequately mitigate (i.e.,
modify its practices to reduce) the conflict to the point where full
and fair disclosure of the conflict to the client and informed

consent is possible.\1350\ To the extent that this approach of
addressing conflicts of interest would extend to the fiduciary standard
in this alternative, a broker-dealer would also have to eliminate or
modify a conflict of interest to the point where full and fair
disclosure and informed consent is possible. The potential reduction in
the effect of conflicts of interest on recommendations and the
potential reduction in the information asymmetry between a retail
customer and a broker-dealer would likely increase the efficiency of
the recommendation provided by the firm to the retail customer,
relative to the baseline. Thus, this alternative may reduce the agency
costs of the relationship between a broker-dealer and a retail
customer, which would benefit retail customers, relative to the
baseline.
---------------------------------------------------------------------------

    \1350\ See Fiduciary Interpretation.
---------------------------------------------------------------------------

    However, any such benefits would come at a cost. As an initial
matter, the fiduciary standard under this alternative is a principles-
based regime and shaped by decades of case law specific to investment
advisory model. In contrast, the standard of conduct that applies to
broker-dealers under the baseline is more prescriptive, and governed by
detailed SRO rules. Therefore, if this alternative were adopted,
broker-dealers would face increased compliance costs resulting from
having to conform their advice models to a regulatory regime that was
not formed for a transaction-based model governed by detailed SRO
rules.
    The potential increased compliance costs associated with applying
the fiduciary standard in this alternative to broker-dealers would
likely increase the broker-dealers' incentives to offer investment
advice in the capacity of investment adviser and may decrease their
incentive to continue offering investment advice in the capacity of
broker-dealer dealer (on a transaction-by-transaction basis), relative
to the baseline.\1351\ For example, if this alternative were to create
situations where the compensation to a broker-dealer for providing a
recommendation in a commission-based brokerage account would be less
than the compensation under a fee-based advisory account and/or where
the perceived regulatory burden for an investment adviser is lower,
relative to the baseline, a broker-dealer's incentive to offer advice
in the capacity of investment adviser would likely increase, relative
to the baseline.\1352\
---------------------------------------------------------------------------

    \1351\ See Vivek Bhattacharya, Gaston Illanes, & Manisha Padi,
Fiduciary Duty and the Market for Financial Advice (Working Paper,
Apr. 2019) for a recent paper providing an empirical analysis on the
effect of state-level standards of conduct on the structure of the
market for investment advice in the context of variable annuities.
The study finds differences in broker-dealer behavior when comparing
states with and without a fiduciary obligation for broker-dealers.
The states with the obligation are associated with fewer variable
annuity sales and are also associated with some broker-dealers
exiting the industry. Specifically, the paper observes, among other
things, that a state-level obligation reduces the number of broker-
dealers that are not dually registered by about 16% but has no
meaningful effect on the number of dual-registrants. The authors
argue that this compositional shift in the number of broker-dealers
is due to firms exiting the market. The paper also observes that a
state-level obligation on broker-dealers may cause a compositional
shift in the pool of variable annuities sold by broker-dealers
toward annuities that offer a larger and more diverse set of
investment options, which, in certain circumstances, may also
generate higher expected returns for retail customers. The paper
also observes that under certain circumstances a state-level
obligation on broker-dealers may increase the quality of the
variable annuities sold by broker-dealers. ``Quality'' is defined by
the authors as ``the return on variable annuities assuming optimal
allocation.'' The authors interpret these results as suggesting that
a state-level obligation on broker-dealers may (i) cause some
broker-dealers to exit the market, and (ii) cause a compositional
shift in the variable annuities sold by the broker-dealers that do
not exit the market toward annuities of higher quality as defined in
the paper. However, the limitations of the data sample and of the
empirical methodology make it difficult to (i) generalize these
results to the entire market of annuities sold by broker-dealers,
(ii) extrapolate these results to the entire universe of securities
that broker-dealers offer advice on, (iii) extrapolate the results
to the population of broker-dealers not captured by the data sample,
or (iv) use the results as a basis for comparing the investor
protections offered by state-level standards of conduct, SRO rules,
existing federal standards of conduct, and Regulation Best Interest.
See also supra footnote 1163 and surrounding discussion noting that
there is substantial variation in the sources, scope, and
application of state fiduciary law.
    \1352\ Broker-dealers that choose to deregister would eliminate
the costs of complying with FINRA rules, which are broader than
retail customer sales practice obligations, and submitting to FINRA
examinations as well as compliance with other specific rules, which
do not apply to advisers.
---------------------------------------------------------------------------

    To the extent broker-dealers act on the increased incentives and
decide to participate in the market for investment advice only in the
capacity of investment advisers--for example, dual-registrants may
prefer to offer investment advice only in the capacity of investment
adviser--retail customers may experience an increase in the cost of
obtaining investment advice, relative to the baseline. Furthermore, as
noted above, the potential exit of broker-dealers from the market for
investment advice in the capacity of broker-dealer may limit how retail
customers can access certain securities or investment strategies and
how they can pay for investment advice, which, in turn, may further
increase the cost of obtaining investment advice, relative to the
baseline.\1353\ Alternatively, to the extent broker-dealers decide to
continue to participate in the market for investment advice in the
capacity of broker-dealers, they may pass on the increased compliance
costs, in full or in part, to their retail customers in the form of
higher prices for services rendered. In particular, retail customers
may experience an increase in the cost of obtaining investment advice,
relative to the baseline.
---------------------------------------------------------------------------

    \1353\ See supra Section III.D.1.
---------------------------------------------------------------------------

    It is also possible that the fiduciary standard of this alternative
may result in a different menu of choices that allows retail customers
to access investment advice in a more cost-efficient manner relative to
the baseline. For example, if more financial professionals decide to
participate in the market for investment advice in the capacity of
investment advisers, competitive pressure may result in investment
advisers providing better pricing and/or more choices of accessing
investment advice for retail customers.
    To the extent that the cost of accessing investment advice
increases under the fiduciary standard of this alternative, some retail
customers may be pushed outside the market for investment advice. For
example, currently, a retail customer that prefers to receive
recommendations from a broker-dealer or its associated persons to
implement a buy-and-hold strategy may find a brokerage account to be
better suited to his or her needs compared to an advisory
account.\1354\ Under the fiduciary standard in this alternative, this
retail customer may have to pay more for the broker-dealer services
that come with his or her account, including obtaining investment
advice, relative to the baseline. If this increase in the cost for
broker-dealer services outweighs the benefits of the potential improved
efficiency of the recommendations provided by the

broker-dealer for this retail customer, as noted above, the retail
customer may prefer to switch to a more-limited brokerage account that
does not come with personalized investment advice (e.g., an execution-
only brokerage account).\1355\ Alternatively, and as noted by one
commenter, the retail customer may switch to a light version of an
advisory account that implements automated investment strategies
tailored around a retail customer's goals.\1356\ However, this type of
advisory account may not offer the flexibility of personalized
investment advice to the evolving needs of the customer and may not be
as responsive to market movements not anticipated by the automated
investment strategies.
---------------------------------------------------------------------------

    \1354\ For example, Del Guercio & Reuter (2014), supra footnote
1081, document (Table 1 on page 1682) that retail customers can
access index funds through both broker-dealers (i.e., the broker-
sold channel, as discussed above) and directly from the fund sponsor
(i.e., the direct-sold channel). Furthermore, in their sample, the
average expense ratio for an index fund is 0.86 if sold through the
broker-sold channel and 0.44 if sold through the direct channel.
Assuming that a retail customer is interested in implementing a buy-
and-hold strategy using index funds that carry no loads, the cost to
the retail customer of implementing this strategy through a broker-
dealer would be on average 86 basis points of the assets invested
per year. In contrast, the cost to the retail customer of
implementing the same strategy through an investment adviser would
be on average 44 basis points plus the investment adviser's AUM-
based fee per year. Assuming that in the investment adviser's fee is
100 basis points of AUM per year, the cost to the retail customer of
implementing his or her strategy with an investment adviser would be
on average 144 basis points.
    \1355\ Relative to a brokerage account that offers personalized
investment advice, execution-only brokerage accounts may also come
with enhanced research tools, more investment choices, and,
potentially, other forms of impersonal advice.
    \1356\ See, e.g., CFA August 2018 Letter at 79, noting that
``[f]or example, Vanguard charges 0.30% for its Personal Advisor
Services, Schwab charges 0.28% for its Intelligent Advisory
Services, and Betterment charges 0.25% for its Digital offering and
0.40% for its Premium offering.''
---------------------------------------------------------------------------

b. Uniform Fiduciary Standard Under 913(g)
    Another alternative approach to the standard of conduct imposed by
Regulation Best interest is a ``new'' uniform fiduciary standard of
conduct applicable to both broker-dealers and investment advisers, such
as that recommended by the staff in the 913 Study.\1357\ The fiduciary
standard under this alternative would require firms ``to act in the
best interest of the customer without regard to the financial or other
interest of the broker, dealer, or investment adviser providing the
advice.'' Based on the Commission staff's recommendations about ways in
which the fiduciary standard proposed by the 913 study could be
implemented, the fiduciary standard under this alternative could have
imposed any or all of the following requirements: (1) Eliminate or
disclose conflicts of interest; (2) prohibit certain conflicts of
interest by requiring firms to mitigate conflicts through specific
action, or to impose specific disclosure and consent requirements; and
(3) specify the basis a broker-dealer or investment adviser has in
making a recommendation to a retail customer by referring to and
expanding upon broker-dealers' existing suitability requirements.
---------------------------------------------------------------------------

    \1357\ One of the staff's primary recommendations was that the
Commission engage in rulemaking to adopt and implement a uniform
fiduciary standard of conduct for broker-dealers and investment
advisers when providing personalized investment advice about
securities to retail customers. The staff's recommended standard
would require firms ``to act in the best interest of the customer
without regard to the financial or other interest of the broker,
dealer, or investment adviser providing the advice.'' The staff made
a number of specific recommendations for implementing the uniform
fiduciary standard of conduct, including that the Commission should:
(1) Require firms to eliminate or disclose conflicts of interest;
(2) consider whether rulemaking would be appropriate to prohibit
certain conflicts, to require firms to mitigate conflicts through
specific action, or to impose specific disclosure and consent
requirements; and (3) consider specifying uniform standards for the
duty of care owed to retail customers, such as specifying what basis
a broker-dealer or investment adviser should have in making a
recommendation to a retail customer by referring to and expanding
upon broker-dealers' existing suitability requirements. See 913
Study.
---------------------------------------------------------------------------

    Some of the benefits of the investment advisers' fiduciary standard
of the previous alternative would carry over to the new uniform
standard of this alternative. In particular, relative to the baseline,
the new fiduciary standard of this alternative applied to broker-
dealers could benefit retail customers in some circumstances by
extending the obligations of all firms and financial professionals to
act in the best interest of retail customers (and to not place the
interest of the firm or those of the financial professionals ahead of
the interest of the retail customer) to aspects of the relationship
other than providing personalized investment advice through
recommendations.
    In addition, the new fiduciary standard of this alternative applied
to broker-dealers may create additional benefits for their retail
customers, relative to the baseline. For example, requirements (1) and
(2) may enhance the obligations under the baseline by requiring broker-
dealers to disclose conflicts of interest and to take actions to
mitigate or eliminate certain conflicts of interest. To the extent that
these requirements reduce of the effect of the conflicts of interest on
the recommendation provided by a broker-dealer or its associated
persons and reduce the information asymmetry between retail customers
and broker-dealers, the new fiduciary standard of this alternative may
increase, relative to the baseline, the efficiency of the
recommendations made by broker-dealers and their associated persons.
Furthermore, requirement (3) may enhance the existing suitability
requirements that apply to broker-dealers and, to the extent that this
requirement results in recommendations that are better aligned with the
objectives of the retail customers, the new fiduciary standard of
conduct of this alternative may further increase, relative to the
baseline, the efficiency of the recommendations provided by broker-
dealers and their associated persons. The potential increase in the
efficiency of the recommendations provided by broker-dealers and their
associated persons under the new fiduciary standard of this alternative
would benefit retail customers, relative to the baseline.
    Similarly, the new fiduciary standard of this alternative applied
to investment advisers may create benefits for their clients, relative
to the baseline. Requirements (1) and (2) would enhance the obligations
of the investment advisers under the current fiduciary standard that
applies to investment advisers by requiring investment advisers to take
actions to mitigate or eliminate certain conflicts of interest. To the
extent that these requirements reduce of the effect of the conflicts of
interest on the recommendation provided by an investment adviser or its
associated persons and reduce the information asymmetry between retail
customers and investment advisers, the new fiduciary standard under
this alternative may increase the efficiency of the recommendations
made by investment advisers and their associated persons, relative to
the baseline.
    The new fiduciary duty of this alternative may also result in
increased competition across financial professionals for retail
customers or clients, relative to the baseline. This potential increase
in competition, relative to the baseline, may benefit retail customers
of broker-dealers and clients of investment advisers in the form of
lower prices for investment advice.
    Turning to the potential costs imposed by this alternative, we note
that some of the costs of the investment advisers' fiduciary standard
of the previous alternative carry over to the new fiduciary standard of
this alternative. As noted above, this alternative would impose a new
regulatory paradigm on broker-dealers relative to the baseline. The
fiduciary standard of this alternative would be principles-based and
shaped by common law. In contrast, the standard of conduct that applies
to broker-dealers under the baseline is more prescriptive and governed
by detailed SRO rules. A paradigm shift from the standards of conduct
under the current baseline to the uniform standard in this alternative
may increase compliance costs relative to the baseline.\1358\
---------------------------------------------------------------------------

    \1358\ See also 913 Study at 156-159.
---------------------------------------------------------------------------

    Furthermore, the potential increased compliance costs associated
with applying the fiduciary standard of this alternative to broker-
dealers may increase, relative to the baseline, a broker-dealer's
incentives to offer investment advice in the capacity of an

investment adviser and may decrease their incentive to offer investment
advice in the capacity of broker-dealer. For example, if this
alternative creates situations where the compensation to a broker-
dealer for providing a recommendation in a commission-based brokerage
account would be less than the compensation under a fee-based advisory
account while the perceived regulatory burden is equal to that of an
investment adviser, a broker-dealer's incentive to offer advice in the
capacity of investment adviser may increase, relative to the
baseline.\1359\
---------------------------------------------------------------------------

    \1359\ See supra footnote 1351.
---------------------------------------------------------------------------

    To the extent broker-dealers act on the increased incentives and
decide to participate in the market for investment advice only in the
capacity of investment advisers--for example, dual-registrants may
prefer to offer investment advice only in the capacity of investment
adviser--retail customers may experience an increase in the cost of
obtaining investment advice, relative to the baseline. Alternatively,
to the extent broker-dealers decide to continue to participate in the
market for investment advice in the capacity of broker-dealers, they
may pass on the increased compliance costs, in full or in part, to
their retail customers in the form of higher prices for services
rendered, relative to the baseline. In particular, retail customers may
experience an increase in the cost of obtaining investment advice,
relative to the baseline.\1360\
---------------------------------------------------------------------------

    \1360\ See also 913 Study at 159-162.
---------------------------------------------------------------------------

    Similarly, the new fiduciary standard of this alternative may also
impose additional compliance costs for investment advisers relative to
the baseline.\1361\ For example, to the extent that investment advisers
currently provide investment advice to their clients in a manner that
is not fully consistent with the requirements (2) and (3), investment
advisers may incur compliance costs in adhering to these potentially
more stringent requirements.
---------------------------------------------------------------------------

    \1361\ See id. at 159.
---------------------------------------------------------------------------

    Investment advisers would likely pass on the potential increase in
the costs of complying with the new fiduciary standard of this
alternative to their clients. In turn, under the new fiduciary standard
of this alternative, clients may experience an increase in the cost of
obtaining investment advice, relative to the baseline.
    It is also possible that the new fiduciary standard of this
alternative may result in a different menu of choices that allows
retail customers and clients to access investment advice in a more
cost-efficient manner relative to the baseline. For example, if more
financial professionals decide to participate in the market for
investment advice as investment advisers, competitive pressure may
result in better pricing and/or greater choice in accessing investment
advice for retail customers and clients that choose to use an
investment adviser.
    However, to the extent that the cost of accessing investment advice
increases under the new fiduciary standard of this alternative, some
retail customers may be pushed outside the market for investment
advice, relative to the baseline. For example, currently, a retail
customer who prefers to receive recommendations from a broker-dealer or
its associated persons to implement a buy-and-hold strategy may find a
brokerage account to be better suited to his or her needs than an
advisory account. Under the new fiduciary standard of this alternative,
this retail customer may have to pay more for the broker-dealer
services that come with his or her account, including obtaining
investment advice, relative to the baseline. If, from the perspective
of a retail customer, this increase in the cost for broker-dealer
services outweighs the expected benefits of the potential improved
efficiency of the recommendations provided by the broker-dealer, the
retail customer may prefer to switch to a more limited brokerage
account that does not come with personalized investment advice (e.g.,
an execution-only brokerage account).\1362\
---------------------------------------------------------------------------

    \1362\ Relative to a brokerage account that offers personalized
investment advice, execution-only brokerage accounts may also come
with enhanced research tools, more investment choices, and,
potentially, other forms of impersonal advice.
---------------------------------------------------------------------------

    Alternatively, and as noted by one commenter, the retail customer
may switch to an advisory account that implements automated investment
strategies.\1363\ However, this type of advisory account may not offer
the flexibility of personalized investment advice to the evolving needs
of the customer, the level of contact a retail customer seeks from a
relationship with a financial professional, and may not be as
responsive to market movements not anticipated by the automated
investment strategies.
---------------------------------------------------------------------------

    \1363\ See, e.g., CFA August 2018 Letter at 79, noting that
``[f]or example, Vanguard charges 0.30% for its Personal Advisor
Services, Schwab charges 0.28% for its Intelligent Advisory
Services, and Betterment charges 0.25% for its Digital offering and
0.40% for its Premium offering.''
---------------------------------------------------------------------------

    Similarly, under the new fiduciary standard of this alternative,
clients of investment advisers may experience an increase in the cost
of obtaining investment advice. Some of these clients may not be able
to afford the additional cost and may be pushed outside the market for
investment advice, relative to the baseline. As noted above, the
options available to these clients may not offer the flexibility of
tailored investment advice that may benefit a client with evolving
needs.
c. Fiduciary Standard Under the DOL Rule and BIC Exemption
    A third alternative approach to addressing the agency costs
associated with obtaining advice from broker-dealers is a fiduciary
standard coupled with a series of disclosures and other requirements
akin to the full complement of conditions of the DOL's BIC Exemption
adopted in connection with the DOL Fiduciary Rule. This alternative
would mirror the key conditions that apply to an ``adviser'' under the
BIC Exemption.\1364\ This alternative approach would apply to broker-
dealers when providing recommendations to retail customer for all types
of retail accounts rather than retirement accounts only. At least one
commenter signaled support for this alternative.\1365\
---------------------------------------------------------------------------

    \1364\ For a discussion of key conditions of the BIC Exemption,
see Section I.A.2 of the Proposing Release at 21581. As discussed
above, the DOL Fiduciary Rule--including the BIC Exemption--was
vacated by the United States Court of Appeals for the Fifth Circuit
on March 15, 2018, although some firms may continue to seek comply
with certain of its conditions under a DOL temporary enforcement
policy. See also supra Section III.B.2.e. See also supra footnote
32.
    \1365\ See Galvin Letter.
---------------------------------------------------------------------------

    Unlike other alternatives considered in this section, or Regulation
Best Interest, this alternative can be analyzed, at least in part,
based upon its previous adoption by the DOL and partial implementation.
Because this alternative was already partly implemented, the market for
investment advice, the securities market, and, ultimately investors
have had an opportunity to partially adjust to it. Section III.B.2.e.ii
summarizes the evidence about the response of firms, investors and
product markets in response to the DOL Fiduciary Rule.
    The requirements of the standard of conduct in this alternative
would enhance the obligations under the baseline by requiring broker-
dealers to adhere to the impartial conduct standard, which included
requirements to act in their retail customers' best interest, disclose
material conflicts of interest and designate a person responsible for
addressing material conflicts of interest and monitoring the adherence
of the associated persons of the broker-dealer to the impartial conduct
standard. To the extent that

these requirements reduce the effect of the conflicts of interest on
the recommendation provided by a broker-dealer or its associated
persons and reduce the information asymmetry between retail customers
and broker-dealers, the new standard of conduct in this alternative
would increase the efficiency of the recommendations made by broker-
dealers and their associated persons, relative to the regulatory
baseline. Furthermore, the requirement to act in the retail customers'
best interest would enhance the existing suitability standard that
applies to broker-dealers and, to the extent that the new standard of
conduct of this alternative would result in recommendations that are
better aligned with the objectives of the retail customers, this new
standard would further increase the efficiency of the recommendations
provided by broker-dealers and their associated persons, relative to
the regulatory baseline. The potential increase in the efficiency of
the recommendations provided by broker-dealers and their associated
persons under the new standard in this alternative would benefit retail
customers, relative to the baseline.
    This alternative may also affect product markets. As discussed
above in Section III.B.2.ii, certain product sponsors introduced new
products in the market for mutual funds, such as clean and T shares
that were designed to facilitate compliance with various anticipated
regulations, including the DOL Fiduciary Rule. In certain
circumstances, these products may come with lower fees for retail
customers. To the extent that this alternative would enhance this trend
in product innovation, retail customers may benefit from this trend.
    However this alternative would also impose costs on broker-dealers
and retail customers.
    Compliance costs would include costs associated with the contract
provision, and the disclosure, policies and procedure, and record-
making and recordkeeping requirements. It is possible that broker-
dealers would pass on these direct compliance costs, in part or in
full, to retail customers.
    In addition to these costs, this alternative would likely cause
some broker-dealers to change their current practices, which, in turn,
may impose further costs on them or their retail customers. As
discussed above in Section III.B.2.e.ii some studies find evidence
suggesting that firms have adjusted their practices, at least in the
short-run, in response to the DOL fiduciary Rule. In particular,
certain of these studies observe that in certain cases some broker-
dealers have either eliminated or reduced access to brokerage advice
services. Other studies observe that some broker-dealers migrated
toward fee-based advisory services or limited brokerage services (i.e.,
no provision of advice) and, in the process, offered their retail
customers the option to shift from commission-based brokerage accounts
to fee-based accounts, automated investment accounts or self-directed
accounts. Some of their customers chose to not move to a fee-based
account.
    Certain studies provide evidence suggesting that some broker-
dealers adjusted the range of their offerings.\1366\ Specifically,
according to these studies, some of the respondents reduced or
eliminated access to certain assets or share classes, such as certain
mutual funds or mutual fund share classes, and or annuity securities
offered.
---------------------------------------------------------------------------

    \1366\ See supra Section III.B.2.e.ii.
---------------------------------------------------------------------------

    Finally, there is some anecdotal evidence that suggests that
certain firms changed the compensation structure for their associated
persons.\1367\ Specifically, some firms equalize commissions and
deferred sales charges across similar securities, while other firms
banned sales quotas, contests, and certain bonuses.
---------------------------------------------------------------------------

    \1367\ See id.
---------------------------------------------------------------------------

    To the extent that the fiduciary standard in this alternative would
result in similar responses by broker-dealers, the alternative would
impose cost on retail customers relative to the baseline. For example,
switching a retail customer from a commission-based brokerage account
to a different type of account, such as fee-based advisory account, may
leave a customer worse off in certain circumstances. For instance, a
retail customer who is a buy-and-hold investor may overpay for the
advice typically associated with this type of investment strategy if
the retail customer were to shift from a brokerage account to a fee-
based account.\1368\ As another example, a retail customer would lose
access to occasional personalized advice if he or she were to shift
from his or her brokerage account to a self-directed account.
---------------------------------------------------------------------------

    \1368\ See supra footnote 1354.
---------------------------------------------------------------------------

    The cost to retail customers from switching to a suboptimal account
is particularly important in the context of IRA brokerage accounts,
because of the larger size of these accounts and the importance of
these accounts for retail investors to meet their retirement needs.
These costs may also be higher for IRA brokerage accounts than for
other account types to the extent that these accounts include long-
term, buy-and-hold investments. As discussed in Section III.B.2.e.ii,
one study provided an estimate for this potential cost.\1369\ However,
as discussed above, the estimates provided by various studies,
including this one, or by commenters are generally subject to
assumptions or methodological limitations which may affect the
inferences based on such estimates.
---------------------------------------------------------------------------

    \1369\ See SIFMA Study.
---------------------------------------------------------------------------

    In addition to the evidence discussed above, there are other
potential economic implications of this alternative. For instance, this
alternative may exclude from the market for investment advice those
retail customers that have account balances that are below the account
minimum for typical advisory accounts. The investment advisory industry
might adjust to a lack of supply by accommodating lower account
balances. However, because investment advisers have a fiduciary duty to
all their clients, and because they have limited time and resources,
there is likely a limit to how much an investment adviser can lower his
or her account minimum to accommodate more advisory clients. Similarly,
the product market may adjust by innovating new products to accommodate
retail customers with account balances that are below the typical
advisory account minimum. For example, hybrid products that implement
automated investment strategies tailored to a retail customer's goals
may substitute for the services of an investment adviser for customers
with lower account balances.
2. Prescribed Format for Disclosure
    Although Regulation Best Interest specifies the required content of
disclosure necessary to meet a broker-dealer's Disclosure Obligation,
it does not prescribe a specific format for that disclosure. As an
alternative, and as suggested by commenters,\1370\ we

considered requiring broker-dealers to use a specific form similar to,
for example, Form ADV.
---------------------------------------------------------------------------

    \1370\ See, e.g., LPL August 2018 Letter that notes that ``all
investors should be provided with general disclosures somewhat akin
to those contained in Form ADV Part 2A--e.g., which set forth the
ranges of remuneration payable to a broker-dealer in connection with
its recommendations of different products . . . [W]e believe that
detailed product-specific disclosures should be required prior to or
at the time of a recommendation only in instances where the
remuneration associated with the recommendation exceeds the
previously disclosed range or where the recommendation implicates a
conflict of interest that has not previously been disclosed. In all
other cases, a broker-dealer should be permitted to satisfy its
Disclosure Obligation by directing an investor in writing to review
the recommended product's offering documents and providing
hyperlinks to those documents (or providing a hyperlink to a central
page on the broker-dealer's website that contains hyperlinks to the
product documents), either prior to the recommendation via a general
Form ADV Part 2A-like disclosure document or shortly thereafter via
a trade confirmation.'' See also Morningstar Letter, noting
``publicly available disclosures with a standard taxonomy work best
because they empower third parties such as `fintech' and `reg-tech'
firms to analyze and contextualize critical information and amplify
a call to action for ordinary investors.'' See also Letter from
Peter J. Chepucavage (May 31, 2018) (``Chepucavage Letter''), noting
that ``[c]osts for the small bd's however can be reduced with a
commission approved standard disclosure which would add certainty
and ought to be considered especially for the small investor. [. .
.] A standard disclosure document would also be useful for the small
bd that cannot afford the legal assistance needed to evaluate this
1,000 page proposal and draft appropriate documents. [. . .] The
Commission should therefore reconsider the impact of its proposal on
small investors and small bd's with the assumption that retirement
accounts are significantly more important than regular brokerage
accounts especially for small and elderly investors. A standard
disclosure for small firms would reduce costs for the firms and
their customers.''
---------------------------------------------------------------------------

    Because this alternative would still impose all the obligations of
Regulation Best Interest, all the benefits and the costs identified in
Regulation Best Interest would carry over to this alternative as well.
However, by changing the way broker-dealers would meet the Disclosure
Obligation, this alternative may create additional benefits and impose
additional costs.
    The requirement to use a form similar to Form ADV to meet the
Disclosure Obligation would put more structure on the disclosure of
material facts relating to the scope and terms of the relationship with
the retail customer and material facts relating to conflicts of
interest that are associated with a recommendation. This added
structure would facilitate retail customers' comparison of multiple
broker-dealers, which would benefit retail customers. For example, the
evidence provided by the investor testing surveys suggests that retail
customers form preference over various variables that are being
disclosed.\1371\ On the backdrop of this evidence, the structured
disclosure provided by a specific form may enhance a retail customer's
ability to select a broker-dealer in a manner consistent with his or
her preferences. In addition, the structured disclosure provided by a
form may allow a third party to collect the information disclosed by
firms, process it, and present it to retail customers in a way that
would make it easier for the retail customer to select a broker-dealer.
To the extent the format of disclosure under this alternative would
result in this potential outcome, the alternative would further benefit
retail customers.
---------------------------------------------------------------------------

    \1371\ See Relationship Summary Adopting Release for a
discussion of the evidence provided by the investor testing surveys.
---------------------------------------------------------------------------

    However, the requirement to use a form similar to Form ADV to meet
the Disclosure Obligation may also impose costs on broker-dealers, at
least in the short run, to the extent that this form of disclosure is
different from the form of disclosure that firms employ currently to
satisfy their disclosure obligations and liabilities under the
baseline. In general it may be difficult to design a form that, while
comprehensive in terms of capturing the diversity of business practices
that broker-dealers employ, remains easy to understand for retail
customers. In general, given that there is a wide variety of business
models and practices, there is value in providing broker-dealers with
flexibility to enable them to better tailor disclosure and information
that their retail customers can understand and may be more likely to
read at relevant points in time, rather than, for example, mandating a
standardized all-inclusive (and likely lengthy) disclosure. Depending
on the specific form that is eventually mandated, some firms may incur
more costs than others. To the extent firms pass on those costs to
retail customers, the alternative would impose a cost on retail
customers.
3. Disclosure-Only
    Another potential alternative to addressing the agency costs of
obtaining advice from broker-dealers is a disclosure-only alternative,
which would require that broker-dealers satisfy only the Disclosure
Obligation of Regulation Best Interest. In other words, broker-dealers
would be required to provide the retail customer, in writing, full and
fair disclosure of all material facts relating to the scope of the
relationship with the retail customer and all material facts relating
to the conflicts of interest associated with the recommendations to the
retail customer, prior to or at the time of the recommendation.
However, this alternative would not impose either the Care Obligation
or the Conflict of Interest Obligation.
    As discussed in Sections III.C.2 and III.C.4, there may be
substantial overlap between the disclosure requirements of Regulation
Best Interest and the disclosure requirements under the regulatory
baseline. From this perspective, relative to the regulatory baseline,
the cost of this alternative to the broker-dealers may be small, at
least for some broker-dealers. However, as pointed out above, a
disclosure-only alternative is not likely to address the agency costs
associated with obtaining advice from broker-dealers. As a result, the
Commission believes both specific disclosure and mitigation
requirements are needed to address those conflicts. Also, we noted
above that sales contests, sales quotas, bonuses, and non-cash
compensation that are based on the sales of specific securities within
a limited period of time create high-pressure situations for associated
persons to increase the sales of specific securities by compromising
the best interest of their customers; the Commission does not believe
such conflicts of interest can be reasonably mitigated, let alone
disclosed, in a manner that adequately prevents harm to retail
customers and, accordingly, believes that these conflicts must be
eliminated in their entirety.
    Finally, as we discussed earlier, commenters noted 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 their associated persons) and a retail customer.\1372\
---------------------------------------------------------------------------

    \1372\ See supra footnote 1208 and accompanying text. See also
supra Section III.B.4.c for a discussion of the literature on the
effectiveness of disclosure.
---------------------------------------------------------------------------

IV. Paperwork Reduction Act

    Certain provisions of Regulation Best Interest and the rule
amendments that we are adopting today contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\1373\ The Commission submitted
Regulation Best Interest and the rule amendments to the Office of
Management and Budget (``OMB'') for review and approval in accordance
with the PRA.\1374\ The Commission's earlier PRA assessments have been
revised to reflect the modifications to the rule and amendments from
the Proposing Release, as well as additional information and data
provided to the Commission by commenters. An agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid OMB control number.
The titles and OMB control numbers for the collections of information
are:
---------------------------------------------------------------------------

    \1373\ 44 U.S.C. 3501 et seq.
    \1374\ See 44 U.S.C. 3507(d); 5 CFR 1320.11.
    \1375\ See 17 CFR 240.17a-3. The addition of paragraph (a)(35)
to Rule 17a-3 would amend the existing PRA for Rule 17a-3.
    \1376\ See 17 CFR 240.17a-4. The amendment to Rule 17a-4(e)(5)
would amend the existing PRA for Rule 17a-4.

------------------------------------------------------------------------
                                                            OMB control
             Rule                      Rule title               No.
------------------------------------------------------------------------
Rule 15l-1....................  Regulation Best Interest
Rule 17a-3....................  Records to be made by          3235-0033
                                 certain exchange
                                 members, brokers and
                                 dealers \1375\.
Rule 17a-4....................  Records to be preserved        3235-0279
                                 by certain exchange
                                 members, brokers and
                                 dealers \1376\.
------------------------------------------------------------------------

    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 by
requiring broker-dealers, among other things, to: (1) Comply with
specific obligations to make recommendations that are in the best
interest of the retail customer, and that do not place the broker-
dealer's interests ahead of the interests of the retail customer; and
(2) address conflicts of interest by fully and fairly disclosing
material facts about conflicts of interest, and in instances where we
believe disclosure is insufficient to reasonably address the conflict,
establish, maintain and enforce policies and procedures reasonably
designed to mitigate or, in certain instances, eliminate the conflict.
Generally, in crafting Regulation Best Interest, we aimed to provide
broker-dealers flexibility in determining how to satisfy the component
obligations. For purposes of this analysis, we have made assumptions
regarding how a broker-dealer would comply with the obligations of
Regulation Best Interest, as well as the amendments under Rule 17a-
3(a)(35) and Rule 17a-4(e)(5).
    In the Proposing Release, we requested comment on the matters
discussed in the PRA, including our estimates for the new and recurring
burdens and associated costs described in connection with Regulation
Best Interest and the amendments under Rule 17a-3(a)(35) and Rule 17a-
4(e)(5).\1377\ In particular, we sought comment on estimates as to: (1)
The number of natural persons who are associated persons; (2) the
number of broker-dealers that make securities-related recommendations
to retail customers; (3) the number of natural persons who are
associated persons that make securities-related recommendations to
retail customers; and (4) any other costs or burdens \1378\ associated
with proposed Regulation Best Interest that had not been identified in
the Proposing Release.
---------------------------------------------------------------------------

    \1377\ The Proposing Release proposed to add new paragraph
(a)(25) of Rule 17a-3. As noted above, we are adopting the provision
substantially as proposed but redesignating it as new paragraph
(a)(35) of Rule 17a-3. See supra footnote 820 and accompanying text.
    \1378\ Throughout the PRA analysis in the Proposing Release, the
burdens on in-house personnel were measured in terms of burden
hours, and external costs were expressed in dollar terms.
---------------------------------------------------------------------------

    As discussed in Sections I, II, and III, we received comments that
addressed whether we could minimize the burden of the proposed
collections of information. We received several comments suggesting
that our estimated burdens and costs for the rule as a whole were too
low.\1379\ In addition, the Commission received some comments
specifically addressing the costs to smaller broker-dealers.\1380\
Also, as discussed in the Economic Analysis section above, we received
comments regarding the potential costs and burdens of proposed
Regulation Best Interest on broker-dealers.\1381\ In response, we have
modified several substantive requirements to the rule by, among other
things, providing more specificity in the rule text in the Disclosure
and Conflict of Interest Obligations, which we believe will mitigate
some of these burdens and costs relative to the Proposing
Release.\1382\ At the same time, certain modifications, such as
maintaining a written record of oral disclosure, resulted in new
burdens and costs, relative to those addressed in the Proposing
Release, which are reflected below.
---------------------------------------------------------------------------

    \1379\ See, e.g., NSCP Letter; see also CCMC Letters (costs to
implement the proposal were underestimated and greater than 40% of
firms surveyed anticipate having to spend a moderate or substantial
amount to implement Regulation Best Interest and Form CRS); Raymond
James Letter (noting the significant implementation costs of
Regulation Best Interest and Form CRS for the industry); SIFMA
August 2018 Letter (stating that implementation costs of Regulation
Best Interest and Form CRS would be significant).
    \1380\ See, e.g., Chepucavage Letter (finding that the estimates
in the proposal are severely understated unless they are excluding
time needed for review of the proposal and final rule and suggesting
the Commission reconsider the impact on small investors and small
broker-dealers); NSCP Letter (requesting the Commission to consider
the financial and operational impacts of the proposed rule,
particularly on small firms, and to minimize those impacts, given
that small firms do not have compliance departments adequate to deal
with increasing regulatory demands). See also, e.g., Iowa Insurance
Commissioner Letter; Letter from David S. Addington, National
Federation of Independent Business (May 30, 2018) (``NFIB Letter'').
    \1381\ See supra Section III.
    \1382\ Throughout this PRA analysis, the burdens on in-house
personnel are measured in terms of burden hours, and external costs
are expressed in dollar terms.
---------------------------------------------------------------------------

A. Respondents Subject to Regulation Best Interest and Amendments to
Rule 17a-3(a)(35) and Rule 17a-4(e)(5)

1. Broker-Dealers
    Regulation Best Interest imposes a best interest obligation on a
broker-dealer when making recommendations of any securities transaction
or investment strategy involving securities to retail customers. Except
where noted, we have assumed that a dually registered firm, already
subject to the Advisers Act, would be subject to new, distinct burdens
under Regulation Best Interest.
    As of December 31, 2018, 3,764 broker-dealers were registered with
the Commission, either as standalone broker-dealers or as dually
registered entities.\1383\ Based on data obtained from Form BR, the
Commission believes that approximately 73.5% of this population, or
2,766 broker-dealers, have retail customers and therefore would be
subject to Regulation Best Interest and the amendments under Rules 17a-
3(a)(35) and 17a-4(e)(5).\1384\ Further, based on FOCUS Report
data,\1385\ the Commission estimates that as of December 31, 2018,
approximately 985 broker-dealers may be deemed small entities under the
Regulatory Flexibility Act.\1386\ Of these,

approximately 756 have retail business.\1387\ Therefore, we estimate
that 2,010 broker-dealers would qualify as large broker-dealers with
retail customers for purposes of this analysis.\1388\
---------------------------------------------------------------------------

    \1383\ The Commission estimated the number of respondents in the
Proposing Release as of December 31, 2017. The Commission is
updating its estimated number of broker-dealers to reflect the
number of broker-dealers registered with the Commission as of
December 31, 2018.
    \1384\ As of December 31, 2018, 3,764 broker-dealers filed Form
BD. Retail sales by broker-dealers were obtained from Form BR. As
discussed above in Section III.B.1.a, the number of broker-dealers
that serve retail customers (i.e., 2,766) likely overstates the
number of broker-dealers that will be subject to Regulation Best
Interest, because not all broker-dealers that serve retail investors
provide recommendations to retail investors. We do not have reliable
data to determine the precise number of broker-dealers that provide
recommendations, and as a result, we have assumed, for purposes of
this analysis that 2,766 broker-dealers will be subject to
Regulation Best Interest.
    \1385\ FOCUS Reports, or ``Financial and Operational Combined
Uniform Single'' Reports, are monthly, quarterly, and annual reports
that broker-dealers are generally required to file with the
Commission and/or SROs pursuant to Exchange Act Rule 17a-5. See 17
CFR 240.17a-5.
    \1386\ See infra Section V for an explanation of which brokers-
dealers, subject to Regulation Best Interest, are ``small
entities,'' for purposes of the Regulatory Flexibility Act analysis.
     The Commission's estimate is obtained from Form BD filings.
Although Form BD filings are updated on a more frequent basis than
annually, FOCUS data, which also informs this baseline with respect
to broker-dealers, is only sparsely updated throughout the year.
Moreover, instead, broker-dealers tend to make their most complete
updates in the fourth calendar quarter of each year. Therefore, in
order to minimize discrepancies in the broker-dealer data between
Form BD and FOCUS data, we have normalized all of the data to the
most recently complete FOCUS data, which is for December 2018.
    \1387\ Id.
    \1388\ This calculation was made as follows: (2,766 total retail
broker-dealers)-(756 total small retail broker-dealers) = 2,010
large retail broker-dealers.
---------------------------------------------------------------------------

2. Natural Persons Who Are Associated Persons of Broker-Dealers
    As with broker-dealers, Regulation Best Interest imposes a best
interest obligation on natural persons who are associated persons of
broker-dealers when making recommendations of any securities
transaction or investment strategy involving securities to retail
customers.
    The Commission believes that approximately 428,404 natural persons
would qualify as retail-facing, registered representatives at
standalone broker-dealers or dually registered firms,\1389\ and would
therefore be subject to Regulation Best Interest.\1390\
---------------------------------------------------------------------------

    \1389\ See supra Section III.B.1 at Table 5. This estimate is
based on the following calculation: (504,005 total licensed
representatives (including representatives of investment advisers))
x (15% (the percentage of total licensed representatives who are
standalone investment adviser representatives)) = approximately
75,601 representatives at standalone investment advisers. To isolate
the number of representatives at standalone broker-dealers and
dually registered firms, we have subtracted 75,601 from 504,005, for
a total of 428,404 retail-facing, licensed representatives at
standalone broker-dealers or dually registered firms.
    \1390\ Unless otherwise noted, for purposes of the PRA, we use
the term ``registered representatives'' to refer to associated
persons of broker-dealers who are registered, have series 6 or 7
licenses, and are retail-facing, and we use the term ``dually
registered representatives of broker-dealers'' to refer to
registered representatives who are dually registered and are
associated persons of a standalone broker-dealer (who may be
associated with an unaffiliated investment adviser) or a dually
registered broker-dealer.
---------------------------------------------------------------------------

B. Summary of Collections of Information

    Regulation Best Interest requires broker-dealers and their
associated persons \1391\ when making a recommendation of any
securities transaction or investment strategy involving securities to a
retail customer to 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 interest of the retail
customer. As discussed above, Regulation Best Interest specifically
provides that this best interest obligation shall be satisfied if the
broker-dealer complies with the specific Disclosure, Care, Conflict of
Interest, and Compliance Obligations.
---------------------------------------------------------------------------

    \1391\ However, in certain instances, as described more fully
below, the Commission assumes that broker-dealers will undertake
certain Disclosure Obligations on behalf of their registered
representatives. See, e.g., infra footnote 1396.
---------------------------------------------------------------------------

    Rule 17a-3 requires a broker-dealer to make and keep current
certain records. The Commission is amending this rule by adding new
paragraph (a)(35) to impose new record-making obligations on broker-
dealers subject to Regulation Best Interest. Rule 17a-4 requires a
broker-dealer to preserve certain records if it makes or receives them.
The Commission is amending Rule 17a-4(e)(5) to impose new record
retention obligations on broker-dealers subject to Regulation Best
Interest.
    The obligations arising under Regulation Best Interest and the
amendments under Rule 17a-3(a)(35) and Rule 17a-4(e)(5) would give rise
to distinct collections of information and associated costs and burdens
for broker-dealers subject to the rules. The collections of information
associated with Regulation Best Interest and rule amendments are
described below.
1. Disclosure Obligation
    The Disclosure Obligation under Regulation Best Interest requires a
broker, dealer, or natural person who is an associated person of a
broker or dealer, prior to or at the time of recommending a securities
transaction or strategy involving securities to a retail customer, to
provide the retail customer, in writing, full and fair disclosure of:
(1) All material facts relating to the scope and terms of the
relationship with the retail customer, including (a) 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, (b) the fees and costs that apply to the retail
customer's transactions, holdings, and accounts, and (c) 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 (2) all material facts relating to conflicts of interest that are
associated with the recommendation. The Commission believes that
requiring broker-dealers to disclose to a retail customer, in writing,
all material facts relating to the scope and terms of the relationship
with the retail customer would facilitate the retail customer's
understanding of the nature of his or her account, the broker-dealer's
fees and costs, as well as the nature of services that the broker-
dealer provides, as well as any limitations to those services. It would
also provide retail customers with information to better understand the
differences among certain financial service providers, such as broker-
dealers, investment advisers, and dually registered firms and dually
registered financial professionals. In addition, the obligation to
disclose all material facts relating to conflicts of interest that are
associated with a recommendation would raise retail customers'
awareness of the potential effects of conflicts of interest, and
increase the likelihood that broker-dealers would make recommendations
that are in the retail customer's best interest.
    We are explicitly requiring in the rule text of Regulation Best
Interest, items that the Proposing Release had only provided as
examples of ``material facts relating to the scope and terms of the
relationship with the retail customer'' that must be disclosed, namely:
(1) That the broker, dealer or such natural person is acting as a
broker, dealer or an associated person of a broker-dealer with respect
to the recommendation; (2) the material fees and costs that apply to
the retail customer's transactions, holdings, and accounts; and (3) 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. We
generally believe the proposed burdens and costs identified in the
Proposing Release were accurate but have updated estimates to reflect
changes in the number of broker-dealers and costs of certain services
since the last estimate. The collections of information associated with
the Disclosure Obligation, as well as the associated record-making and
recordkeeping obligations are addressed below.
a. Obligation To Provide to the Retail Customer Full and Fair
Disclosure, in Writing, of all Material Facts Relating to the Scope and
Terms of the Relationship With the Retail Customer
    The Commission assumes for purposes of this analysis that broker-
dealers would meet the obligation to disclose to the retail customer,
in writing, the material facts related to the scope and terms of the
relationship with the retail customer through a

combination of delivery of the Relationship Summary, creating account
disclosures to include standardized language related to capacity and
type and scope of services, and the development of fee schedules.
(1) Disclosure of Capacity
    As discussed above, the Commission believes that a standalone
broker-dealer would be able to satisfy its obligation to disclose that
it is acting in a broker-dealer capacity by providing the retail
customer with the Relationship Summary in the manner prescribed by the
rules and guidance in the Relationship Summary Adopting Release.\1392\
---------------------------------------------------------------------------

    \1392\ See Relationship Summary Adopting Release.
---------------------------------------------------------------------------

    We assume, for purposes of this PRA analysis, that a dually
registered broker-dealer would satisfy its obligation to disclose it is
acting in a broker-dealer capacity by creating an account disclosure
with standardized language, and by providing it to the retail customer
at the beginning of the relationship. The account disclosure would set
forth when the broker-dealer would be acting in a broker-dealer
capacity, and the method the broker-dealer planned to use to clarify
its capacity at the time of the recommendation. We understand that many
broker-dealers already include such information in account disclosures.
(2) Disclosure of Fees and Costs and Type and Scope of Services,
Including Any Material Limitations on the Securities or Investment
Strategies That may be Recommended
    While many broker-dealers provide fee information to retail
customers in a fee schedule, the Commission believes that to comply
with the Disclosure Obligation broker-dealers will either amend their
existing schedules or develop a new standardized fee schedule to
disclose the fees and costs applicable to retail customers'
transactions, holdings, and accounts. This fee schedule would be
delivered to retail customers at the beginning of a relationship. If,
at the time the recommendation is made, the disclosure made to the
retail customer is not current or does not contain all material facts
regarding the fees and costs of the particular recommendation, the
broker-dealer would need to deliver an amended fee schedule or provide
an oral update, under the circumstances outlined in Section II.C.1.
    With respect to disclosure of the type and scope of services
provided by the broker-dealer, including any material limitations on
the securities or investment strategies that may be recommended to the
retail customer, we assume for purposes of this PRA analysis that a
broker-dealer would satisfy the Disclosure Obligation by including this
information in the account disclosure provided to the retail customer
at the beginning of the relationship, as described above. The broker-
dealer would need to deliver an amended account disclosure to the
retail customer in the case of any material changes made to the type
and scope of services or provide an oral update, under the
circumstances outlined in Section II.C.1.
b. Obligation To Provide to the Retail Customer Full and Fair
Disclosure, in Writing, of All Material Facts Relating to Conflicts of
Interest That are Associated With the Recommendation
    Regulation Best Interest requires a broker-dealer to provide the
retail customer, in writing, full and fair disclosure of all material
facts relating to conflicts of interest that are associated with a
recommendation.
    As discussed above, we assume that broker-dealers will satisfy the
obligation to disclose all material facts relating to conflicts of
interest through the use of: (1) A standardized, written disclosure
document provided to all retail customers and (2) supplemental
disclosure provided to certain retail customers for recommendations of
specific products.
    We assume for purposes of this analysis that delivery of written
disclosure will occur at the beginning of a relationship, such as
together with the account opening agreement. For existing retail
customers, the disclosure will need to occur ``prior to or at the
time'' of a recommendation. Subsequent disclosures may be delivered or
the broker-dealer may provide an oral update, under the circumstances
outlined in Section II.C.1, in the event of a material change or if the
broker-dealer determines additional disclosure is needed for certain
types of products.
    The corresponding estimated total annual reporting costs and
burdens are addressed below.\1393\
---------------------------------------------------------------------------

    \1393\ The costs and burdens arising from the obligation to
identify all material conflicts of interest that are associated with
the recommendation are addressed below, in the context of the
Conflict of Interest Obligation, in Section V.B.1.
---------------------------------------------------------------------------

c. Estimated Costs and Burdens
(1) Disclosure of Capacity, Type and Scope of Services
    Standalone broker-dealers will satisfy the obligation to disclose
the capacity in which they are acting through the delivery to retail
customers of the Relationship Summary, in accordance with the rules and
guidance set forth in the Relationship Summary Adopting Release.
Additionally, although we understand that many dual-registrants and
standalone broker-dealers, as a matter of best practice, already
disclose the capacity in which they are acting as well as the and type
and scope of services they offer to retail customers, for purposes of
this analysis, we assume that dual-registrants would create new account
disclosure related to capacity and all broker-dealers would create or
update account disclosure related to type and scope of services
specifically for purposes of compliance with Regulation Best Interest.
The Commission assumes that broker-dealers would provide the account
disclosure to each retail customer account, regardless of whether the
retail customer has multiple accounts with the broker-dealer.
    While the Commission recognizes that the Disclosure Obligation
applies to the broker-dealer entity and its associated persons, we do
not expect associated persons to incur any initial or ongoing burdens
with respect to the scope and terms of the relationship, as we assume
for purposes of this analysis that this information would be addressed
by the broker-dealer entity's account disclosure.\1394\ With regard to
disclosure of the capacity in which the associated person is acting,
the Commission believes that dually registered representatives of
broker-dealers will incur initial and ongoing burdens.\1395\
---------------------------------------------------------------------------

    \1394\ A broker-dealer or an associated person may satisfy the
Disclosure Obligation by using oral disclosure if it has previously
provided written disclosure to the retail customer beforehand as
well as the method it planned to use to clarify the disclosure at
the time of the recommendation. In addition, a record of the fact of
such oral disclosure having been made must be created and retained.
We assume that any disclosure required of a registered
representative will be made orally, and that any ongoing costs and
burdens will be associated with the record-making memorializing the
fact of the oral disclosure. See Section IV.B.5 (discussing the
costs and burdens associated with record-making).
    \1395\ See supra Section IV.B.5 (discussing the costs and
burdens associated with record-making).
---------------------------------------------------------------------------

    Following is a discussion of the estimated initial and ongoing
burdens and costs.
i. Initial Costs and Burdens
    Because, as noted above, standalone broker-dealers will satisfy the
obligation to disclose the capacity in which they are acting through
the delivery to retail customers of the Relationship Summary, we
estimate zero burden hours for standalone broker-dealers to disclose
the capacity in which they are acting.

We estimate that a dually registered firm will incur an initial
internal burden of 10 hours for in-house counsel and in-house
compliance \1396\ to draft language regarding the capacity in which
they are acting for inclusion in the standardized account disclosure
that is delivered to the retail customer.\1397\
---------------------------------------------------------------------------

    \1396\ The ten hour estimate includes five hours for in-house
counsel to draft and review the standardized language, and five
hours for consultation and review of compliance personnel.
    \1397\ As discussed above, the following estimates include the
costs and burdens that broker-dealers would incur in drafting
standardized account disclosure language related to the scope and
terms of the relationship on behalf of their dually registered
representatives. For purposes of this analysis, the Commission
assumes that broker-dealers will undertake these tasks on behalf of
their registered representatives. See Section IV.B.5 (discussing the
costs and burdens associated with record-making).
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    In addition, we estimate that dual-registrants will incur an
estimated external cost of $4,970 for the assistance of outside counsel
in the preparation and review of standardized language regarding
capacity.\1398\ For the estimated 563 dually registered firms with
retail business,\1399\ we project an aggregate initial burden of 5,630
hours,\1400\ and $2.8 million in aggregate initial costs relating to
disclosure of the capacity in which they are acting.\1401\
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    \1398\ Data from the Securities Industry Financial Markets
Association's Management & Professional Earnings in the Securities
Industry 2013 (``SIFMA Management and Professional Earnings
Report''), modified by Commission staff to account for an 1,800-hour
work-year and inflation, and multiplied by 5.35 (professionals) or
2.93 (office) to account for bonuses, firm size, employee benefits,
and overhead, suggests that costs for this position is $497 per
hour. The SIFMA Management and Professional Earnings Report was
updated in 2019 to reflect inflation. The numbers in the report are
higher than the numbers we used in the Proposing Release. This
estimate is based on the following calculation: (10 hours for
outside counsel review/drafting) x ($497/hour for outside counsel
services) = $4,970 in initial outside counsel costs.
    \1399\ See supra Section III.B.1.a, at Table 1, Panel B. The
number of dually registered broker-dealers includes broker-dealers
that are also Commission- and state-licensed investment advisers.
    \1400\ This estimate is based on the following calculation: (563
dually registered retail firms) x (10 hours) = 5,630 initial
aggregate burden hours.
    \1401\ This estimate is based on the following calculation: (563
dually registered retail firms) x ($4,970 in external cost per firm)
= $2.8 million in aggregate initial costs.
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    Similarly, to comply with Regulation Best Interest, we believe that
broker-dealers \1402\ will draft standardized language for inclusion in
the account disclosure to provide the retail customer with more
specific information regarding the type and scope of services that they
provide. We expect that the associated costs and burdens will differ
between small and large broker-dealers, as large broker-dealers
generally offer more products and services and therefore will need to
evaluate a larger number of products and services.
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    \1402\ In the Proposing Release, we inadvertently referred to
``standalone broker-dealers'' in this discussion, but our subsequent
references and estimates reflected our intent to capture initial
costs and burdens relating to disclosure of type and scope of
services on all broker-dealers (distinguishing between small and
large).
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    Given these assumptions, we estimate that a small broker-dealer
will incur an internal initial burden of 10 hours for in-house counsel
and in-house compliance to draft this standardized language.\1403\ In
addition, a small broker-dealer will incur an estimated external cost
of $4,970 for the assistance of outside counsel in the preparation and
review of this standardized language.\1404\ For the estimated 756 small
broker-dealers,\1405\ we project an aggregate initial burden of 7,560
hours,\1406\ and aggregate initial costs of $3.8 million.\1407\
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    \1403\ The 10-hour estimate includes 5 hours for in-house
counsel to draft and review the standardized language, and 5 hours
for consultation and review by in-house compliance.
    \1404\ This estimate is based on the following calculation: (10
hours for outside counsel review/drafting) x ($497/hour for outside
counsel services) = $4,970 in initial outside counsel costs.
    \1405\ See supra footnote 1384 and accompanying text.
    \1406\ This estimate is based on the following calculation: (756
small broker-dealers) x (10 hours per small broker-dealer) = 7,560
initial aggregate burden hours.
    \1407\ This estimate is based on the following calculation: (756
small broker-dealers) x ($4,970 in external cost per small broker-
dealer) = $3.8 million in aggregate initial outside counsel costs.
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    Given the broader array of products and services offered, we
estimate that a large broker-dealer will incur an internal burden of
twenty hours to draft this standardized language.\1408\ A large broker-
dealer will also incur an estimated cost of $7,470 for the assistance
of outside counsel in the preparation and review of this standardized
language.\1409\ For the estimated 2,010 large retail broker-dealers, we
estimate an aggregate initial burden of 40,200 hours \1410\ and $15
million in aggregate initial costs.\1411\
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    \1408\ The 20-hour estimate includes 10 hours for in-house
counsel to draft and review the standardized language, and 10 hours
for consultation and review by in-house compliance.
    \1409\ This estimate is based on the following calculation: (15
hours for outside counsel review/drafting) x ($497/hour for outside
counsel services) = $7,455 in initial outside counsel costs.
    \1410\ This estimate is based on the following calculation:
(2,010 large broker-dealers) x (20 burden hours) = 40,200 aggregate
initial burden hours.
    \1411\ This estimate is based on the following calculation:
(2,010 large broker-dealers) x ($7,455 initial outside counsel
costs) = $15 million in aggregate initial costs.
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    We estimate that all broker-dealers will each incur approximately
0.02 burden hours \1412\ for delivery of the account disclosure
document.\1413\ Based on FOCUS data, we estimate that the 2,766 broker-
dealers that report retail activity have approximately 139 million
customer accounts, and that approximately 73.5%, or 102 million, of
those accounts belong to retail customers.\1414\ We therefore estimate
that broker-dealers will have an aggregate initial burden of 2,040,000
hours, or approximately 738 hours \1415\ per broker-dealer for the
first year after Regulation Best Interest is in effect.\1416\
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    \1412\ This is the same estimate the Commission makes in the
Relationship Summary Adopting Release. It is also the same estimate
the Commission made in the Amendments to Form ADV Adopting Release,
and for which we received no comment. See Amendments to Form ADV, 17
CFR parts 275 and 279 at 49259. We expect that delivery requirements
will be performed by a general clerk. The general clerk's time is
included in the initial burden estimate.
    \1413\ As noted above, for new retail customers, we expect
delivery to occur at the beginning of the relationship; for existing
customers, we expect delivery to occur prior to or at the time of a
recommendation.
    \1414\ We have revised our estimates from the Proposing Release
to reflect the updated FOCUS Report data. Therefore, the 2,766
broker-dealers (including dual-registrants) with retail customers
report 139 million customer accounts. See Section III.B.1.a, at
Table 1, Panel B. Assuming the amount of retail customer accounts is
proportionate to the percentage of broker-dealers that have retail
customers, or 73.5% of broker-dealers, then the number of retail
customer accounts would be 73.5% of 139 million accounts = 102
million retail customer accounts. This number likely overstates the
number of deliveries to be made due to the double-counting of
deliveries to be made by dual-registrants to a certain extent, and
the fact that one customer may own more than one account.
    \1415\ These estimates are based on the following calculations:
(0.02 hours per customer account x (102 million retail customer
accounts) = 2,040,000 aggregate burden hours. Conversely, (2,040,000
hours)/(2,766 broker-dealers) = approximately 738 burden hours per
broker-dealer for the first year after Regulation Best Interest is
in effect.
    \1416\ We estimate that broker-dealers will not incur any
incremental postage costs because we assume that they will make such
deliveries with another mailing the broker-dealer was already
delivering to retail customers.
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    We estimate a total initial aggregate burden for all broker-dealers
to develop and deliver to retail customers account disclosures relating
to capacity and type and scope of services of 2,093,390 burden
hours.\1417\ We estimate a total initial aggregate cost of $21.6
million.\1418\
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    \1417\ This estimate is based on the following calculation:
(5,630 aggregate initial burden hours for dual-registrants) + (7,560
aggregate initial burden hours for small broker-dealers) + (40,200
burden hours for large broker-dealers) + (2,040,000 aggregate
initial burden hours for all broker-dealers to deliver the account
disclosures) = 2,093,390 total aggregate initial burden hours.
    \1418\ This estimate is based on the following calculation:
($2.8 million in initial aggregate costs for dual-registrants) +
($3.8 million in initial aggregate costs for small broker-dealers) +
($15 million in initial aggregate costs for large broker-dealers) =
$21.6 million in total initial aggregate costs.

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ii. Ongoing Costs and Burdens
    For purposes of this analysis, we assume that broker-dealers will
review and amend the standardized language in the account disclosure,
on average, once a year.\1419\ Further, we assume that broker-dealers
will not incur outside costs in connection with updating account
disclosures, as in-house personnel will be more knowledgeable about
changes in capacity, and the type and scope of services offered by the
broker-dealer. Additionally, with respect to standalone broker-dealers,
because they will meet their obligation to disclose capacity by
delivering the Relationship Summary, and will be subject to
requirements to amend the Relationship Summary consistent with Form
CRS, we estimate zero burden hours annually for ongoing costs relating
to disclosure of capacity under the Disclosure Obligation.
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    \1419\ We believe this annual timeframe is consistent with other
obligations imposed on broker-dealers. For example, FINRA rules set
an annual supervisory review as a minimum threshold for broker-
dealers, for example, in FINRA Rules 3110 (requiring an annual
review of the businesses in which the broker-dealer engages), 3120
(requiring an annual report detailing a broker-dealer's system of
supervisory controls, including compliance efforts in the areas of
antifraud and sales practices); and 3130 (requiring each broker-
dealer's CEO or equivalent officer to certify annually to the
reasonable design of the policies and procedures for compliance with
relevant regulatory requirements).
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    We estimate that each dually registered broker-dealer will incur
approximately five burden hours annually for in-house compliance and
business-line personnel to review changes in the dual-registrant's
capacity,\1420\ and another two burden hours annually for in-house
counsel to amend the account disclosure to disclose material changes to
the dual-registrant's capacity, for a total of seven burden hours. The
estimated ongoing aggregate burden to amend dual-registrants' account
disclosures to reflect changes in capacity is therefore 3,941 hours per
year.\1421\
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    \1420\ In the Proposing Release, we referred to capacity and
type and scope of services, however, we captured the ongoing costs
and burdens relating to disclosure of type and scope of services in
the paragraphs that followed, where we inadvertently referred to
``small standalone broker-dealers'' and ``large standalone broker-
dealers,'' but where our calculations reflected the burdens on all
``small broker-dealers'' and all ``large broker-dealers.'' See
Proposing Release, footnotes 600-601. We believe it is appropriate
to distinguish between standalone and dually registered broker-
dealers in assessing the costs and burdens relating to disclosure of
capacity, and to distinguish between small and large firms in