incur significantly larger losses (by more than 50 basis points)
from underdiversification compared to investors who seek financial
advice (irrespective of financial literacy) and investors with
higher financial literacy who do not seek advice.
    \1002\ Studies provide results of investor misunderstanding that
is consistent with some investors being at risk of entering into a
mismatched relationship. For example, survey results in OIAD/RAND,
supra footnote 3 suggest that a non-trivial subset of retail
investors may misunderstand the type of their financial
professional, the type of services the professional offers, and how
the professional is compensated.
    \1003\ See supra discussion in Section II.A.2.
---------------------------------------------------------------------------

    Below, we discuss in more detail the nature of the potential harm
faced by retail investors from confusion about the market for brokerage
and investment advisory services. We also discuss considerations
involved in creating disclosures for retail investors that may reduce
the potential for investor harm by increasing their knowledge about the
market for brokerage and investment advisory services and facilitating
their search for a firm or financial professional.\1004\
---------------------------------------------------------------------------

    \1004\ We are extending our discussion on broad economic
considerations from the Proposing Release in response to concerns
about the economic analysis in the Proposing Releases by commenters;
see, e.g., Letter from Charles Cox, Former SEC Chief Economist, et
al. (Feb. 6, 2019), available at https://www.sec.gov/comments/s7-07-18/s70718-4895197-177769.pdf. (``Former SEC Senior Economists
Letter''). The Former SEC Senior Economists Letter raised three main
concerns about the economic analysis in the proposed Regulation Best
Interest and the Proposing Release: (1) The discussion of the
potential problems in the customer-advisor relationship was
incomplete and identified other features of the market for ongoing
retail investment advice that might be problematic; (2) there was
inadequate discussion and analysis of the existing economic
literature on financial advice; and (3) there were questions of
whether the disclosure requirements in the proposing release would
provide meaningful information for customers. These concerns more
directly focused on the economic analysis of the proposed Regulation
Best Interest. However, concerns (1) and (3) appear to also apply to
the economic analysis of the Proposing Release to some extent, and
we address those concerns in this economic analysis. For instance,
with respect to (1), this section provides a more in depth
discussion compared to the Proposing Release of the harm that may
arise when retail investors lack knowledge or are confused about the
market for investment advisory and brokerage services, including a
discussion of why additional disclosure may be useful to investors.
With respect to (3), the discussion in this section expands on the
discussion already provided in the Proposing Release on the
potential limits to the effectiveness of disclosure to address the
identified investor harm, but also discusses how disclosure should
be designed to be effective, including how appropriately designed
disclosures can help overcome some of the identified potential
limitations of disclosure. The latter discussion provides a
framework that informs our analysis in Section IV.D of the
anticipated economic impacts of the relationship summary. In
addition, the Former SEC Senior Economists Letter stated that ``[w]e
feel (preliminarily) that the new CRS forms would provide some
helpful information. But we would far prefer for there to be
evidence that the intended targets of these disclosures feel the
same.'' Our discussion takes into account the various investor
surveys and studies that were conducted after the Proposing Release
that reported that large majorities of investors believed the
relationship summary would help them make more informed decisions
about types of accounts and services. See, e.g., RAND 2018.
---------------------------------------------------------------------------

    Academic studies have documented a multitude of potential benefits
that accrue to retail investors as a result of seeking investment
advice, including, but not limited to: Higher household savings rates,
setting long-term goals and calculating retirement needs, more
efficient portfolio diversification and asset allocation, increased
confidence and peace of mind, facilitation of small investor
participation, improvement in financial situations, and improved tax
efficiency.\1005\ Further, financial

professionals may also explain to retail investors the informational
asymmetries between product providers and their customers. Retail
investors might not be able to disentangle such information asymmetries
on their own. Studies also find that low financial literacy is
negatively associated with the propensity to seek financial
advice.\1006\ These findings collectively suggest that retail investors
of low level financial literacy might be harmed because they might be
less likely to seek financial advice in spite of the potential benefit
from it.
---------------------------------------------------------------------------

    \1005\ See, e.g., Mitchell Marsden, Catherine Zick, & Robert
Mayer, The Value of Seeking Financial Advice, 32 J. Fam. & Econ.
Issues 625 (2011); Jinhee Kim, Jasook Kwon, & Elaine A. Anderson,
Factors Related to Retirement Confidence: Retirement Preparation and
Workplace Financial Education, 16 J. Fin. Counseling & Plan. (2005);
Daniel Bergstresser, John Chalmers & Peter Tufano, Assessing the
Costs and Benefits of Brokers in the Mutual Fund Industry, 22 Rev.
Fin. Stud. 4129 (2009); Ralph Bluethgen, Steffen Meyer, & Andreas
Hackethal, High-Quality Financial Advice Wanted!, Euro. Bus. Sch.,
Working Paper, (Feb. 2008), available at http://citeseerx.ist.psu.edu/viewdoc/download?doi=<IP_ADDRESS>6.2310&rep=rep1&type=pdf; Neal M. Stoughton,
Youchang Wu, & Josef Zechner, Intermediated Investment Management,
66 J. Fin. 947 (2011). Francis M. Kinniry, et al., Putting a value
on your value: Quantifying Vanguard Advisor's Alpha, Vanguard
Research (Sept. 2016) estimates the value to investors associated
with obtaining financial advice of approximately 3% in net returns
to investors, associated with suitable asset allocation, managing
expense ratios, behavioral coaching, alleviating home bias, among
others.
    \1006\ For a discussion of the academic research on the role of
financial literacy in seeking financial advice see, e.g., OIAD/RAND,
supra footnote 3 at 8.
---------------------------------------------------------------------------

    For a retail investor who decides to enter a relationship with a
financial services provider, a low level of knowledge about the market
for financial services might reduce the investor's ability to
accurately identify whether any given firm or financial professional
offers a type of relationship that matches his or her preferences and
expectations. This, in turn, increases the risk that the firm or
financial professional is a poor match for the retail investor when
compared to an alternative financial services provider. A relationship
that represents a poor match between an investor and a firm or
financial professional can leave an investor worse-off, relative to a
better match, or no match at all, because the relationship could result
in a cost of services that is higher than the investor expects or a
level or type of service that is different than the investor expects,
such as episodic recommendations versus continuing advice.
    A retail investor might search across a set of financial service
providers to find a financial professional that best meets his or her
needs.\1007\ For an investor who is able to acquire information from
the financial service providers the investor chooses to evaluate, the
more extensive a search the investor engages in, the more likely the
investor will locate a good match. However, conducting such a search is
costly and requires time, effort, and access to resources. Investors
likely balance the benefits of evaluating each additional provider
against the incremental cost of doing so, ending their search when the
expected marginal cost of the search is greater than the expected
marginal benefit from the search.\1008\ Moreover, some investors may
experience higher-level of uncertainty about the benefits or costs of a
search. For example, investors who are less knowledgeable about the
general differences between different types of financial professionals,
the services these professionals provide, and the factors they should
consider in their choice, may not fully appreciate the benefits of
searching for a provider that best meets their needs. To the extent
such investors perceive a search as burdensome because they
underestimate the benefits of searching, they might refrain from
conducting a search or conduct a less extensive search to learn about
potential alternatives, thereby increasing their risk of entering a
relationship with a firm or financial professional that is a poor match
with their expectations and preferences or not engaging in a
relationship even if one might be beneficial.\1009\
---------------------------------------------------------------------------

    \1007\ The evidence discussed in supra Section IV.B.2.a on how
investors select a financial professional or firm suggests that a
large majority of retail investors rely on personal or professional
referrals, which may indicate that they evaluate very few, if any
alternative providers. One potential reason for this reliance on
referrals could be that investors currently perceive their search
costs to be high. Another possible reason, among others, could be
that investors value the information derived from other people's
experiences more than other sources of information.
    \1008\ This assumes a sequential search process, but an
analogous argument can be made if an investor instead searches by
deciding ex ante on a fixed number of alternatives to evaluate, in
which case the marginal decisions then relates to what this number
will be. See, e.g., Babur De los Santos, et al., Testing Models of
Consumer Search Using Data on Web Browsing and Purchasing Behavior,
102 Am. Econ. Rev. 2955 (2012). We have expanded our discussion on
search costs in response to main concern (1) of the Former SEC
Senior Economists Letter; see supra footnote 1004.
    \1009\ This argument assumes that less knowledgeable investors
can learn at least some information from engaging in an initial
search or a continued search that could be used to evaluate fit
(albeit imperfectly so). If less knowledgeable investors cannot
learn from a search at all, the choice of a firm or financial
professional becomes similar to a random draw and a search, no
matter how extensive, will not decrease the risk of a mismatch.
---------------------------------------------------------------------------

    General trust (in the sense of confidence) in financial markets can
help alleviate certain behavioral biases and encourage participation
in, for example, the stock market.\1010\ Trust at an interpersonal
level may be less beneficial in certain circumstances. Research
suggests that lower financial literacy among investors is positively
associated with higher personal trust in their financial
professionals.\1011\ However, to the extent retail investors substitute
trust for knowledge in their relationship with a financial
professional, overreliance on trust may induce some investors to
maintain a mismatched relationship longer than they otherwise would if
they had higher financial literacy and a better understanding of the
costs and benefits of the financial advice they receive from the
professional, as well as awareness of alternative services or
providers.\1012\ That is, particularly for less-knowledgeable
investors, a high level of trust in a particular financial professional
or firm may exacerbate the potential harm of a mismatched relationship.
Similarly, some retail investors that select a firm or financial
professional based on referrals from friends and family may do so
solely on the basis of a high level of trust in these referring
parties.\1013\ This can exacerbate the potential harm of a mismatched
relationship in particular for less sophisticated investors and/or for
investors who relied on referrals from less financially sophisticated
parties.\1014\
---------------------------------------------------------------------------

    \1010\ See, e.g., the literature review in discussion in OIAD/
RAND, supra footnote 3, at 11.
    \1011\ See, e.g., Thomas Pauls, Oscar Stolper, & Adreas Walter,
Broad-Scope Trust and Financial Advice, Working Paper (Nov. 2016),
available at https://www.researchgate.net/publication/314235638_Broad-scope_trust_and_financial_advice.
    \1012\ We acknowledge commenters' concerns that higher financial
literacy and more disclosures alone may not fully address the risk
that retail investors would rely on trust in their financial
services providers over other factors, such as knowledge about
financial services industry participants, practices and products.
See CFA Letter I (``We've seen anecdotal evidence in our own
personal encounters with investors of their tendency to trust their
``financial adviser'' without actually verifying how or how much
they are paying or how their investments are performing. Even
investors who would be considered sophisticated by any reasonable
measure can exhibit a level of trust and confidence in their
financial professional that isn't based on data. Any disclosures
about their financial professional's services, duties, costs, and
conflicts are unlikely to change those views''); AARP Letter
(``Recent behavioral science studies have shown that disclosures are
largely ineffective because they tend to increase conflict in
advisers and make the investor more likely to trust the adviser and
thus follow biased advice''); see also Regulation Best Interest
Release, supra footnote 47, (discussing how that rulemaking
addresses the limitations of disclosure for customers of broker-
dealers).
    \1013\ We recognize that trust is not the only reason to rely on
referrals; for example, there is informational value in other
people's personal experiences.
    \1014\ See supra Section IV.B.2.a for survey evidence on the
role of personal referrals in retail investors' choice of financial
professionals.
---------------------------------------------------------------------------

    Further, investors may endure a mismatched relationship for a
longer period of time than they would absent switching costs, including
the cost of a new search and any transaction costs involved in moving
assets from one firm to another. These costs lower a retail investor's
incentive to look for a new firm or financial professional even if the

current relationship turns out to be a poor match. Both overreliance on
trust and the presence of switching costs increase the ex-ante value of
avoiding a mismatched relationship in the first place.
    Retail investors could increase their knowledge about the market
for brokerage and investment advisory services, and thereby engage in a
more efficient search, by accessing information and disclosures
currently provided directly by firms or available in a number of
existing regulatory forms and platforms. Current sources of information
include, among others, Form ADV (and IAPD) and BrokerCheck.\1015\
However, because existing disclosures are made on multiple and
sometimes lengthy forms, and are obtained in different ways, it can be
difficult for investors to grasp the most important features of the
financial services from reading these materials.\1016\ In addition, the
information available to retail investors about broker-dealers on
BrokerCheck does not include the same information that investment
advisers provide in the Form ADV brochure and brochure supplement,
which makes direct comparisons between broker-dealers and investment
advisers more difficult.
---------------------------------------------------------------------------

    \1015\ See Proposing Release, supra footnote 5, at n.280.
Investment advisers and broker-dealers may also provide additional
information to retail investors through the firm's website and the
retail investor's account agreement. Additionally, investment
advisers and broker-dealers may provide information to retail
investors through marketing materials (e.g., brochures) and other
customer communications (e.g., fee schedules).
    \1016\ There is some evidence suggesting investors are not
reading current disclosures. For example, RAND 2018 reports that 13%
of surveyed investors said that they had viewed Form ADV (11% said
they viewed both an ADV and broker account opening document, 2% had
only reviewed Form ADV). RAND 2018, supra footnote 13.
---------------------------------------------------------------------------

    Voluntary disclosures and educational efforts made by financial
services providers such as broker-dealers and investment advisers can
potentially inform investors about the specific relationships they can
have with providers and the types of services providers offer, but also
about the overall market for financial advice and the different types
of service providers and relationships available in the market. And
such voluntary disclosure could, in principle, facilitate investor
search. However, financial services providers may lack incentives to
voluntarily disclose salient information or make the effort needed to
educate investors about the various alternatives available to them
because it is costly to do so. In addition to the costs of producing
disclosures and training employees to deliver disclosures, providers
may also perceive a risk that competitors would take advantage of
disclosed information. Furthermore, disclosures that are not tailored
to the provider and have more general educational value to retail
investors have the features of a public good. If providers rely on
their competitors to educate potential clients generally about the
market for financial advice, there is an inefficiently low level of
general educational material available to investors. Underprovision
might occur even if such disclosures, were they to be provided, would
increase the overall efficiency of the market for financial advice and
thus benefit financial services providers as a group in the long run,
for example, by sufficiently reducing confusion among the general
investing public that more investors are willing to search for a
financial services provider.
    Additionally, some broker-dealers and investment advisers may even
privately gain from a lack of knowledge among retail investors to the
extent they profit from attracting and retaining customers and clients
who would be a better match with another provider.\1017\ For example, a
customer of a broker-dealer who has a preference for active investing
may actually be better off being a client of an investment adviser and
paying a fixed percentage of assets per year as a fee for the advice
instead of broker commissions each time she receives a recommendation
that results in a transaction. However, this investor is likely a
profitable customer for the broker-dealer. Similarly, a client of an
investment adviser who prefers buy-and-hold investments in a few index
funds could potentially be better off in a relationship with a broker-
dealer, by only paying a few one-time sales charges and commissions
instead of a recurring percentage fee on the assets, which is likely
more profitable to the investment adviser. In both of these cases, the
firm has little incentive to provide the investor with information
about available advice relationships that could persuade the investor
to seek advice elsewhere or to switch to a different business line.
---------------------------------------------------------------------------

    \1017\ See, e.g., CFA Letter I (stating that ``[t]he problem is
that investors are being misled into relying on biased sales
recommendations as if they were objective, best interest advice and
that they are suffering significant financial harm as a result.
Investor confusion is relevant only because it limits the tools the
Commission has available to address that harm . . .'').
---------------------------------------------------------------------------

    In the presence of the frictions described above, requiring firms
and financial professionals to furnish a short summary disclosure like
Form CRS can benefit retail investors by reducing information asymmetry
between investors and firms and financial professionals and turning
investor attention to more salient aspects of a firm and its services.
In addition, as discussed above, no current required disclosure allows
for comparability among broker-dealers and investment advisers by
requiring disclosures on the same topics under standardized headings in
a prescribed order to retail investors. A reduction in information
asymmetry and improved comparability may reduce search costs for
investors and increase their understanding about differences in offered
relationships across firms and financial professionals, thereby
reducing the risk of investors' hiring a provider that is a poor match
for their needs. However, for the relationship summary to be effective
for retail investors it must be understandable. Studies have found that
the format and structure of disclosure may improve (or decrease)
investor understanding of the disclosures being made.\1018\ We discuss
these studies below.
---------------------------------------------------------------------------

    \1018\ See, Justine S. Hastings & Lydia Tejeda-Ashton, Financial
Literacy, Information, and Demand Elasticity: Survey and
Experimental Evidence from Mexico, NBER Working Paper 14538 (Dec.
2008) (finding that providing fee disclosures to Mexican investors
in peso rather than percentage terms caused financially
inexperienced investors to focus on fees); see Richard G. Newell &
Juha Siikamaki, Nudging Energy Efficiency Behavior, Resources for
the Future Discussion Paper 13-17 (Jul. 10, 2013) (finds that
providing dollar operating costs in simplified energy efficiency
labeling significantly encouraged consumers to choose higher energy
efficiency appliances, while another related study presents similar
evidence from payday loans).
---------------------------------------------------------------------------

    Some commenters questioned the general efficacy of disclosure in
the context of investment advice to retail investors.\1019\ We do not
share this view. As we discussed above, we believe a short summary
disclosure like Form CRS can provide benefits to retail investors.
However, as we also discussed in the Proposing Release,\1020\ we
recognize that there may be limits to the efficacy of disclosure in
some

circumstances. For example, the documented low level of financial
sophistication of many retail investors can make it harder for them to
process the implications of disclosure.\1021\ Another limitation of the
efficacy of disclosure documented in research is that investors may
have various behavioral biases, such as anchoring \1022\ and over-
confidence,\1023\ which could affect how the disclosed information is
interpreted.\1024\ This could in turn lead investors to misinterpret,
under-weight, or over-weight the implications of disclosures. Limited
attention problems can also impede investors' ability to effectively
process the implications of some disclosures.\1025\
---------------------------------------------------------------------------

    \1019\ See, e.g., AARP Letter (stating that ``[r]ecent
behavioral science studies have shown that disclosures are largely
ineffective because they tend to increase conflict in advisers and
make the investor more likely to trust the adviser and thus follow
biased advice''); Comment Letter of Economic Policy Institute (Aug.
7, 2018) (``EPI Letter'') (stating that ``Disclosure requirements
can be onerous, and disclosure may not only be ineffective, but
counterproductive. For example, detailed disclosures can serve to
bury important information, or disclosure of conflicts can be
interpreted by consumers as evidence of honesty. Disclosure can make
sellers more comfortable recommending products and services that are
not in buyers' best interests, and it can make clients less
comfortable rejecting these recommendations at the risk of giving
offense'').
    \1020\ See Proposing Release, supra footnote 5, at Section
IV.B.1.
    \1021\ See, e.g., L.E. Willis, Decision making and the limits of
disclosure: The problem of predatory lending: Price, 65 Md. L. Rev.
707 (2006) (``Willis Study''). Commenters discussed similar issues,
see, e.g., Comment Letter of Charles Ryan (Aug. 7, 2018); CFA Letter
I; American Investment Council Letter.
    \1022\ Anchoring bias implies undue reliance on a particular
information signal at the expense of other signals. See, e.g.,
Robert A. Prentice, Moral Equilibrium: Stock Brokers and the Limits
of Disclosure, 2011 Wis. L. Rev. 1059, at 1083 (2011) (explaining
``people tend to anchor on the first information they receive, and
then revise their judgments in the face of new information, but to
an insufficient degree'').
    \1023\ Over-confidence bias implies over-estimation of
probabilities of certain outcomes over objective probabilities. Id.,
at 1072, explains that ``studies indicate that people tend, in
mathematically impossible percentages, to believe that they are
above average in driving, auditing, and teaching.''
    \1024\ See, e.g., Jorgen Vitting Anderson, Detecting Anchoring
in Financial Markets, 11 J. Behav. Fin. 129 (2010).
    \1025\ See, e.g., David Hirshleifer & Siew Hong Teoh, Limited
Attention, Information Disclosure, and Financial Reporting, 36 J.
Acct. & Econ. 337 (2003) (``Hirshleifer and Teoh Study'').
---------------------------------------------------------------------------

    In addition, academic studies find that sometimes certain
disclosures may result in unintended consequences. In particular,
existing research has found that conflict of interest disclosures can
increase the likelihood that the disclosing party would act on the
conflict of interest.\1026\ This bias can be caused by ``moral
licensing,'' a belief that the disclosing party has already fulfilled
its moral obligations in the relationship and therefore can act in any
way (including to the customer's detriment), or it can be caused by
``strategic exaggeration,'' aimed at compensating the disclosing party
for the anticipated loss of profit due to the disclosure. Experimental
evidence also suggests that disclosure could turn some clients or
customers into ``reluctant altruists.'' \1027\ For example, if
financial professionals disclose that they earn a referral fee if a
customer enrolls in a program, the customer may implicitly feel that
they are being asked to help their financial professional receive the
fee. One study also found evidence that disclosure of a professional's
financial interests (particularly in face-to-face interactions) can
induce a ``panhandler effect,'' whereby customers may face an implicit
social pressure to meet the professional's financial interests.\1028\
The above literature indicates that conflicts of interest disclosures
may interact with psychological biases to produce unintended effects
that undermine the intended benefits of the disclosures. However, these
studies also suggest certain factors that may mitigate the unintended
consequences. For example, in the case of the ``panhandler effect,''
researchers have found that distancing the client or customer from the
financial professional either in the decision or disclosure phase can
dampen this effect.\1029\
---------------------------------------------------------------------------

    \1026\ See, Daylian M. Cain, George Loewenstein, & Don A. Moore,
The Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts
of Interest, 34 J. Legal Stud. 1 (2005) (``Cain 2005 Article'');
Daylian M. Cain, George Loewenstein & Don A. Moore, When Sunlight
Fails to Disinfect: Understanding the Perverse Effects of Disclosing
Conflicts of Interests, 37 J. Consumer Res. 836 (2011); Bryan K.
Church & Xi (Jason) Kuang, Conflicts of Disclosure and (Costly)
Sanctions: Experimental Evidence, 38 J. Legal Stud. 505 (2009);
Christopher Tarver Robertson, Biased Advice, 60 Emory L.J. 653
(2011). These papers study conflicts of interest in general,
experimental settings, not specialized to the provision of financial
advice.
    \1027\ See Jason Dana, Daylian M. Cain, & Robyn M. Dawes, What
You Don't Know Won't Hurt Me: Costly (but Quiet) Exit in Dictator
Games, 100 Organizational Behav. & Hum. Decision Processes 193
(2006).
    \1028\ Sunita Sah, George Loewenstein, & Daylian M. Cain, The
Burden of Disclosure: Increased Compliance With Distrusted Advice,
104(2) J. Personality & Soc. Psychol. 289-304 (2013).
    \1029\ See id.
---------------------------------------------------------------------------

    Academic research has identified a set of characteristics that may
increase the effectiveness of a disclosure document to consumers. These
characteristics, discussed below, frame our analysis of the economic
impacts of the proposed rule.\1030\
---------------------------------------------------------------------------

    \1030\ See George Loewenstein, Cass R. Sunstein, & Russell
Golman, Disclosure: Psychology Changes Everything, 6 Ann. Rev. Econ.
391 (2014). The paper provides a comprehensive survey of the
literature relevant to disclosure regulation.
---------------------------------------------------------------------------

    Studies have found that the structure or format of disclosure may
improve (or decrease) investor understanding of the disclosures being
made.\1031\ Every disclosure document not only presents new information
to retail investors but also provides a particular structure or format
for this information that affects investors' evaluation of the
disclosure.\1032\ This ``framing effect'' could lead investors to draw
different conclusions depending on how information is presented. For
example, if the disciplinary history information is presented first, it
could affect the way investors perceive all subsequent disclosures in
the relationship summary and, possibly, discount more heavily the
information provided by firms with disciplinary history relative to
firms with no disciplinary history. If, instead, disciplinary history
information were provided at the end of the relationship summary, the
effect of the information could be moderated because it would no longer
frame the other information provided to investors. Because of such
framing effects, it is important that the structure of a disclosure
document supports the intended purpose of the disclosure.
---------------------------------------------------------------------------

    \1031\ To that end, in order to facilitate more effective
processing of disclosures by investors, some commenters emphasized
the need to incorporate ``design thinking'' into the structure of
the relationship summary. See, e.g., Fidelity Letter. See also supra
footnotes 58-59.
    \1032\ See Amos Tversky & Daniel Kahneman, The Framing of
Decisions and the Psychology of Choice, 211 Sci. 453 (1981).
---------------------------------------------------------------------------

    Because individuals can exhibit limited ability to absorb and
understand the implications of the disclosed information, for example
due to limited attention or low level of sophistication,\1033\ more
targeted and simpler disclosures may be more effective in communicating
information to investors than more complex disclosures. Academic
studies suggest that costs, such as increased investor confusion or
reduced understanding of the key elements of the disclosure, are likely
to increase as disclosure documents become longer, more convoluted, or
more reliant on narrative text.\1034\ Consistent with such findings,
other empirical evidence suggests that disclosure simplification may
benefit consumers of disclosed information.\1035\ In general, academic
research appears to support the notion that shorter and more focused
disclosures could be more effective at increasing investors
understanding than longer, more complex disclosures.
---------------------------------------------------------------------------

    \1033\ See, e.g., Hirshleifer and Teoh Study, supra footnote
1025; and Willis Study, supra footnote 1021.
    \1034\ See, e.g., Samuel B. Bonsall & Brian P. Miller, The
Impact of Narrative Disclosure Readability on Bond Ratings and the
Cost of Debt, 22 Rev. Acct. Stud. 608 (2017) and Alistair Lawrence,
Individual Investors and Financial Disclosure, 56 J. Acct. & Econ.
130 (2013); see also CCMC Comment Letter.
    \1035\ See, e.g., Sumit Agarwal, et al., Regulating Consumer
Financial Products: Evidence from Credit Cards, NBER Working Paper
No. 19484 (Jun. 2014), available at https://www.nber.org/papers/w19484 (finding that a series of requirements in the Credit Card
Accountability Responsibility and Disclosure Act (CARD Act),
including several provisions designed to promote simplified
disclosure, has produced substantial decreases in both over-limit
fees and late fees, thus saving U.S. credit card users $12.6 billion
annually).

---------------------------------------------------------------------------

    Another characteristic of effective disclosures documented in
academic research is disclosure salience.\1036\ Salience detection is a
key feature of human cognition allowing individuals to focus their
limited mental resources on a subset of the available information and
causing them to over-weight this information in their decision making
processes.\1037\ Within the context of disclosures, information
disclosed to promote greater salience, such as information presented in
bold text, or at the top a page, would be more effective in attracting
attention than less saliently disclosed information, such as
information presented in a footnote. Limited attention among
individuals also increases the importance of focusing on salient
disclosure signals. Some research finds that more visible disclosure
signals are associated with stronger stakeholder response to these
signals.\1038\ Moreover, research suggests that increasing signal
salience is particularly helpful in reducing limited attention of
consumers with lower education levels and financial literacy.\1039\
There is also empirical evidence that visualization improves individual
perception of information.\1040\ For example, one experimental study
shows that tabular reports lead to better decision making and graphical
reports lead to faster decision making (when people are subject to time
constraints).\1041\ Overall these findings suggest that problems such
as limited attention may be alleviated if key information in Form CRS
is emphasized, is reported closer to the beginning of the document, and
is visualized in some manner. This is also consistent with the
recommendation of several commenters.\1042\ However, it is also
important to note that given a choice, registrants may opt to emphasize
elements of the disclosure that are most beneficial to themselves
rather than investors, while deemphasizing elements of the disclosure
that are least beneficial to them. As discussed further in the economic
analysis below and discussions above, the final instructions of the
relationship summary include requirements that are designed to mitigate
this risk. For example, the final instructions require standardized
headers in a prescribed order, certain other prescribed language
(including for the required conversation starters), page limits, and
certain text features, which mitigate providers' incentives to behave
opportunistically.
---------------------------------------------------------------------------

    \1036\ This is a view also supported by commenters. See, e.g.,
AARP Letter (``A good disclosure statement will highlight the
information most important to the consumer.'').
    \1037\ Daniel Kahneman, THINKING, FAST AND SLOW (2013). Susan
Fiske & Shelley E. Taylor, SOCIAL COGNITION: FROM BRAINS TO CULTURE
(3rd ed. 2017).
    \1038\ See Hirshleifer and Teoh Study, supra footnote 1025.
Commenters also addressed the benefit of visible disclosure signals.
For example, the Fidelity Letter refers to Stanford Law School
Design Principles stating ``[u]se visual design and interactive
experiences, to transform how you present legal info to lay
people.'' Also, Kleimann II states that ``[f]or good design, we want
to build upon this tendency by identifying the key questions
investors should or are likely to ask and featuring them prominently
in the text, thus easing the cognitive task for readers. . . .''
Kleimann II, supra footnote 19.
    \1039\ See, e.g., Victor Stango & Jonathan Zinman, Limited and
Varying Consumer Attention: Evidence from Shocks to the Salience of
Bank Overdraft Fees, 27 Rev. of Fin. Stud. 990 (2014).
    \1040\ See John Hattie, VISIBLE LEARNING. A SYNTHESIS OF OVER
800 META-ANALYSES RELATING TO ACHIEVEMENT (2008).
    \1041\ See Izak Benbasat & Albert Dexter, An Investigation of
the Effectiveness of Color and Graphical Information Presentation
Under Varying Time Constraints, 10-1 MIS Q. 59 (1986). However, one
commenter noted that participants in the RAND 2018 qualitative
interviews did not appear to process side-by-side tabular
disclosures effectively. See Schwab Letter II.
    \1042\ See, e.g., CFA Letter I; Morgan Stanley Letter.
---------------------------------------------------------------------------

    There is also a trade-off between allowing more disclosure
flexibility and ensuring disclosure comparability (e.g., through
standardization).\1043\ Greater disclosure flexibility potentially
allows the disclosure to reflect more relevant information, as
disclosure providers can tailor the information to firms' own specific
circumstances.\1044\ Although disclosure flexibility allows for
disclosure of more decision-relevant information, it also allows
registrants to emphasize information that is most beneficial to
themselves rather than investors, while deemphasizing information that
is least beneficial to the registrants. Economic incentives to present
one's services in better light may drive investment advisers and
broker-dealers to deemphasize information that may be relevant to
retail investors.\1045\ Moreover, although standardization makes it
harder to tailor disclosed information to a firm's specific
circumstances, it also comes with some benefits. For example, people
are generally able to make more coherent and rational decisions when
they have comparative information that allows them to assess relevant
trade-offs.\1046\ The final rules are intended to strike a balance
between the relative benefits and costs of disclosure standardization
versus disclosure flexibility; for example, by requiring standardized
headings and a prescribed order of topics but allowing some flexibility
in the firm's own wording and the order of presentation within each
topic.
---------------------------------------------------------------------------

    \1043\ See CFA Institute Letter I.
    \1044\ See, e.g., Cambridge Letter; FSI Letter I; Mutual of
America Letter; Northwestern Mutual Letter; SIFMA Letter; Vanguard
Letter; Primerica Letter; TIAA Letter.
    \1045\ Commenters had similar concerns, see, e.g., EPI Letter;
Regulatory Impact Analysis, supra footnote 853; CFA Letter I.
    \1046\ See, e.g., JR Kling, et al., Comparison Friction:
Experimental Evidence from Medicare Drug Plans, 127 Q. J. Econ. 199
(2012) (finding that in a randomized field experiment, in which some
senior citizens choosing between Medicare drug plans that were
randomly selected to receive a letter with personalized,
standardized, comparative cost information (``the intervention
group'') while another group (``the comparison group'') received a
general letter referring them to the Medicare website; plan
switching was 28% in the intervention group, but only 17% in the
comparison group, and the intervention caused an average decline in
predicted consumer cost of about $100 a year among letter
recipients); CK Hsee, et al., Preference Reversals Between Joint and
Separate Evaluations of Options: A Review and Theoretical Analysis,
125 Psychol. Bull. 576 (1999).
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D. Economic Effects of the Relationship Summary

1. Retail Investors
a. Overall Anticipated Economic Effects of Form CRS
    Overall, we expect that these final rules requiring firms to
deliver a relationship summary will benefit retail investors in several
ways, including by reducing information asymmetry between investors and
firms (and their financial professionals), reducing search costs and
facilitating easier comparisons between and among brokerage and
investment advisory firms, and increasing understanding of, and
confidence in, the market for financial services more generally.
    First, in the specific context of a retail investor considering a
firm or financial professional, the relationship summary will reduce
the information asymmetry between the investor and the firm or
professional by increasing transparency to that investor about a firm's
services, fees, conflicts of interest, standard of conduct, and
disciplinary history.\1047\ Some--though not all--of this information
is currently available in the marketplace. The relationship summary,
however, will require all firms to provide information on these topics
in one summary disclosure, which will be available on firms' websites,
if they have one, at BrokerCheck and IAPD, and through Investor.gov.
Current disclosure requirements do not provide this level of
transparency and comparability for both broker-dealers and investment

advisers. In addition, through the use of layered disclosure, the
relationship summary will facilitate investors' access to additional,
more detailed, information. The relationship summary is also the first
narrative disclosure for broker-dealers' retail customers that will be
filed with the Commission and widely available to the public. We
believe providing this overview of information in one place will
enhance the accessibility of this information for the retail investor
reviewing it relative to the baseline. Moreover, some information, such
as the payments to financial professionals, is not currently required
to be publicly disclosed, making that information available for the
first time. The relationship summary may also benefit investors by
helping them separate ``hard'' information about services and fees from
marketing communications. To the extent the relationship summary will
be effective at informing retail investors,\1048\ it should improve
their ability to assess whether a relationship offered by a particular
firm is a good match with their preferences and expectations. Moreover,
a reduction in information asymmetry may also help retail investors
increase the value from any given relationship they enter with a firm
or financial professional by potentially increasing their ability to
monitor the relationship and to make more informed decisions related to
the relationship during its duration, including whether to terminate
the relationship.
---------------------------------------------------------------------------

    \1047\ These aspects of the relationship summary are consistent
with, for example, the disclosure items identified in the 917
Financial Literacy Study as essential for retail investors:
adviser's fees (76%), disciplinary history (67%), adviser's
conflicts of interest (53%), and adviser's methodology in providing
advice (51%); see 917 Financial Literacy Study, supra footnote 588.
    \1048\ As discussed supra, in Sections I and II, we commissioned
the RAND 2018 report and received several surveys and studies
provided by commenters. See supra footnotes 13-21 and accompanying
text. Results of the RAND 2018 survey and other surveys or studies
submitted to the comment file indicate that survey and study
participants indicated their subjective view that a relationship
summary would be useful for retail investors; see supra Section I
and IV.B.3.b.
---------------------------------------------------------------------------

    Second, Form CRS will provide benefits to those retail investors
that want to compare more than one provider or service, including those
that want to compare brokerage and advisory services, relative to the
baseline. Form CRS is distinct from other required disclosures as it is
a standardized disclosure to retail investors that is broadly uniform
between investment advisers and broker-dealers, or that requires dual
registrants to describe both brokerage and advisory services. In
facilitating this comparability, the relationship summary may promote
competition between financial service providers along dimensions such
as fees, costs, and conflicts, in ways that improve retail investor
welfare. The comparative benefits discussed above could increase
further should third-party data aggregators enter the market and use
the information disclosed in relationship summaries to provide
consolidated data on firms, as search and processing costs could be
reduced even further for retail investors.\1049\
---------------------------------------------------------------------------

    \1049\ The requirement that the headings should be machine-
readable may facilitate such entry by third-party data aggregators.
---------------------------------------------------------------------------

    Third, we also believe that requiring all broker-dealers and
investment advisers that serve retail investors to provide a
relationship summary, along with the other initiatives we are adopting,
will increase understanding of, and confidence in, the market for
financial advice more generally. Specifically, because of confusion
about the market for brokerage and advisory services or a general lack
of confidence in the market, some retail investors are potentially
discouraged from seeking a relationship with a financial provider and
do not participate in the market for financial services.\1050\ The
relationship summary may help spread awareness and understanding about
the market for financial services by increasing transparency about the
services, fees, conflicts and standard of conduct of financial
professionals; reducing confusion among investors generally; and
increasing the general level of confidence. This general increase in
understanding and confidence should, in turn, make it more likely that
investors participate in the market for financial services when
participation is likely to benefit them.
---------------------------------------------------------------------------

    \1050\ See, e.g., OIAD/RAND, supra footnote 3, for a review of
the academic evidence on such effects.
---------------------------------------------------------------------------

    Some commenters suggested the general benefits to investors of the
proposed relationship summary would be limited.\1051\ More
specifically, several commenters were concerned that retail investors
may be subject to information overload from reading the relationship
summary, reducing the potential benefits to investors because of the
cognitive costs of digesting the information.\1052\ We acknowledge that
there are limits to investor cognition with respect to lengthy and
detailed disclosures,\1053\ however the relationship summary is shorter
and more concise than disclosures currently available to investors,
which should reduce the likelihood of information overload. Moreover,
we have modified the relationship summary from the proposal to further
streamline and shorten it, and minimize the use of legal or technical
jargon, thereby further reducing the potential that the relationship
summary poses a cognitive burden for retail investors that undermines
the overall benefit of the disclosure.
---------------------------------------------------------------------------

    \1051\ See, e.g., CFA Letter I and EPI Letter.
    \1052\ Such concerns are raised in, e.g., AARP Letter; ACLI
Letter; Rhoades Letter. Relatedly, some commenters argued that the
relationship summary is duplicative of other disclosures and is
unnecessary. See, e.g., supra footnote 33.
    \1053\ See supra footnote 1034 and accompanying text.
---------------------------------------------------------------------------

    We also recognize that the relationship summary, as with other
required disclosures, has costs.\1054\ For example, as discussed above,
there is a risk that disclosure of conflicts of interest can actually
increase costs to investors by, for example, providing a perceived
``moral license'' to financial professionals to act on disclosed
conflicts and encourage them to provide more conflicted advice at the
expense of investors.\1055\ In addition, some commenters expressed a
belief that the disclosures in the proposed relationship summary,
particularly due to the prescribed wording, may increase investor
confusion \1056\ or may ``create misimpressions, and may even
constitute outright misstatements, inaccuracies, or
misrepresentations'' in certain contexts.\1057\ In consideration of
these comments, the final requirements for Form CRS permit firms,
within the parameters of the instructions, largely to describe their
services, investment offerings, fees, and conflicts of interest using
their own wording. The final requirements also incorporate many other
changes in response to commenters' concerns and suggestions and
insights from investor surveys and roundtables, which are intended to
increase the benefits and reduce the costs to investors relative to the
proposed disclosure. Additionally, as with required disclosures
generally, we recognize that the relationship summary alone likely
would not fully alleviate investor confusion or risk of mismatched
relationships in the marketplace.
---------------------------------------------------------------------------

    \1054\ See the discussion on the limits and potential costs of
disclosures to retail investors in supra Section IV.C.
    \1055\ Some commenters raised similar concerns. See, e.g., CFA
Letter I.
    \1056\ See, e.g., Financial Planning Coalition Letter
(expressing concern that Form CRS may exacerbate investor
confusion). See supra footnotes 77 and 80 and accompanying text.
    \1057\ Committee of Annuity Insurers Letter. See supra footnotes
76-81 and accompanying text.
---------------------------------------------------------------------------

    Moreover, firms may attempt to pass through some of the direct
compliance costs we discuss further below to retail investors, for
example, by charging higher commissions, asset-based management fees,
or other fees. However, we believe such pass through of costs is likely
to be limited because we expect these direct expenses to be

relatively small in the context of the overall size of the brokerage
and investment advisory industries.\1058\ Additionally, to the extent
the relationship summary may promote competition between financial
service providers, as discussed above, any increase in competition both
among and between broker-dealers and investment advisers could reduce
the pricing power of firms, and thereby reduce the ability to pass
through the compliance costs associated with the relationship summary.
---------------------------------------------------------------------------

    \1058\ See infra Section IV. D.2.b.(4) for a summary of
estimates of certain compliance costs developed for the purpose of
the Paperwork Reduction Act analysis.
---------------------------------------------------------------------------

    The magnitude of the anticipated economic effects discussed above
will depend on a number of factors, including the extent to which the
relationship summary will increase investors' understanding about their
potential or current relationships with firms and financial
professionals, and in what ways such an increase in understanding would
affect their behavior. Given the number and complexity of assumptions
that would be required to be able to estimate how the relationship
summary will affect investors' understanding and their decision-making,
and the lack of data on relevant characteristics of individual firms
and their prospective and existing retail investors, the Commission is
not able to meaningfully quantify the magnitude of these anticipated
economic effects.
    We discuss the benefits and costs to retail investors of certain
elements of the relationship summary requirements below, including
requirements regarding length and presentation, standardization,
content (including layered content), delivery, and filing. As part of
these discussions, we also discuss certain changes from the proposal
and how we anticipate those changes affect the benefits and costs of
the final relationship summary relative to the proposed requirements.
b. Presentation and Format
    The presentation and format of the relationship summary are
designed to facilitate retail investors' processing of the provided
information to help them compare information about firms' relationships
and services, fees and costs, specified conflicts of interest and
standards of conduct, and disciplinary history, among other things. The
relationship summary is also designed to promote effective
communication between firms and their retail investors. Several
features of the relationship summary should reduce some of the
limitations discussed above that may undermine the efficacy of
disclosures, such as cognitive limitations and disclosure overload, as
discussed further below.
    The magnitude of the anticipated benefits and costs to retail
investors discussed below will depend on a number of factors, including
the extent to which the presentation and formatting requirements for
the relationship summaries will help increase investors' understanding
about the content of the relationship summaries, and in what ways such
an increase in understanding would affect their behavior.
(1) Length and Amount of Information
    Unlike many other required disclosures by financial firms, the
relationship summary has a page limit. We believe that limiting the
disclosure length and prescribing certain elements of the relationship
summary's content could benefit investors relative to the baseline by
forcing firms to provide concise and clear investor-relevant
information, thereby reducing information overload and increasing the
likelihood that investors will focus their attention on the
relationship summary. The optimal length of the relationship summary
for investors may vary from investor to investor based on individual
limits to attention and ability to process a lengthier document, though
investor and commenter feedback indicated many investors preferred a
relationship summary no longer than, and in some cases shorter than,
what was proposed.\1059\ We have also reduced the page limit for
standalone broker-dealers' and standalone investment advisers'
relationship summaries from four to two, thereby potentially increasing
the benefits of a shorter document relative to the proposal.
---------------------------------------------------------------------------

    \1059\ For example, 57% of RAND 2018 survey respondents
indicated that the relationship summary was too long, 41% said it
was about right, and roughly 2% said it was too short. RAND 2018,
supra footnote 13. See also supra footnotes 129-139.
---------------------------------------------------------------------------

    However, we recognize that there are potential costs to requiring a
page limit.\1060\ For example, as pointed out by commenters, a
prescribed page limit may make it more difficult for some firms to
effectively describe the nature or range of the relationships and may
prompt them to exclude details that investors might find
important.\1061\ To the extent the provided disclosure becomes too
abbreviated it may confuse investors rather than inform them about the
relationship, which could increase search costs and increase the risk
of a mismatched relationship relative to the baseline. The relationship
summary includes several elements to mitigate the potential costs of
providing less comprehensive information by utilizing layered
disclosure, which includes encouraging, and in some cases requiring,
hyperlinks to additional information and other textual features, such
as hovers, to provide descriptions or definitions of terms.\1062\ The
relationship summary also includes conversation starters that are
designed to elicit more substantial conversations on certain topics.
Such conversations could further mitigate the costs of less
comprehensive information by encouraging the providers to elaborate on
topics that investor may find confusing.
---------------------------------------------------------------------------

    \1060\ Just as reducing the maximum page length from four to two
for standalone broker-dealers and investment advisers could increase
the benefits relative to the proposal; this change could also
increase these costs relative to the proposal.
    \1061\ See supra Section II.A.2 for examples of commenters
raising this concern.
    \1062\ See generally supra Section II.A.4 for examples of
graphical features encouraged by the Relationship Summary
instructions.
---------------------------------------------------------------------------

    Finally, we believe that allowing only the required and permitted
information will promote standardization of the information presented
to retail investors, minimize information overload, and allow retail
investors to focus on information that we believe is particularly
helpful in deciding among firms. However, we acknowledge that the
potential cost of this level of standardization is that firms will not
be able to include other information that might also be helpful to
investors.
(2) Organization of Information and Text Features
    As discussed above, academic research has documented how individual
perceptions of information can change depending on the framing of the
information.\1063\ The relationship summary's requirement to use
standardized questions as headings should help retail investors frame
the information that follows the question by establishing sufficient
context and increasing salience of the information presented.\1064\
---------------------------------------------------------------------------

    \1063\ See supra footnote 1032 and accompanying text.
    \1064\ The proposal had required headings to frame the
information, but did not require they be in the form of questions.
See supra Section II.A.2 for a discussion of comments related to the
question-and-answer format, including its potential utility to
investors' understanding, and our decision to require this format.
---------------------------------------------------------------------------

    The final instructions include an instruction encouraging the use
of

electronic and graphical features in the relationship summary.\1065\
Additionally, the relationship summary requires the use of text
features for certain information, such as the conversation starters,
which should increase the salience of this particular information and
increase the likelihood that investors will review it. Based on
academic research on disclosure readability,\1066\ we believe the use
of text features, whether voluntary or required, will facilitate retail
investors' absorption of the provided information. Additionally,
certain electronic features, such as embedded hyperlinks and hovers,
should facilitate retail investors' access to additional information if
they are interested, thereby reducing their costs in locating the
information.
---------------------------------------------------------------------------

    \1065\ For a non-exclusive list of features the instructions
encourage firms to use, see supra Section II.A.3. Some features are
exclusive to electronic versions of the disclosure, such as hovers,
while others could be used as part of a paper disclosure, such as
comparison boxes. The benefits and attendant costs of any electronic
features will generally be limited to those retail investors that
access the document electronically.
    \1066\ See, e.g., supra footnote 1034 and accompanying text.
---------------------------------------------------------------------------

    We recognize that because we are encouraging, but not requiring,
firms to use graphical and electronic features, some firms might not
use text features beyond what is required, potentially reducing their
use and the attendant benefits. We believe, however, that providing
some flexibility in design to firms may provide a benefit to retail
investors, because firms competing for retail investors likely have
incentives to use graphical and electronic features to enhance the
retail investor's experience. Moreover, flexibility also allows firms
to continuously improve their use of graphical and electronic features
as they learn over time what features are the most effective. We
recognize, however, that one potential cost of allowing this
flexibility is that firms may also have incentives to use certain text
features to increase the salience of the portions of the disclosed
information that they prefer to highlight, rather than the information
that may be the most useful to investors to highlight.
    The final instructions do not include certain presentation
requirements that we had proposed. For example, we proposed requiring
that dual registrants present their information in a single
relationship summary, using a two-column format. The final instructions
permit dual registrants (or affiliated broker-dealers and investment
advisers) to prepare either a single relationship summary describing
both brokerage and investment advisory services, or two separate
relationship summaries describing each service.\1067\ Additionally, we
are requiring such firms to use standardized headings in a prescribed
order, and to design their relationship summary in a manner that
facilitates comparison, but the final instructions do not specifically
require a two-column format. We believe this modification could
increase the benefits relative to the proposal to investors of the
relationship summary by permitting firms to choose design elements that
might facilitate comparison more effectively than a two column format.
We recognize, however, that absent a specific design requirement, some
firms might present this information in a manner that is less effective
at facilitating investors' understanding than the proposed two-column
format. We believe, however, that the potential benefits of allowing
firms with differing business models to determine the design methods
most effective at facilitating comparability justifies the change from
a single, prescribed design element. Additionally, the final rule does
not adopt the proposed restrictions on paper size, font size, or margin
width, and instead requires them to be ``reasonable.'' We believe that
these modifications from the proposal will incentivize firms to design
relationship summaries that most effectively and accurately communicate
their disclosed information to the benefit of investors, as well as
encourage firms to make interactive, electronic disclosures available.
---------------------------------------------------------------------------

    \1067\ See generally Section II.A.5 for a discussion of specific
instructions, as well as comments received.
---------------------------------------------------------------------------

c. Standardization
(1) Standard Question-and-Answer Format and Standard Order of
Information
    The final rules require that firms present information under
standardized headings and respond to all the items in the final
instructions in a prescribed order.\1068\ We expect that requiring the
same set of headings in a prescribed order for each relationship
summary will facilitate retail investors' ability to compare
relationship summaries across firms. In addition, the prescribed
wording of the headings reduces the risk that firms would use the
headings to ``frame'' each topic in ways that would be less useful for
retail investors' understanding of the disclosed information. As
discussed above, academic research has documented how individuals'
perceptions of information can change depending on the framing of the
context of the information.\1069\
---------------------------------------------------------------------------

    \1068\ See generally infra Section II.A.2 for discussion of the
specific instructions, as well as comments received. In terms of
specifically adopting a question-and-answer format for the
standardized headings, we believe that adopting this format is
likely to increase the salience of the information under each
heading and improve investors' cognitive engagement with the
document, which should facilitate their understanding of the
disclosed information.
    \1069\ See supra footnote 1032 and accompanying text.
---------------------------------------------------------------------------

    We expect retail investors to benefit from this standardization to
the extent they review relationship summaries from more than one firm,
as the standardized headings in the prescribed order will allow them to
compare firms' responses.\1070\ Additionally, the requirement that
firms structure the headings in machine-readable format could reduce
the cost of third party data aggregators to analyze relationship
summaries across many firms and display comparisons of responses,
ultimately reducing search costs for investors.\1071\
---------------------------------------------------------------------------

    \1070\ See Morningstar Letter (commenting on the importance of
standardized disclosure, that ``[f]urther, it is extremely important
for conflict-mitigation disclosures to be standardized. . . The
Commission could require a table, as we discuss below, for the
Client Relationship Summary that standardizes how all broker/dealers
list their relevant fees, making the costs of opening and
maintaining an account transparent and comparable'').
    \1071\ Two commenters argued for machine-readability to allow
for third party development of comparison tools. See supra footnotes
663 and 664.
---------------------------------------------------------------------------

    Because firms will be given very limited flexibility in terms of
language for headings and the order of the sections,\1072\ some firms
may find it more difficult to effectively present the information
specific to their business and circumstances they believe should be
made salient to retail investors. To the extent that the headings and
the specified order do not specifically promote such information for a
particular firm, and this information is relevant to investment
decisions, investors may potentially find the relationship summary less
useful in evaluating the specific firm. To mitigate this potential cost
and provide some flexibility to firms, the final rules allow firms to
discuss the required sub-topics within each item in an order that firms
believe best promotes accurate and readable descriptions of their
business.\1073\ The final rules also allow firms to omit or modify a
disclosure or conversation starter that is inapplicable to their
business or specific required wording that is inaccurate. The benefit
of such flexibility is that it allows firms to increase saliency of and
direct investor attention to the more relevant

disclosures. We believe the mix of requiring standardized headings and
a prescribed order of topics but allowing some flexibility in the order
of presentation within each topic strikes an appropriate balance in the
inevitable trade-off, discussed further below, between the relative
benefits and costs of disclosure standardization versus disclosure
flexibility.
---------------------------------------------------------------------------

    \1072\ See supra footnote 91.
    \1073\ The proposed instructions prescribed the order of
information within each item. See supra footnote 121.
---------------------------------------------------------------------------

    The magnitude of the anticipated benefits and costs to retail
investors discussed above will depend on a number of factors, including
the extent to which the standardized headings and prescribed order of
information will help increase investors' understanding about the
content of the relationship summaries, and in what ways such an
increase in understanding would affect their behavior.
(2) Prescribed Wording
    The final instructions include a mixture of limited prescribed
wording that firms must include and requirements for firms to draft
their own descriptions that comply with instructions about topics they
must address.\1074\ As with any disclosure document, there are
inevitable trade-offs between prescribing specific wording for firms to
use (when applicable) and providing discretion to firms to use their
own wording. We describe those trade-offs, as they relate to the final
instructions, below.
---------------------------------------------------------------------------

    \1074\ See generally supra Section II.A.1 for a discussion of
these instructions, comments received on the proposal, and changes
made regarding the amount of prescribed wording.
---------------------------------------------------------------------------

    The proposed instructions would have required prescribed wording in
several items of the relationship summary, including fees and costs and
a comparison section for standalone broker-dealers and investment
advisers. We explained in the Proposing Release that prescribed wording
for these items could benefit investors through standardization and by
improving comparability across relationship summaries, while at the
same time could impose costs on investors if prescribed wording does
not accurately represent a firm's services.\1075\ We are adopting final
instructions that largely eliminate prescribed wording for most of
these items and instead permit firms, within the parameters of the
instructions, to respond to the relationship summary items using their
own wording.\1076\ We continue to prescribe wording for headings,
conversation starters, and the standard of conduct, as well as a
factual disclosure concerning the impact of fees and costs on
investments over time.\1077\ However, firms may omit or modify required
disclosures or conversation starters that are inapplicable to their
business or specific wording required by the final instructions that is
inaccurate.\1078\ Based on feedback from commenters and observations
reported by investor studies and surveys, this change will increase the
benefits of the relationship summary to investors relative to the
proposal. Specifically, several commenters suggested that some of the
prescribed wording would not only reduce the accuracy of the
information provided by firms but could also confuse investors about a
firm's offerings, and we have made changes in light of those comments.
We believe the final rules strike an appropriate balance between
comparability between firms and the accuracy and relevance of
information contained in relationship summaries, increasing potential
benefits to investors relative to the proposal.
---------------------------------------------------------------------------

    \1075\ See Proposing Release, supra footnote 5, at Section
IV.B.2.a.
    \1076\ See generally Section II.A.1.
    \1077\ See generally Section II.A.1. We discuss the benefit and
costs of these items, including related to the prescribed wording,
below, in Section IV.A.c.
    \1078\ See supra footnote 91.
---------------------------------------------------------------------------

    We nevertheless recognize reductions in benefits relative to the
proposal stemming from this approach. It decreases the degree of
standardization of the information which could impact comparability
across relationship summaries, as suggested by some academic
research.\1079\ However, to the extent some of the prescribed language
in the proposed rules would be considered ``boilerplate'' by investors
or would not be applicable to a particular firm's services or business,
the reduction of such prescribed wording in the final rules is not
likely to come at a cost to investors (and in fact is likely to benefit
investors). The risk of lower standardization and comparability also is
mitigated because, while not prescribing specific wording, the final
instructions require prescribed topics that all firms must include in
each item. For example, in their description of services, all firms
must address monitoring, investment authority, limited investment
offerings, and account minimums.\1080\ Moreover, increased flexibility
for firms to describe their services and offerings relative to the
proposal could impose costs on retail investors if it increases the
potential ability of some firms to provide information in a less useful
or clear way in their own words than when required to use prescribed
wording.\1081\
---------------------------------------------------------------------------

    \1079\ See generally supra Section IV.C.
    \1080\ See generally supra Section II.A.3.
    \1081\ We also acknowledge there is a risk that some firms could
use the flexibility to strategically omit or obscure information.
Such action, however, would risk liability under Form CRS or the
antifraud provisions of the Advisers Act. See, e.g., General
Instruction 2.B. to Form CRS.
---------------------------------------------------------------------------

    One section proposed for standalone broker-dealers and investment
advisers, which we referred to as the Comparisons section, had entirely
prescribed wording.\1082\ We are not adopting this proposed section.
Additionally, we removed prescribed wording from the proposed
introduction, which would have noted that brokerage and advisory
services were distinct.\1083\ On one hand, omission of the Comparisons
section potentially could reduce the risk of information overload for
investors. On the other hand, omitting this section might reduce
benefits relative to the proposal by reducing the salience of
potentially valuable comparative information available to retail
investors at the point of forming a relationship, particularly if a
retail investor does not review relationship summaries of multiple
firms. We have taken specific measures to maintain some of the benefits
we had intended to achieve in the proposed Comparisons section by using
other methods to enable retail investors to continue to view
comparative information and access more general educational
information. For example, all firms must provide at the beginning of
the document a link to Investor.gov/CRS, which offers educational
information about investment advisers, broker-dealers, financial
professionals and other information about investing in securities. In
addition, dual registrants and affiliated firms that offer their
brokerage and investment advisory services together are required to
provide information about both types of services with equal prominence
and in a manner that clearly distinguishes and facilitates comparison.
This instruction applies regardless if they prepare a single
relationship summary or two separate relationship summaries describing
each type of service. If dual registrants prepare two separate
relationship summaries, they must cross-reference or link to the other
and deliver both with equal prominence and at the same time. Affiliates
offering brokerage and investment advisory services together have
similar presentation and delivery requirements.
---------------------------------------------------------------------------

    \1082\ See generally supra Section VI for a discussion of the
proposed requirements as well as comments received.
    \1083\ See supra Section I.
---------------------------------------------------------------------------

    The magnitude of the anticipated benefits and costs to retail
investors discussed above will depend on a number of factors, including
the extent

to which the specific requirements regarding wording will help increase
investors understanding about the content of the relationship
summaries, and in what ways such an increase in understanding would
affect their behavior.
d. Content
    The final instructions require firms to include specific items in
the relationship summary. Below we discuss the anticipated benefits and
costs to retail investors from these items.\1084\ The magnitude of
these anticipated benefits and costs to retail investors will depend on
a number of factors, including the extent to which the specific items
of disclosure will help increase investors understanding about their
potential or current relationships with firms and financial
professionals, and in what ways such an increase in understanding would
affect their behavior.
---------------------------------------------------------------------------

    \1084\ See supra Section II.B.
---------------------------------------------------------------------------

(1) Relationship and Services
    The relationship summary requires an overview of the services that
the firm provides to retail investors.\1085\ The topics that the firm
must discuss include principal brokerage and advisory services,
monitoring, investment authority, limited investment offerings, as
proposed, and, new to the adopting release, account minimums and other
requirements. The services firms provide to retail investors vary
widely. These differences exist not only between broker-dealers and
investment advisers, but also within different types of broker-dealers
and investment advisers. We believe that this section will increase the
transparency, saliency, and comparability of information about the
types of services, accounts, and investments provided by firms, which
should likewise improve matching between firms and retail investors.
---------------------------------------------------------------------------

    \1085\ See supra Section II for a discussion of the requirements
and comments received on the proposal.
---------------------------------------------------------------------------

    We have made some changes from the proposal intended to increase
the potential matching benefit. In particular, instead of using
prescribed wording, firms will describe their services using their own
wording. Firms must also describe account minimums, which could improve
matching with the provider and may reduce investor search costs,
especially for investors that fall short of required minimums so that
retail investors can be aware of potential limitations on their initial
or continued eligibility for services.\1086\ Because all firms must
describe particular topics, we believe investors can also use this
information to compare firm services if they review multiple
relationship summaries. We believe the approach of firms using their
own wording to describe their services will increase the benefit to
investors relative to the proposal by allowing firms to provide
descriptions that are a better match for their particular services.
This approach also avoids the cost of firms being required to make
inaccurate or confusing disclosures given their specific business
models, as raised by commenters.\1087\ This potential increase in
benefit, however, comes with attendant potential increases in costs to
the extent that firms do not present the most relevant aspects of their
services or their descriptions are unclear, as discussed in the
considerations regarding prescribed wording above. On balance, we
believe that allowing for a description that is accurate and better
matched to a firm's services likely would be more beneficial and less
confusing to investors.
---------------------------------------------------------------------------

    \1086\ Disclosures of account minimums could also help make
retail investors more focused on their future planning needs, for
example, by incentivizing them to target minimal future investment
levels to reach an asset value level that will make lower fees or
additional services available from a particular provider.
    \1087\ See, e.g., supra footnote 269.
---------------------------------------------------------------------------

(2) Fees and Costs, Standard of Conduct, and Conflicts of Interest
    The relationship summary requires several prescribed questions and
required responses about fees, conflicts of interest, and the standard
of conduct.\1088\ Some of this information will be required to be
provided to investors for the first time, such as an articulation of
the standard of conduct. Other information, while currently available
in various sources, will be presented centrally in the relationship
summary, with links to more detailed, layered information about fees
and conflicts. Additionally, providing retail investors with context
for the more detailed information could potentially pique their
interest and lead retail investors to seek more information about fees
and conflicts through the required links. We believe both the
information not previously required and the consolidated summary of
information already available elsewhere will benefit investors by
increasing salience, transparency, and comparability, and reducing
information asymmetry compared to the baseline. More specifically,
including these disclosures prominently, in one place, in a digestible
manner, at or before the start of a retail investor's relationship with
a firm or financial professional could facilitate meaningful disclosure
in the relationship summary, as well as conversations between the
retail investor and his or her financial professional, and help the
retail investor decide on the types of services that are right for him
or her. In addition, to the extent that the specified conflicts of
interest disclosures could draw retail investors' attention to
conflicts, they may improve retail investors' ability to select and
monitor firms and financial professionals.
---------------------------------------------------------------------------

    \1088\ See supra Section III for a discussion of the
requirements and comments received on the proposal.
---------------------------------------------------------------------------

    The fees, costs, and conflicts disclosure also potentially has
costs for investors. In particular, and as discussed above,\1089\ the
perception that an investor has been warned (via the disclosure) of a
firm's and financial professional's potential bias may lead some
financial professionals to believe that they are less obligated to
provide unbiased advice. Further, the standard of conduct and conflict
disclosures could make firms and financial professionals appear more
trustworthy and as a result reduce the incentives for retail investors
to examine additional information more carefully. Conversely, a
potential cost for investors of such disclosures is that some investors
may mistakenly leave the market for financial services or choose to not
engage with a financial professional because they infer from the
discussion of conflicts of interest and fees that a financial
professional could provide bad advice or recommend products that will
reduce their financial well-being. However, the placement of the
prescribed standard of conduct disclosure immediately preceding the
conflicts disclosure may alleviate the risk that investors will
overreact to the conflicts of interest disclosure in this manner,
because the standard of conducts disclosure clarifies that the firm or
financial professional must act in the investor's best interest.
---------------------------------------------------------------------------

    \1089\ See supra footnote 1026 and accompanying text.
---------------------------------------------------------------------------

    We received significant comments about the potential efficacy of
the proposed disclosures related to fees and costs, conflicts, and the
standard of conduct, and the ultimate benefit of such disclosures to
investors. Likewise, feedback from investors through surveys and
studies and in Feedback Forms revealed confusion about the proposed
standard of conduct section in

particular.\1090\ Results reported in investor surveys and studies also
showed that the proposed conflicts section was rated one of the least
useful sections, which may suggest that some investors did not
understand the role of conflicts based on the disclosure as presented
by the sample proposed dual registrant relationship summary.\1091\ We
have made several changes from the proposed relationship summary
designed to increase the clarity and salience of the disclosures,
thereby increasing the potential benefit and reducing the potential
costs discussed above relative both to the baseline and the proposal.
We also believe the changes will reduce the risk that investors will
not read the section or will misinterpret it, increasing the
effectiveness of these disclosures and therefore the potential benefit.
---------------------------------------------------------------------------

    \1090\ See supra footnotes 475-478 and accompanying text.
    \1091\ See supra footnotes 522-524 and accompanying text.
---------------------------------------------------------------------------

    First, by integrating the section covering fees, costs, conflicts
of interests, standard of conduct, and how representatives are
paid,\1092\ we believe retail investors may be more primed to process
implications of these disclosures in a more integrated fashion due to
their proximity. In particular, providing these disclosures in the same
section could increase the salience of this information for
investors,\1093\ both relative to the proposal and the baseline, and
may potentially improve investor cognitive processing of how conflicts
of interest can have an impact on the services and advice provided and
costs paid by investors.
---------------------------------------------------------------------------

    \1092\ See supra discussion in Section II.A.4.
    \1093\ This is also consistent with some commenters' suggestions
and the organization of several sample relationship summaries
submitted by commenters. See supra footnote 373 and accompanying
text.
---------------------------------------------------------------------------

    Second, with respect to fees, the relationship summary requires
firms to discuss under separate question headers (i) the principal fee
and the incentive that it creates and (ii) other fees and costs that
the investor will pay. We are requiring firms to summarize, in their
own words, the principal fees and costs that retail investors will
incur, including how frequently they are assessed and the conflicts of
interest that they create. We think investors will be better able to
process the implications of the principal fee disclosure through this
requirement. Additionally, requiring firms to describe other fees and
costs investors will pay, distinct from the principal fee, will clarify
for investors that they pay not only a principal fee for advice, but
also additional fees and costs. This may potentially prompt investors
to use the required link to learn more information, ask follow-up
questions, or monitor for such fees and costs.
    Third, the instructions require that the standard of conduct
disclosure be placed under the same header as the summary of firm-level
conflicts. The expected benefit of placing these conflicts of interest
and standard of conduct disclosures together is to improve investor
processing of the implications of conflicts of interest disclosure and
legal obligations underlying the particular standard of conduct (i.e.,
best interest for broker-dealers and fiduciary duty for investment
advisers) as well as to prevent investor misinterpretation of these
disclosures. We continue to prescribe wording for the standard of
conduct, which we believe will have greater benefits than giving firms
flexibility to describe the standard of conduct. Unlike other areas
where we are allowing firms to use their own words, the standard of
conduct, whether a fiduciary duty for an investment adviser or
Regulation Best Interest for a broker-dealer, applies during the course
of the adviser's relationship or where a broker-dealer makes
recommendations. We also changed from the proposal the specific wording
in an effort to simplify the disclosure relating to the standard of
conduct and thereby increase understanding by investors. We believe
reducing the length and the complexity of the prescribed wording for
the standard of conduct will increase the salience and comprehension of
the required standard of conduct disclosure, because a more readable
and shorter disclosure is less likely to be ignored by investors due to
information overload and limited attention.
    While retail investors may benefit from understanding the standard
of conduct that firms and financial professionals are subject to when
providing investment advice or recommendations, discussing the standard
of conduct in connection with conflicts of interest may benefit
investors by making it clear that the standard of conduct does not mean
that advice is conflict-free.
    Regarding the conflicts disclosure itself, we have added a new
requirement that if none of the enumerated conflicts required to be
disclosed by the instructions is applicable to a firm, the firm must
select at least one of its material conflicts to describe. This was
designed to eliminate the potential that firms would not have to
disclose any conflicts, which would have been costly to investors if it
caused them to believe that the firm had no conflicts. The relationship
summary does not require disclosure of all conflicts but does require
firms to include a link to additional information about their
conflicts. We believe this will benefit investors relative to the
baseline by providing sufficient information about certain conflicts to
increase their understanding of incentives generally and potentially
inducing them to review the linked information, which also minimizes
the potential for information overload.
    Finally, in addition to requiring firm-level conflicts, the
relationship summary includes a separate question and required response
about how financial professionals are compensated and the conflicts of
interest those payments create. This disclosure will distinguish firm-
level from financial professional-level conflicts, which we believe
will benefit retail investors by helping them better understand the
role of conflicts and how these conflicts might impact a financial
professional's motivation when providing investment advice.
    Despite the changes to presentation of fees, costs, conflicts, and
standard of conduct relative to the proposal to increase clarity, we
recognize the complexity of these issues. Accordingly, we recognize
benefits to investors could be limited by investors' potential lack of
ability to comprehend the disclosure.\1094\ In the extreme, standards
of conduct disclosure may also have a reverse effect of unduly
enhancing investor trust in providers because investors may misperceive
providers as holding themselves to a standard higher than legally
required, and making investors discount the severity of the disclosed
conflicts.\1095\ Because firms have some flexibility to decide what
additional fees and costs to describe and, in the case of a firm with
none of the enumerated conflicts, which conflict to use as an example,
benefits could be reduced to the extent that they choose examples that
are not informative to the retail investor. Additionally, there could
be a cost to investors to the extent they believe the enumerated fees
and conflicts in the relationship summary are the only fees and
conflicts the firm has, although we believe that the required wording
that explains the

summarized conflicts are examples, as well as the required links to
more information about fees and conflicts, mitigate the risk of this
misperception.
---------------------------------------------------------------------------

    \1094\ See supra footnotes, 378-382, 475-478, 522-524, and
accompanying text, for a discussion of comments and investor survey
results on the comparative difficulty for investors to comprehend
these disclosures.
    \1095\ See, e.g., Betterment Letter I (Hotspex), supra footnote
18 (reporting that only 26% of participants correctly identified as
false a statement that broker-dealers are held to a fiduciary
standard).
---------------------------------------------------------------------------

    In addition, referencing academic research on the potential
negative effects of conflicts of interest disclosure, several
commenters expressed concerns that the proposed required disclosure of
conflicts of interest in the relationship summary could lead to a
``moral license'' for financial professionals to provide even more
biased advice and thus take unfair advantage of investors, or lead
investors to fail to discount biased advice, trust their providers even
more or make them feel pressured to remain in a potentially
disadvantageous relationship, i.e., the panhandler effect.\1096\
Despite the changes we have made from the proposal to the required
conflicts of interest disclosure in the final instructions, we
acknowledge that there is still some risk for such negative unintended
consequences.
---------------------------------------------------------------------------

    \1096\ See, e.g., Better Markets Letter; AARP Letter; Warren
Letter; CFA Letter I; see also supra Section IV.C for a discussion
of moral license.
---------------------------------------------------------------------------

(3) Disciplinary History
    As proposed, the relationship summary will contain a section where
firms must state in binary fashion whether or not they have
disciplinary history, as well as include a reference to Investor.gov/CRS, where investors can conduct further search for additional
information on those events.\1097\ We have made a change to increase
the salience of this information relative to the proposal by making a
separate Disciplinary History section, including its own question and
required response, rather than--as proposed--including it with other
content in an Additional Information section, which should increase any
benefits or costs relative to the proposal.
---------------------------------------------------------------------------

    \1097\ See supra Section II.B.4 for a discussion of the
requirements and comments received on the proposal.
---------------------------------------------------------------------------

    The primary benefit of the disciplinary history disclosure relative
to the baseline is that investors will be alerted to a potential need
to search and review their provider's disciplinary information and will
have a mechanism to find more information about any disciplinary
history. Although this information already exists publicly, clearly
linking to Investor.gov/CRS for further information about disciplinary
history at the time investors are selecting a firm or financial
professional will help retail investors know where to find additional
information about those events, which should reduce search costs and is
an improvement relative to the baseline.\1098\ The conversation
starters also will provide investors with a cue to the importance of
understanding the disciplinary history and could trigger more
information gathering and ultimately more effective cognitive
processing of this disclosure. As a result, an investor may choose to
not engage a firm or financial professional if the disciplinary history
is considered to be too problematic, or, if an investor chooses to
proceed with a provider that has some concerning disciplinary history,
awareness of those events could provide incentives to the investor to
monitor his or her account more carefully than if she were not aware.
---------------------------------------------------------------------------

    \1098\ See, e.g., RAND 2018, supra footnote 13 (when investors
were asked why they would not look up disciplinary history, 37% of
all respondents indicated that they did not know where to get the
information, whereas 19% of all respondents indicated that it would
take too much time or effort).
---------------------------------------------------------------------------

    The potential cost is that investors may overreact to the ``yes''
or ``no'' response reported in the Disciplinary History section.
Investors may attribute the disciplinary history of one or few
financial professionals at a firm to the entire firm, and thus choose
not to select a provider that could be a good match for them (for
example, a larger firm with more employees and thus a greater
likelihood of disclosable events) \1099\ or avoid hiring a financial
professional altogether. Retail investors may also misinterpret a
higher baseline rate of disciplinary history for broker-dealers than
for investment advisers, given that the scope of events that trigger a
disclosure event is arguably broader for broker-dealers than for
investment advisers.\1100\ As a result, retail investors may avoid
choosing a broker-dealer, even when such a relationship would be a
better match for the investors. Relatedly, investors may over-rely on
lack of disclosure of disciplinary history as evidence of more ethical
conduct; however, lack of such disclosures may be due to unrelated
factors such as a comparatively short history of a particular firm or
fewer employees (and thus less likelihood of having employees with
disclosable events). However, the risk of some investors
misinterpreting, or over-relying on, the disciplinary history should be
mitigated to the extent firms or financial professionals provide more
information about and encourage retail investors to ask follow-up
questions regarding the nature, scope, or severity of any disciplinary
history. On balance, we believe the benefits to investors from
including the disclosure on disciplinary history, as discussed above,
justify any potential negative effects.\1101\
---------------------------------------------------------------------------

    \1099\ See supra Section II.B.4.
    \1100\ See id.
    \1101\ This view is supported by survey evidence that suggests
that investors consider disciplinary history to be an important
factor when searching for a provider of investment advice. See supra
footnote 996; see also supra footnotes 566 and 567.
---------------------------------------------------------------------------

(4) Additional Information
    The relationship summary will conclude with a section where
registrants will let investors know where investors can find additional
information about their services and request a copy of the relationship
summary, which should benefit investors relative to the baseline by
providing this general resource, in addition to the links or references
provided throughout the document.\1102\ In a change from the proposal,
the Additional Information section eliminates the proposed requirement
to provide information on how investors should report complaints about
their investments, accounts, or financial professionals. Instead, we
are requiring a conversation starter on whom investors should contact
about their concerns. The benefit of this approach is that it improves
readability of the form by reducing prescribed wording and potentially
facilitates a conversation between investors and their financial
professionals; the cost of this approach is that some investors will
not have access to direct instructions on how to report their
complaints. Finally, investors with limited or no access to internet
(e.g., due to costs of internet access or due to a disability) will
also benefit from a requirement that firms provide a number through
which retail investors can request up-to-date information or a copy of
the relationship summary.
---------------------------------------------------------------------------

    \1102\ See supra Section II.B.5 for a discussion of the
requirements and comments received on the proposal.
---------------------------------------------------------------------------

(5) Conversation Starters
    Disclosures currently required by investment advisers and broker-
dealers generally do not have suggested questions for investors to ask
their financial professional. The relationship summary will require
firms to incorporate suggested follow-up questions for the investor to
ask, which the instructions refer to as ``conversation starters.''
\1103\
---------------------------------------------------------------------------

    \1103\ See supra Section II.B.2.c for a discussion of the
requirements and comments received on the proposal.
---------------------------------------------------------------------------

    Conversation starters should benefit investors relative to the
baseline by improving the potential to match investors with providers
that provide services more suitable to the investors'

preferences and needs. We believe that this is accomplished through
enabling the investor to be more engaged, potentially assisting the
investor with comprehension of relevant disclosures, and assisting the
investor in receiving more personalized information than the firm-level
disclosure documents, such as Form ADV or documents issued by broker-
dealers. That is, to the extent that these conversation starters
promote more transparency and better communication between investors
and financial professionals, retail investors are more likely to
understand the information and select the right firm or financial
professional to meet their preferences and expectations. In addition,
to the extent the conversation starters help increase investors'
engagement in a selected relationship it may also increase their
monitoring of their relationship and more critically evaluate any
advice or recommendations they receive. However, a closer personal
engagement between retail investors and financial professionals may
cause some investors to feel social pressure to act on the advice or
recommendations of the professional due to a panhandler effect,\1104\
which may attenuate some of the benefits of the conversation starters.
---------------------------------------------------------------------------

    \1104\ See supra footnote 1028 and accompanying text.
---------------------------------------------------------------------------

    A potential cost associated with the conversation starters is that
the particular required questions may anchor the attention of retail
investors to those prescribed questions and reduce the likelihood that
they would explore other potential questions that could be important to
them based on their individualized circumstances. In response, we have
reframed the proposed questions, which were at the end of the proposed
relationship summary as ``Key Questions,'' and instead have integrated
them within the relevant information item throughout the relationship
summary to reduce the risk that investors only focus on this set of
questions in their discussions.\1105\ Moreover, many of the
conversation starter questions are broad and open-ended, which could
further mitigate the risk of investors' anchoring on the content of
these questions at the expense of the other disclosures in the
relationship summary.
---------------------------------------------------------------------------

    \1105\ See supra Section II.A.4. for discussion on conversation
starters.
---------------------------------------------------------------------------

    As pointed out by one commenter, unless the ``Key Questions'' in
the relationship summary are provided to investors in advance, some
retail investors may entirely ignore these questions.\1106\ As
discussed above, the final rules incorporate the questions as
``conversation starters'' directly in the different sections of the
relationship summary, which should increase their salience and reduce
the risk of them being ignored by investors compared to the proposal.
In addition, because the relationship summaries will be available to
investors online on firms' websites or through Investor.gov/CRS, the
relationship summaries may be downloaded and accessed by some investors
prior to meeting a financial professional, which would give such
investors the opportunity to review the conversation starters before
meeting a financial professional.
---------------------------------------------------------------------------

    \1106\ See CFA Institute Letter I.
---------------------------------------------------------------------------

e. Filing, Delivery, and Updating Requirements
(1) Filing Requirements
    The final instructions require firms to file their relationship
summaries with the Commission (using IARD, Web CRD[supreg], or both, as
applicable), and make their relationship summaries available on their
websites. In addition to firms' websites, firms' most recent
relationship summaries will be accessible to the public through IAPD
and BrokerCheck, public interfaces of IARD and Web CRD[supreg],
respectively. Investors also will be able to use the Commission's
website Investor.gov, which has a search tool on its main landing page
and at Investor.gov/CRS that links to BrokerCheck and IAPD. If
investors prefer, they may request copies of firms' relationship
summaries by calling the numbers that firms must include in their
relationship summaries. We expect that making firms' relationship
summaries accessible in these ways should reduce investor search costs
in connection with selecting investment firms or financial
professionals. We also believe that retail investors could benefit from
their ability to access the relationship summaries independently
through the companies' websites, BrokerCheck, IAPD, or Investor.gov
prior to any contact with a financial professional. Such access could
increase retail investors' understanding about differences between
firms and financial professionals even before approaching a particular
firm or financial professional, which could reduce search costs for
investors early on in the search process and further reduce the risk of
a mismatched relationship. The online availability of the relationship
summaries will also enable investors who are currently not
participating in the market to become better informed about the market
for financial advice and the particular relationships provided without
the need to incur the cost of actively contacting a firm or financial
professional, which may ultimately encourage them to seek out a
relationship with a provider.
    In addition, the online availability of the relationship summaries
in central locations and the machine-readable headers of the summaries
will allow third-party data aggregators to more easily collect
relationship summaries and facilitate the development of comparison
tools for the investing public. To the extent such tools and metrics
are developed, it could facilitate investors' searches by helping them
narrow the set of available financial service providers to those that
are most likely to provide a good match. However, the benefits to
investors from the development of such tools will be mitigated by any
fees charged by third-party aggregators for access to the tools.
(2) Delivery and Updating Requirements
    Firms will deliver a relationship summary to each new or
prospective retail investor based on the initial delivery triggers
specific to investment advisers, broker-dealers, and dual
registrants.\1107\ Firms also must deliver the relationship summary to
existing clients and customers who are retail investors in certain
circumstances.\1108\ For these existing clients and customers, the
final rules require that firms deliver the relationship summary
(including updates) in a manner consistent with the Commission's
electronic delivery guidance and the firm's existing arrangement with
that client or customer.\1109\
---------------------------------------------------------------------------

    \1107\ See supra Section II.C.3.b.
    \1108\ See supra Section II.C.3.c.
    \1109\ See supra Section II.C.3.a.
---------------------------------------------------------------------------

    Because retail investors may face substantial switching costs when
they move from one financial professional to another, the benefits
associated with finding a good match may be particularly significant.
Accordingly, investors' benefits should increase in accordance with
their ability to understand and compare relationship summaries, which
may take time. We recognize that, as some commenters noted, if a
financial professional delivers the relationship summary at the time of
service, retail investors may not have sufficient time to thoroughly
evaluate the financial professional or may have already made a
preliminary decision to engage the particular financial professional by
the time they receive the relationship summary. As discussed above,
however, there are

compliance uncertainties and other costs associated with requiring a
relationship summary be delivered at first contact or requiring a
waiting period, as suggested by some commenters.\1110\ First contact
between an investor and a financial professional may include
circumstances that are not limited to the seeking of investment advice,
such as business interactions for other purposes or social
interactions. In addition, as noted by commenters, a waiting period may
prevent investors from meeting certain deadlines.\1111\ As we discuss
above, the availability of relationship summaries online may mitigate
the concern that retail investors will not have enough time to review
them, to the extent that it provides retail investors an opportunity to
compare firms before contacting them to obtain services.
---------------------------------------------------------------------------

    \1110\ See supra footnotes 720-724 and accompanying text.
    \1111\ See supra footnote 719 and accompanying text.
---------------------------------------------------------------------------

    We expect that the rules regarding form of delivery--electronic or
paper--generally will be beneficial for retail investors relative to
the baseline by enabling a form of delivery that is a good match for
the particular retail investor. For retail investors who prefer
electronic delivery, electronic forms of delivery should facilitate
both the engagement with and the processing of the disclosed
information, particularly the required and optional hyperlinks and
other features. For the investors who prefer paper documents, paper
delivery should result in greater likelihood of the investor paying
attention to the relationship summary disclosures. We believe that
maintaining the mode of delivery consistent with the way information
was requested for new customers and consistent with existing
arrangements for existing customers will help to further ensure that
the investors will not miss and will process the information contained
in the relationship summaries. Customers requesting the relationship
summary in paper format may be less likely to access the additional
information available through the electronic means of access discussed
above, which could result in their inability to process potentially
important additional information.
    We also believe that existing clients and customers of broker-
dealers and investment advisers that are retail investors will benefit
from the requirement that firms deliver the relationship summary again
if they: (i) Open a new account that is different from the retail
investor's existing account(s); (ii) recommend that the retail investor
roll over assets from a retirement account into a new or existing
account or investment; or (iii) recommend or provide a new brokerage or
investment advisory service or investment that does not necessarily
involve the opening of a new account and would not be held in an
existing account, for example, the first time purchase of a direct-sold
mutual fund or insurance product that is a security through a ``check
and application'' process, i.e., not held directly within an account.
    This requirement should have the benefit of increasing retail
investors' attention to disclosures provided in the relationship
summary and the implications of new services or account options at the
time of that decision. Additionally, the instructions require firms to
update their relationship summaries to existing retail clients or
customers if the existing relationship summary becomes materially
inaccurate, which would include information that is materially outdated
or materially incomplete. Firms must communicate the changes by
delivering the amended relationship summary or by communicating the
information through another disclosure that is delivered to the retail
investor. Firms delivering the amended relationship summary must
highlight the most recent changes by, for example, marking the revised
text or including a summary of material changes and attaching the
changes as an exhibit to the unmarked amended relationship summary.
Investors should benefit from receiving updated relationship summaries
under these circumstances because this information is relevant to the
decision of whether to enter into new services or continue existing
services, based upon whether the new or existing services match or
continue to match their preferences and expectations. The requirement
to attach revised text or a summary of material changes to the amended
relationship summary should benefit retail investors by helping them to
process the new information quickly. However, we recognize that to the
extent that retail investors with established financial professional
relationships tend to remain in such relationships, it may attenuate
the benefits of receiving the relationship summary again.
2. Broker-Dealers and Investment Advisers (Registrants)
a. Benefits to Registrants
    Beyond benefits to retail investors, we also expect broker-dealers
and investment advisers potentially to benefit from the relationship
summary. Some retail investors, who could benefit from obtaining advice
and other services from financial professionals, currently may choose
to stay out of the market for financial services because they do not
understand what type of firm or financial professional they require.
The relationship summary may provide a clear and concise document that
may draw new investors to the market. If the relationship summary draws
new retail investors to the market for financial services, both broker-
dealers and investment advisers may gain new customers and clients,
respectively. An increase in new retail investors could enhance
revenues for firms and financial professionals, although firms and
financial professionals could also bear additional costs, which are
discussed below.
    Moreover, the relationship summary could provide additional
benefits to firms and financial professionals by improving the
efficiency of the search process in the market for financial advice.
For example, retail investors will be able to access and obtain
relationship summaries for any number of firms online, including both
broker-dealers and investment advisers. To the extent investors use
this feature at the start of their search for a firm, they are more
likely to opt to approach only firms that ex ante meet their
preferences and expectations. Thus, broker-dealers and investment
advisers may be less likely to expend time and effort meeting and
discussing their business model and services with prospective customers
and clients, who are seeking a different kind of relationship and that
would ultimately not engage in a relationship with the firm or
financial professional. Instead, firms and financial professionals can
devote their efforts to acquiring customers and clients that are more
likely to contract for their services. In addition, to the extent the
relationship summary leads to fewer retail investors entering or
remaining in a mismatched relationship that does not meet their
expectations, it may benefit firms by reducing costly customer
complaints and arbitrations.
    While some commenters suggested that brokers have incentives to
provide ineffective disclosures,\1112\ academic studies show that
sellers can benefit from better disclosure of product quality
information to the buyers, and competitive sellers thus have incentives
to disclose better information.\1113\ While

some disclosure documents may contain topics of material that investors
may not understand or prioritize, the relationship summary has been
designed to focus on issues already identified by retail investors to
be of first-order importance with respect to their relationship with
their financial professional,\1114\ such as fees and costs, conflicts
of interest, and disciplinary history of firms and financial
professionals, among other items.\1115\ Further, the relationship
summary is intended to be clear, concise, and readable, while
permitting firms the flexibility to provide information pertinent to
their business model and services offered. Finally, firms may benefit
from providing more clear and understandable disclosures to the extent
it will facilitate a more efficient matching process with prospective
investors. Firms could also bear potential legal liability \1116\ and
reputational costs as a result of providing potentially less
transparent disclosures. For these reasons we believe registrants will
generally have incentives to use the discretion permitted in the final
instructions to design a relationship summary that is effective at
informing retail investors about the nature of their business and
offerings.
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    \1112\ See, e.g., CFA Letter; Warren Letter.
    \1113\ Steven Tadelis & Florian Zettelmeyer, Information
Disclosure as a Matching Mechanism: Theory and Evidence from a Field
Experiment, 105 Am. Econ. Rev. 886 (2015); see also Tao Zhang, et
al., Information disclosure strategies for the intermediary and
competitive sellers, 271 Eur. J. Operational Res. 1156 (2018).
    \1114\ RAND 2018, supra footnote 13 (survey results re:
Importance of each topic to respondents).
    \1115\ See supra Section IV.B.3.b.
    \1116\ See supra footnotes 92-105 and accompanying text
(discussing the parameters for the scope of information expected
within the relationship summary and the antifraud standard as
applied to the relationship summary).
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    The magnitude of the anticipated benefits discussed above will
depend on a number of factors, including the extent to which investors'
will change their behavior as a result of receiving the relationship
summary and how firms and financial professionals will react to such a
change. Given the number and complexity of assumptions that would be
required to be able to estimate how the relationship summary will
affect investors' understanding and their decision-making, and the lack
of data on relevant characteristics of individual firms and their
prospective and existing retail investors, the Commission is not able
to meaningfully quantify the magnitude of these anticipated benefits.
b. Costs to Registrants
    The final rule will also impose costs on affected broker-dealers
and investment advisers, including: costs associated with preparation,
filing, delivery, and firm-wide implementation of the relationship
summary; costs of the associated recordkeeping rules; and as well as
training, monitoring, and supervision for compliance. We expect that
these costs may differ across firms depending on their type (broker-
dealer or investment adviser), size, and complexity of business. We
discuss these costs in more detail below. The Commission has, where
possible, quantified the costs expected to result from the final rules
in the analysis below. However, we are unable to quantify some of the
potential costs discussed below, because of the number and complexity
of assumptions that would be required to be able to estimate how the
relationship summary will affect investors' understanding and choice of
financial services provider and the lack of data on relevant
characteristics of individual firms and their prospective and existing
retail investors.
(1) Preparation, Implementation, and Content
    Registrants will incur costs in connection with preparing and
implementing the relationship summary. With respect to aggregate
compliance costs, as discussed in more detail below, some commenters
suggest these costs could be high.\1117\ One commenter provided a
survey of financial professionals that indicate that 79% of survey
participants agree that implementation costs may be higher at first but
will likely lessen over time, and 40% of firms in the same survey
anticipate moderate or substantial time to implement the requirements
of Form CRS (and Regulation Best Interest).\1118\
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    \1117\ See infra Sections V.A.1 and V.D.1 for examples of
commenters discussing the costs.
    \1118\ See CCMC Letter (Survey conducted by FTI Consulting of 30
individuals at 15 broker-dealers and dually-registered firms
representing $23.1 trillion in assets under management and
administration (AUM/AUA), and 78.54 million investment accounts).
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    Broker-dealers currently are not required to prepare a consolidated
disclosure document for their customers similar to the Form ADV, Part
2A brochure and may incur comparatively greater costs in preparing the
relationship summary than investment advisers, given that investment
advisers can draw on their experience with preparing and distributing
Form ADV Part 2A. The Commission believes that costs of preparation
would also fall differently across firms with relatively smaller or
larger numbers of retail investors as customers or clients. For
example, to the extent that developing the relationship summary entails
a fixed cost, firms with a relatively smaller number of retail
investors as customers or clients may be at a disadvantage relative to
firms with a larger number of such customers or clients since the
former would amortize these costs over a smaller retail investor base.
    The relationship summary requires the use of standardized headings
in a prescribed order, while permitting some flexibility in other
aspects of the relationship summary's wording and design within the
parameters of the instructions. There is a trade-off in terms of
preparation costs to registrants between requirements that prescribe
specific wording and formats for disclosures and requirements that do
not provide any prescribed language and format. For example, we would
expect that the more extensively the relationship summary would rely on
prescribed format and wording, the lower the preparation costs for
providers, because there would be less need for them to devote
resources to construct their own format and wording. On the other hand,
the more extensively the relationship summary would rely on prescribed
format and wording, the more likely it would turn into a ``one-size-
fits-all'' document with largely boilerplate language, and firms would
lose the benefit of being able to more precisely and accurately
describe their own business and offerings to investors. We believe the
final instructions strike an appropriate balance in this trade-off,
with some higher-level prescribed format and language, such as the
standardized language and order of headings, while firms generally will
be able to (and have to) choose their own wording and organization of
the required information under each heading.
    The final instructions provide for more flexibility than the
proposed instructions. We acknowledge that this change could increase
certain compliance costs relative to the proposal, as firms will have
to develop more of their own wording and organization of the
information that is required to be included. However, the flexibility
permitted by the final instructions is mainly in terms of the wording
while the topics and sub-topics of information that are required to be
discussed are largely proscribed. This narrows the field of subjects
that firms could choose to discuss and potentially mitigates the cost
increase from additional flexibility. Moreover, we believe that the
expected benefits of this additional flexibility justify this cost
increase. In particular, we expect this change from the proposal to
benefit firms by allowing them to more

accurately describe their services and offerings to retail
investors.\1119\ We also expect the additional flexibility to benefit
both firms and retail investors to the extent it results in disclosures
that are more engaging and useful to investors and mitigates the
possibility of a mismatch. In addition, several commenters requested
greater flexibility to provide accurate descriptions of their business
models and services, noting the potential for liability for prescribed
disclosures in the proposal that might not be accurate for a particular
registrant's business.\1120\ Some topics, however, will require firms
to use prescribed wording, such as the headings, conversation starters,
statement of their legal standard of conduct, and two statements
related to fees and costs, for the reasons generally discussed in