receiving those payments should consider whether they need to
register as broker-dealers under section 15 of the Exchange Act.

      Table 4--Registered Investment Advisers Compensation by Type
------------------------------------------------------------------------
            Compensation type                   Yes             No
------------------------------------------------------------------------
A percentage of assets under management.          12,041             617
Hourly charges..........................           3,670           8,988
Subscription fees (for a newsletter or               119          12,539
 periodical)............................
Fixed fees (other than subscription                5,406           7,252
 fees)..................................
Commissions.............................             490          12,168
Performance-based fees..................           4,780           7,878
Other...................................           1,846          10,812
------------------------------------------------------------------------

    As discussed above, many investment advisers participate in wrap
fee programs. As of December 31, 2017, more than 5% of the SEC-
registered investment advisers sponsor a wrap fee program and more than
9% act as a portfolio manager for one or more wrap fee programs.\494\
From the data available, we are unable to determine how many advisers
provide advice about investing in wrap fee programs, because advisers
providing such advice may be neither sponsors nor portfolio managers.
---------------------------------------------------------------------------

    \494\ A wrap fee program sponsor is as a firm that sponsors,
organizes, or administers the program or selects, or provides advice
to clients regarding the selection of, other investment advisers in
the program. See General Instructions to Form ADV.
---------------------------------------------------------------------------

ii. Disclosures for Investment Advisers
    As fiduciaries, investment advisers have a duty to provide full and
fair disclosure of material facts and are subject to express disclosure
requirements in Form ADV.\495\ Consistent with this duty and those
requirements, investment advisers file Form ADV to register with the
Commission or state securities authorities, as applicable, and provide
an annual update to the form.\496\ Part 1 of Form ADV provides
information to regulators, and made available to clients, prospective
clients, and the public, about the registrants' ownership, investors,
and business practices. Advisers also prepare a Form ADV Part 2A
narrative brochure that contains information about the investment
adviser's business practices, fees, conflicts of interest, and
disciplinary information,\497\ in addition to a Part 2B brochure
supplement that includes information about the specific individuals,
acting on behalf of the investment adviser, who actually provide
investment advice and interact with the client.\498\ Currently, the
Part 2A brochure is the primary client-facing disclosure document,\499\
however, Parts 1 and 2A are both made publicly available by the
Commission through IAPD,\500\ and advisers are generally required to
deliver Part 2A and Part 2B to their clients. The current Paperwork
Reduction Act estimate of the average annual cost and hour burden for
investment advisers to complete, amend, and file all parts of Form ADV
are $6,051 and 23.77 hours.\501\
---------------------------------------------------------------------------

    \495\ See SEC v. Capital Gains Research Bureau, Inc., 375 U.S.
at 194; see also Brochure Adopting Release, supra note 157. See also
913 Study, supra note 3, at n.92. For example, if an adviser selects
or recommends other advisers to investors, it must disclose any
compensation arrangements or other business relationships between
the advisory firms, along with the conflicts created, and explain
how it addresses these conflicts. See Item 10 of Form ADV Part 2A.
See also 913 Study, supra note 3, at n.93. Other potential conflicts
of interest include acting as a principal in transactions with
investors and compensation received thereof; incentives provided by
third parties to sell their services and products; and agency cross-
trades, where the advisers is also a broker-dealer and executes a
client's order by crossing the orders with those of non-advisory
clients. See Interpretation of Section 206(3) of the Investment
Advisers Act of 1940, Investment Advisers Act Release No. 1732 (Jul.
20, 1998), at n.3.
    \496\ See Advisers Act rules 203-1 and 204-1. Part 1A (1B) of
Form ADV is the registration application for the Commission (and
state securities authorities). Part 2 of Form ADV consists of a
narrative ``brochure'' about the adviser and ``brochure
supplements'' about certain advisory personnel on whom clients may
rely for investment advice. See Brochure Adopting Release, supra
note 157.
    \497\ Part 2A of Form ADV contains 18 mandatory disclosure items
about the advisory firm, including information about an adviser's:
(1) Range of fees; (2) methods of analysis; (3) investment
strategies and risk of loss; (4) brokerage, including trade
aggregation polices and directed brokerage practices, as well as the
use of soft dollars; (5) review of accounts; (6) client referrals
and other compensation; (7) disciplinary history; and (8) financial
information, among other things. Much of the disclosure in Part 2A
addresses an investment adviser's conflicts of interest with its
investors, and is disclosure that the adviser, as a fiduciary, must
make to investors in some manner regardless of the form
requirements. See Brochure Adopting Release, supra note 157.
    \498\ Part 2B, or the ``brochure supplement,'' includes
information about certain advisory personnel that provide retail
client investment advice, and contains educational background,
disciplinary history, and the adviser's supervision of the advisory
activities of its personnel. See Instruction 5 of General
Instructions for Form ADV. Registrants are not required to file Part
2B (brochure supplement) electronically, but must preserve a copy of
the supplement(s) and make them available upon request.
    \499\ See Brochure Adopting Release, supra note 157.
    \500\ See Investment Adviser Public Disclosure, available at
https://adviserinfo.sec.gov/.
    \501\ See infra Section V.A.2.
---------------------------------------------------------------------------

c. Disclosure Obligations for Broker-Dealers and Investment Advisers
Under DOL Rules and Exemptions
    As noted, firms and financial professionals providing services to
customers in retirement accounts, including workplace retirement plans
and IRAs, are subject to certain disclosure obligations under rules and
exemptions issued by the DOL under ERISA and the prohibited transaction
provisions of the Code.\502\ For example, DOL regulations under a
statutory exemption for investment advice services provided to plan
participants and IRAs requires firms and financial professionals to
disclose information about the services that they will provide and
their fees and other compensation, and to acknowledge that the adviser
is acting as a fiduciary.\503\
---------------------------------------------------------------------------

    \502\ See supra note 11.
    \503\ See 29 CFR 2550.408g-1(b)(7). In general, firms and
financial professionals who receive commissions or other
transaction-related compensation in connection with providing
certain fiduciary investment recommendations relating to the assets
of ERISA-covered workplace retirement plans and IRAs could violate
provisions under the Code prohibiting fiduciaries from engaging in
self-dealing and receiving compensation from third parties in
connection with investments by these plans and IRA (and, with
respect to such plans, substantially similar prohibited transaction
rules that apply under ERISA to transactions involving ERISA plans
but not IRAs). To receive such compensation, firms have historically
complied with one or more prohibited transaction exemptions
(``PTEs'') issued by the DOL over time, which generally required
(among other conditions) disclosures about, e.g., direct and
indirect compensation received in connection with a recommended
transactions. See Definition of the Term ``Fiduciary;'' Conflict of
Interest Rule--Retirement Investment Advice, 81 FR 20945, 20991-92
(Apr. 8, 2016) (to be codified at 20 C.F.R. pts. 2509, 2510 and
2550) (``DOL Fiduciary Rule Adopting Release'') (describing action
to adopt new and amended PTEs and revoke certain PTEs applicable to
investment advice services).
---------------------------------------------------------------------------

    More recently, the DOL's BIC Exemption would require that firms
seeking to rely on the exemption to receive commissions and other fees
in connection with making investment recommendations to IRAs and
participants of ERISA-covered plans (including advice relating to
rollovers from plans or between account types) \504\

generally must (among other conditions) provide disclosure about the
services to be performed (including monitoring of recommendations,
offering proprietary products and limiting recommendations) and how the
investor will pay for services, material conflicts of interest
(including third party compensation to the firm, affiliates and
financial professionals), and must also make certain ongoing
disclosures on a public website.\505\ The DOL adopted the BIC Exemption
in connection with the amendment of its regulation defining
``investment advice,'' which had the effect of expanding the
circumstances under which broker-dealers and investment advisers may be
fiduciaries for purposes of the prohibited transaction provisions under
ERISA and the Code (the ``DOL Fiduciary Rule'').\506\ Although a
decision of the Court of Appeals for the Fifth Circuit recently vacated
the DOL Fiduciary Rule,\507\ we understand that many firms already have
taken steps to implement conditions under the BIC Exemption.\508\
---------------------------------------------------------------------------

    \504\ See Best Interest Contract Exemption, 81 FR 21002, 21006-7
(Apr. 8, 2016) (``BIC Exemption Release'') Best Interest Contract
Exemption; Correction (Prohibited Transaction Exemption 2016-01), 81
FR 44773 (July 11, 2016) (``Corrected BIC Exemption''), as amended
18-Month Extension of Transition Period and Delay of Applicability
Dates; Best Interest Contract Exemption (PTE 2016-01); Class
Exemption for Principal Transactions in Certain Assets Between
Investment Advice Fiduciaries and Employee Benefit Plans and IRAs
(PTE 2016-02); Prohibited Transaction Exemption 84-24 for Certain
Transactions Involving Insurance Agents and Brokers, Pension
Consultants, Insurance Companies, and Investment Company Principal
Underwriters (PTE 84-24), 82 FR 56545 (Nov. 29, 2017). Depending on
how they are compensated, investment advisers receiving a level fee
may not be subject to the full set of contract, disclosure and other
conditions of the BIC Exemption.
    \505\ See Corrected BIC Exemption, supra note, 504, at sections
II and III. Ongoing website disclosure would include information
about certain material conflicts of interest and third party
payments, a schedule of typical fees and service charges, a
description of the compensation and incentive arrangements for
individual financial professionals, and a written description of the
financial institution's policies and procedures. Id., at section
III. In the case of recommendations provided to an IRA, the firm
also would be required to enter into a written contract with the IRA
owner that includes an acknowledgement of fiduciary status and an
enforceable promise to adhere to certain ``impartial conduct
standards'' (including a best interest standard of conduct). Id., at
section II(a).
    \506\ See DOL Fiduciary Rule Adopting Release, supra note 503.
    \507\ See Chamber of Commerce of the U.S.A., e. al. v. U.S.
Dep't of Labor, et. al., No. 17-10238 (5th Cir. Mar 15, 2018).
    \508\ See SIFMA and Deloitte, The DOL Fiduciary Rule: A study on
how financial institutions have responded and the resulting impacts
on retirement investors (Aug. 9, 2017), available at https://www.sifma.org/wp-content/uploads/2017/08/;Deloitte-White-Paper-on-
the-DOL-Fiduciary-Rule-August-2017.pdf.
---------------------------------------------------------------------------

    The Commission does not currently have data on the number of firms
that are subject to disclosure obligations under applicable DOL rules
and exemptions.\509\ However, because we understand that most broker-
dealers expected that they would be required to comply with the BIC
Exemption to continue to provide services to retail investors in IRAs
and participant-directed workplace retirement plans,\510\ the
Commission can broadly estimate the maximum number of broker-dealers
that could be subject to disclosure obligations under DOL rules and
exemption including the BIC Exemption from the number of broker-dealers
that have retail investor accounts. Approximately 74.4% (2,857) of
registered broker-dealers report sales to retail customers.\511\
Similarly, approximately 60% (7,600) of investment advisers serve high
net worth and non-high net worth individual clients. The Commission
believes that this number likely overestimates those broker-dealers and
investment advisers that provide retirement account services.
Therefore, these 2,850 broker-dealers and 7,600 investment advisers
that provide retail services represent an upper bound of the number of
broker-dealers and investment advisers that would likely be subject to
compliance with disclosure obligations under DOL rules and exemptions
and may have taken steps to comply with the contract, disclosure and
other conditions under the DOL's BIC Exemption.\512\
---------------------------------------------------------------------------

    \509\ In order to obtain this information, the Commission would
need to know which financial firms have retirement-based accounts as
part of their business model. Under the current reporting regime for
both broker-dealers and investment advisers, they are not required
to disclose whether (or what fraction) of their accounts are held by
retail investors in retirement-based accounts.
    \510\ See BIC Exemption Release, supra note 504, at 21006-07
(DOL states that it ``anticipates that the [DOL Fiduciary Rule] will
cover many investment professionals who did not previously consider
themselves to be fiduciaries under ERISA or the Code.'').
    \511\ As of December 2017, 3,841 broker-dealers filed Form BD.
Retail sales by broker-dealers were obtained from Form BD.
    \512\ The DOL's Regulatory Impact Analysis estimated that the
numbers of broker-dealers and investment advisers (including state-
registered investment advisers) that could be affected by their rule
are approximately 2,500 and 17,500, respectively. See Regulatory
Impact Analysis for Final Rule and Exemptions, Definition Of The
Term ``Fiduciary'' Conflicts Of Interest--Retirement Investment
Advice (Apr. 2016), at 215-229, available at https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/conflict-of-interest-ria.pdf.
---------------------------------------------------------------------------

d. Trends in the Relative Numbers of Providers of Financial Services
    Over time, the relative number of broker-dealers and investment
advisers has changed. Figure 1 presented below shows the time series
trend of growth in broker-dealers and investment advisers between 2005
and 2017. Over the last 13 years, the number of broker-dealers has
declined from over 6,000 in 2005 to less than 4,000 in 2017, while the
number of investment advisers has increased from approximately 9,000 in
2005 to over 12,000 in 2017. This change in the relative numbers of
broker-dealers and investment advisers over time likely affects the
competition for advice, and potentially alters the choices available to
investors on how to receive or pay for such advice, the nature of the
advice, and the attendant conflicts of interest.
BILLING CODE 8011-01-P

[GRAPHIC] [TIFF OMITTED] TP09MY18.002

    Increases in the number of investment advisers and decreases in the
number of broker-dealers could have occurred for a number of reasons,
including anticipation of possible regulatory changes to the industry,
other regulatory restrictions, technological innovation (i.e., robo-
advisers and online trading platforms), product proliferation (e.g.,
index mutual funds and exchange-traded products), and industry
consolidation driven by economic and market conditions, particularly
among broker-dealers.\513\ Commission staff has observed the transition
by broker-dealers from traditional brokerage services to also providing
investment advisory services (often under an investment adviser
registration, whether federal or state), and many firms have been more
focused on offering fee-based accounts than accounts that charge
commissions. \514\ Broker-dealers have indicated that the following
factors have contributed to this migration: Provision of stability or
increase in profitability,\515\ perceived lower regulatory burden, and
provisions of more services to retail customers.
---------------------------------------------------------------------------

    \513\ See, Hester Peirce, Dwindling numbers in the financial
industry, Brookings Center on Markets and Regulation (May 15, 2017),
available at https://www.brookings.edu/research/dwindling-numbers-in-the-financial-industry/ (``Brookings Report'') which notes that
``SEC restrictions have increased by almost thirty percent [since
2000],'' and that regulations post-2010 were driven in large part by
the Dodd-Frank Act, page 5. Further, the Brookings Report
observation of increased regulatory restrictions on broker-dealers
only reflects CFTC or SEC regulatory actions, but does not include
regulation by FINRA, SROs, NFA, or the MSRB.
    \514\ The Brookings Report, supra note 513, also discusses the
shift from broker-dealer to investment advisory business models for
retail investors, in part due to the DOL Fiduciary Rule (page 7).
See also the RAND Study, supra note 5, which documents a shift from
transaction-based to fee-based accounts prior to recent regulatory
changes. Declining transaction-based revenue due to declining
commission rates and competition from discount brokerage firms has
made fee-based products and services more attractive. Although
discount brokerage firms generally provide execution-only services
and do not compete directly in the advice market with full service
broker-dealers and investment advisers, entry by discount brokers
has contributed to lower commission rates throughout the broker-
dealer industry. Further, fee-based activity generates a steady
stream of revenue regardless of the customer trading activity,
unlike commission-based accounts.
    \515\ Commission staff examined a sample of recent Form 10-K or
Form 10-Q filings of large broker-dealers, many of which are dually
registered as investment advisers, that have a large fraction of
retail customer accounts to identify relevant broker-dealers. See,
e.g., Edward Jones 9/30/2017 Form 10-Q available at https://www.sec.gov/Archives/edgar/data/815917/000156459017023050/ck0000815917-10q_20170929.htm; Raymond James 9/30/2017 Form 10-K
available at https://www.sec.gov/Archives/edgar/data/720005/000072000517000089/rjf-20170930x10k.htm; Stifle 12/31/2016 Form 10-K
available at https://www.sec.gov/Archives/edgar/data/720672/000156459017022758/sf-10q_20170930.htm; Wells Fargo 9/30/2017 10-Q
available at https://www.sec.gov/Archives/edgar/data/72971/000007297117000466/wfc-09302017x10q.htm; and Ameriprise 12/31/2016
Form 10-K available at https://www.sec.gov/Archives/edgar/data/820027/;000082002717000007/ameriprisefinancial12312016.htm. We note
that discussions in Form 10-K and 10-Q filings of this sample of
broker-dealers here may not be representative of other large broker-
dealers or of small to mid-size broker-dealers. Some firms have
reported record profits as a result of moving clients into fee-based
accounts, and cite that it provides ``stability and high returns.''
See ``Morgan Stanley Wealth Management fees climb to all-time
high,'' Bloomberg, Jan. 18, 2018, available at https://www.bloomberg.com/news/articles/2018-01-18/morgan-stanley-wealth-management-fees-hit-record-on-stock-rally. Morgan Stanley increased
the percentage of client assets in fee-based accounts from 37% in
2013 to 44% in 2017, while decreasing the dependence on transaction-
based revenues from 30% to 19% over the same time period (Morgan
Stanley Strategic Update, (Jan. 18, 2018), available at https://www.morganstanley.com/about-us-ir/shareholder/4q2017-strategic-update.pdf). See also Beilfuss, Lisa & Brian Hershberg, WSJ Wealth
Adviser Briefing: The Reinvention of Morgan and Merrill, Adviser
Profile, The Wall Street Journal (Jan. 25, 2018), available at
https://blogs.wsj.com/moneybeat/2018/01/25/wsj-wealth-adviser-briefing-the-reinvention-of-morgan-and-merrill-adviser-profile/.
---------------------------------------------------------------------------

    Further, there has been a substantial increase in the number of
retail clients at investment advisers, both high net worth clients and
non-high net worth clients as shown in Figure 2. Although the number of
non-high net worth retail customers of investment advisers dipped
between 2010 and 2012, since 2012, more than 12 million new non-

high net worth retail clients have been added. With respect to assets
under management, we observe a similar, albeit more pronounced pattern
for non-high net worth retail clients as shown in Figure 3. For high
net worth retail clients, there has been a pronounced increase in AUM
since 2012, although AUM has leveled off since 2015.
[GRAPHIC] [TIFF OMITTED] TP09MY18.003

BILLING CODE 8011-01-C
e. Registered Representatives of Broker-Dealers, Investment Advisers
and Dually Registered Firms
    We estimate the number of associated natural persons of broker-
dealers through data obtained from Form U4, which generally is filed
for individuals who are engaged in the securities or investment banking
business of a broker-dealer that is a member of a self-regulatory
organization (``registered

representatives'' or ``RR''s). \516\ Similarly, we approximate the
number of supervised persons of registered investment advisers through
the number of registered investment adviser representatives (or
``registered IAR''s), who are supervised persons of investment advisers
who meet the definition of investment adviser representatives in
Advisers Act rule 203A-3 and are registered with one or more state
securities authorities to solicit or communicate with clients.\517\
---------------------------------------------------------------------------

    \516\ The number of associated natural persons of broker-dealers
may be different from the number of registered representatives of
broker-dealers, because clerical/ministerial employees of broker-
dealers are associated persons, but are not required to register
with the firm. Therefore, using the registered representative number
does not include such persons. However, we do not have data on the
number of associated natural persons and therefore are not able to
provide an estimate of the number of associated natural persons. We
believe that the number of registered representatives is an
appropriate approximation because they are the individuals at
broker-dealers that provide advice and services to customers.
    \517\ See Advisers Act rule 203A-3. However, we note that the
data on numbers of registered IARs may undercount the number of
supervised persons of investment advisers who provide investment
advice to retail investors because not all supervised persons who
provide investment advice to retail investors are required to
register as IARs. For example, Commission rules exempt from IAR
registration supervised persons who provide advice only to non-
individual clients or to individuals that meet the definition of
``qualified client.'' As discussed above, the definition of retail
investor for purposes of this proposed rulemaking would include
qualified clients who are natural persons and trusts that represent
natural persons. Proposed General Instruction 9.(e) to Form CRS. In
addition, state securities authorities may impose different criteria
for requiring registration as an investment adviser representative.
---------------------------------------------------------------------------

    We estimate the number of registered representatives and registered
IARs (together ``registered financial professionals'') at broker-
dealers, investment advisers, and dual registrants by considering only
the employees of those firms that have Series 6 or Series 7 licenses or
are registered with a state as a broker-dealer agent or investment
adviser representative.\518\ We only consider employees at firms who
have retail-facing business, as defined previously.\519\ We observe in
Table 5, that approximately 61% of registered financial professionals
are employed by dually registered entities. The percentage varies by
the size of the firm. For example, for firms with total assets between
$1 billion and $50 billion, 72% of all registered financial
professionals in that size category are employed by dually registered
firms. Focusing on dually registered firms only, approximately 59.7% of
total licensed representatives at these firms are dual-hatted,
approximately 39.9% are only registered representatives; and less than
one percent are only registered investment adviser representatives.
---------------------------------------------------------------------------

    \518\ We calculate these numbers based on Form U4 filings.
Representatives of broker-dealers, investment advisers, and issuers
of securities must file this form when applying to become registered
in appropriate jurisdictions and with self-regulatory organizations.
Firms and representatives have an obligation to amend and update
information as changes occur. Using the examination information
contained in the form, we consider an employee a financial
professional if he has an approved, pending, or temporary
registration status for either Series 6 or 7 (RR) or is registered
as an investment adviser representative in any state or U.S.
territory (IAR). We limit the firms to only those that do business
with retail investors, and only to licenses specifically required to
be licensed as an RR or IAR.
    \519\ See supra notes 460 and 485.
    \520\ The classification of firms as dually registered,
standalone broker-dealers, and standalone investment advisers comes
from Forms BD, FOCUS, and ADV as described earlier. The number of
representatives at each firm is obtained from Form U4 filings. Note
that all percentages in the table have been rounded to the nearest
whole percentage point.

Table 5--Total Licensed Representatives at Broker-Dealers, Investment Advisers, and Dually Registered Firms With
                                             Retail Investors \520\
----------------------------------------------------------------------------------------------------------------
                                                                     % of
  Size of firm (total assets for standalone                    representatives        % of              %
  BDs and dually registered firms; AUM for    Total number of     in  dually    representatives  representatives
               standalone IAs)                representatives     registered     in  standalone    in standalone
                                                                    firms              BD               IA
----------------------------------------------------------------------------------------------------------------
>$50 billion................................           82,668               75                8               18
$1 billion to $50 billion...................          150,662               72               10               18
$500 million to $1 billion..................           31,673               67               16               16
$100 million to $500 million................           62,539               58               24               18
$10 million to $100 million.................          116,047               52               47                1
$1 million to $10 million...................           37,247               34               63                2
<$1 million.................................           13,563                7               87                6
                                             -------------------------------------------------------------------
    Total Licensed Representatives..........          494,399               61               27               12
----------------------------------------------------------------------------------------------------------------

    In Table 6 below, we estimate the number of employees who are
registered representatives, registered investment adviser
representatives, or both (``dual-hatted representatives'').\521\
Similar to Table 5, we calculate these numbers using Form U4 filings.
Here, we also limit the sample to employees at firms that have retail-
facing businesses as discussed previously.\522\
---------------------------------------------------------------------------

    \521\ We calculate these numbers based on Form U4 filings.
    \522\ See supra notes 460 and 485.
---------------------------------------------------------------------------

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

    \523\ Firm size is defined as total assets from the balance
sheet (source: FOCUS reports) for broker-dealers and dual
registrants and is assets under management for investment advisers
(source: Form ADV).
---------------------------------------------------------------------------

    In Table 6, approximately 24% of registered employees at registered
broker-dealers or investment advisers are dual-hatted representatives.
However, this proportion varies significantly across size categories.
For example, for firms with total assets between $1 billion and $50
billion,\523\ approximately 36% of all registered employees are both
registered representatives and investment adviser representatives. In
contrast, for firms with total assets below $1 million, 15% of all
employees are dual-hatted representatives.

   Table 6--Number of Employees at Retail Facing Firms Who Are Registered Representatives, Investment Adviser
                                         Representatives, or Both \524\
----------------------------------------------------------------------------------------------------------------
 Size of firm  (total assets for standalone                     Percentage of
  BDs and dually registered firms;  AUM for    Total  number     dual-hatted     Percentage of    Percentages of
               standalone IAs)                 of  employees   representatives      RRs only        IARs only
----------------------------------------------------------------------------------------------------------------
>$50 billion................................          216,655               18               17                1
$1 billion to $50 billion...................          292,663               36               11                3
$500 million to $1 billion..................           50,531               15               40                6
$100 million to $500 million................          112,119               23               24                8
$10 million to $100 million.................          189,318               19               41                1
$1 million to $10 million...................           61,310               19               39                1
<$1 million.................................           19,619               15               46                3
                                             -------------------------------------------------------------------
    Total Employees at Retail Facing Firms..          942,215               24               24                3
----------------------------------------------------------------------------------------------------------------

    Approximately 88% of investment adviser representatives are dual-
hatted as registered representatives. This percentage is relatively
unchanged from 2010. According to information provided in a FINRA
comment letter in connection with the 913 Study, 87.6% of registered
investment adviser representatives were dually registered as registered
representatives as of mid-October 2010.\525\ In contrast, approximately
50% of registered representatives were dually registered as investment
adviser representatives at the end of 2017.\526\
---------------------------------------------------------------------------

    \524\ See supra notes 520-521. Note that all percentages in the
table have been rounded to the nearest whole percentage point.
    \525\ Comment letter of FINRA to File Number 4-606; Obligations
of Brokers, Dealers and Investment Advisers (Nov. 3, 2010), at 1,
available at https://www.sec.gov/comments/4-606/4606-2836.pdf.
    \526\ In order to obtain the percentage of IARs that are dually
registered as registered representatives of broker-dealers, we sum
the representatives at dually-registered entities and those at
investment advisers, across size categories to obtain the aggregate
number of representatives in each of the two categories. We then
divide the aggregate dually-registered representatives by the sum of
the dually-registered representatives and the IARs at investment
adviser-only firms. We perform a similar calculation to obtain the
percentage of registered representatives of broker-dealers that are
dually registered as IARs.
---------------------------------------------------------------------------

    With respect to disclosure made about licensed individuals, broker-
dealers and investment advisers must report certain criminal,
regulatory, and civil actions and complaint information and information
about certain financial matters in Forms U4 \527\ and U5 \528\ for
their representatives. Self-regulatory organizations, regulators and
jurisdictions report disclosure events on Form U6.\529\ FINRA's
BrokerCheck system discloses to the public certain information on
registered representatives and investment adviser representatives such
as principal place of business, business activities, owners, and
criminal prosecutions, regulatory actions, and civil actions in
connection with any investment-related activity.
---------------------------------------------------------------------------

    \527\ Form U4 requires disclosure of registered representatives'
and investment adviser representatives' criminal, regulatory, and
civil actions similar to those reported on Form BD or Form ADV as
well as certain customer-initiated complaints, arbitration, and
civil litigation cases. See generally Form U4.
    \528\ Form U5 requires information about representatives'
termination from their employers.
    \529\ See FINRA, Current Uniform Registration Forms for
Electronic Filing in Web CRD, available at http://www.finra.org/industry/web-crd/current-uniform-registration-forms-electronic-filing-web-crd.
---------------------------------------------------------------------------

f. Current Use of Names and Titles
    Although many financial services firms are registered as broker-
dealers, investment advisers, or are dually registered, both firms and
financial professionals use a variety of terms to label both the firm
and the professional. Approximately 103 broker-dealers that are not
dually registered as investment advisers use the term ``adviser,''
``advisor,'' or ``advisory'' as part of their current company
name.\530\ Of these broker-dealers, 16 reported at least one type of
non-securities business. Approximately 39 percent of the 103 broker-
dealers described above used a proper name coupled with the term
``advisor'' alone,\531\ and an additional 31 percent used a proper name
coupled with the term ``capital advisor.'' In addition to those terms,
less than 10% of these broker-dealers use the terms ``financial
advisor,'' ``investment advisor,'' or ``wealth advisor'' in their
corporate name. The remainder of the broker-dealers (approximately 25
firms) use unique combinations of other words along with ``adviser,''
``advisor'' or ``advisory.''
---------------------------------------------------------------------------

    \530\ Source: Form BD.
    \531\ E.g. ``ABC Advisor.''
---------------------------------------------------------------------------

    In addition to company names or professional titles, firms are
likely to use labels or terms other than their formal company names to
describe themselves in corporate descriptions, marketing material, or
other communications with the public. To gauge the extent that
registered broker-dealers and investment advisers use terms other than
their registration status as descriptors, Commission staff conducted an
analysis to evaluate the different terms that broker-dealer, investment
adviser, and dually-registered firms use to describe themselves.\532\
Commission staff reviewed firm websites to collect the terms that were
used on the website to describe the firm.\533\ Many firms provided
multiple descriptions of their businesses.\534\
---------------------------------------------------------------------------

    \532\ From the full sample of broker-dealers with retail
investors (2,857) and investment advisers with retail investors
(7,600), the Commission staff used a random number generator to
select 20 firms in each of the size categories listed in Table 7,
from which to construct a sample of firms for which staff hand-
collected data on firm descriptions from firm website homepages and
``About'' pages, as available. When a size category contained less
than 20 firms we sampled all firms in that category. Relative to the
overall proportion of firms, we oversampled firms from the larger
size categories because they employ a majority of all licensed
representatives and are therefore the firms the average retail
investor is most likely to come in contact with. Overall, 83
randomly selected standalone broker-dealers, 100 randomly selected
investment advisers, and 91 randomly selected dual registrants based
on the previously identified size categories (either total assets
for broker-dealers and dual registrants or assets under management
for investment advisers) provided the sample reviewed in the staff
study. Further, the 917 Financial Literacy Study (see supra note 20)
showed that a substantial percentage of retail investors use
information obtained from firm websites in making the selection of
their financial professional.
    \533\ See Table 7, Panel A for firm level identifiers for
broker-dealers, Panel B for identifiers for investment advisers, and
Panel C for dual registrants. Not all firms provided a description
of their firm on their website, which we coded as ``N/A'' for not
available.
    \534\ For purposes of our classification analysis, if ``ABC &
Co.'' were to be a SEC-registered standalone broker-dealer and, on
ABC's webpage in describing its business and operations, ABC refers
to itself as a brokerage firm and a wealth manager, we would
classify, ABC & Co. as using both ``brokerage'' and ``wealth
manager'' as descriptors in our analysis.
---------------------------------------------------------------------------

    As shown below in Panel A of Table 7, over 50% of broker-dealers
sampled use the term ``broker,'' ``dealer,'' ``broker-dealer,'' or
``brokerage'' to

describe their business, while less than 10% use ``financial advisor,''
``wealth advisor,'' or ``investment advisor.'' Registered investment
advisers (Panel B) are more likely to use the term ``investment
advisor,'' ``wealth advisor,'' or ``financial advisor'' as a
description of their business compared to broker-dealers (approximately
40%). Nearly 50% of the sampled standalone investment advisers use the
term ``investment manager'' or ``wealth manager'' to describe their
business model compared to less than 10% of broker-dealers that use
these terms. Dually registered firms (Panel C) are much more diverse in
their use of firm descriptions; approximately 40% use the term
``brokerage,'' ``broker-dealer,'' ``broker,'' or ``dealer,'' while
nearly 30% use a firm description that contains the term ``adviser'' or
``advisor.''
---------------------------------------------------------------------------

    \535\ Broker-dealers are randomly drawn from Form BD data (as of
Dec. 2017). The data on firm descriptions is hand collected from
individual broker-dealer websites.
    \536\ Investment advisers are randomly drawn from Form ADV data
(as of Dec. 2017). The data on firm descriptions is hand collected
from individual investment adviser websites.
    \537\ Dual registrants are randomly drawn from Form BD data (as
of Dec. 2017). The data on firm descriptions is hand collected from
individual dually-registered firms' websites.

                                 Table 7--Panel A: Description of Standalone Broker-Dealer Firms on Firm Websites \535\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Wealth/
                                                          Broker- dealer    Investment      investment       Advisory          Other            N/A
                                                                               bank         management
--------------------------------------------------------------------------------------------------------------------------------------------------------
>$50 billion............................................               2               2               0               2               0               0
$1 billion to $50 billion...............................              15               6               0               0               0               1
$500 million to $1 billion..............................              14               2               0               0               1               0
$100 million to $500 million............................              12               7               4               2               4               0
$10 million to $100 million.............................              11               2               5               3               4               0
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................              54              19               9               7               9               1
--------------------------------------------------------------------------------------------------------------------------------------------------------

                               Table 7--Panel B: Description of Standalone Investment Adviser Firms on Firm Website \536\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Wealth/
                                                          Broker- dealer    Investment      investment       Advisory          Other            N/A
                                                                               bank         management
--------------------------------------------------------------------------------------------------------------------------------------------------------
>$50 billion............................................               0               1              16               3               4               0
$1 billion to $50 billion...............................               0               0              13               5               8               0
$500 million to $1 billion..............................               0               0              10              13               9               0
$100 million to $500 million............................               0               0               6               7               9               3
$10 million to $100 million.............................               2               0               2              10               7               1
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................               2               1              47              38              37               4
--------------------------------------------------------------------------------------------------------------------------------------------------------

                                     Table 7--Panel C: Description of Dually-Registered Firms on Firm Website \537\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Wealth/
                                                          Broker- dealer    Investment      investment       Advisory          Other            N/A
                                                                               bank         management
--------------------------------------------------------------------------------------------------------------------------------------------------------
>$50 billion............................................               5               8               2               4               1               0
$1 billion to $50 billion...............................               7               8               5               6               9               0
$500 million to $1 billion..............................               3               1               2               1               2               0
$100 million to $500 million............................              13               3               1               7               6               0
$10 million to $100 million.............................              10               1               3              10               7               0
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................              38              21              13              28              25               0
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Regarding the use of titles by individual financial professionals,
a 2008 RAND Study,\538\ found that households responding to the survey
\539\ reported a wide variety of titles were used by financial
professionals with whom they worked. The RAND Study Table 6.3
(replicated below in Table 8) provides an overview of the most commonly
used titles by services provided. As shown in the table, financial
professionals providing brokerage services use a large variety of
titles to describe their business and the services that they offer,
including ``financial advisor,'' ``financial consultant,'' ``banker,''
and ``broker.'' Around 31% of professionals providing only brokerage
services used titles containing the terms ``adviser'' or ``advisor.''
Professionals providing advisory services or both brokerage and
advisory services similarly also use a wide variety of titles, but the
proportion of professionals who use titles containing the terms
``adviser'' or ``advisor'' are somewhat larger at 35%. Note that the
RAND Study did not distinguish financial professionals' use of tiles
based on whether they were RRs or IARs, but rather by type of services
provided.
---------------------------------------------------------------------------

    \538\ RAND Study, supra note 5.
    \539\ Internet survey administered to members of the American
Life Panel; 654 (out of 1000) households completed the survey.

                     Table 8--Replication of Table 6.3 of the RAND Study--Professional Titles Most Commonly Reported by Respondents
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Provide         Provide      Provide both
                            Title                             All individual     advisory        brokerage       types of
                                                               professionals   services only   services only     services
----------------------------------------------------------------------------------------------------------------------------
Advisor.....................................................              11               1               1               9
Banker......................................................              21               2               8              11
Broker, stockbroker, or registered representative...........              38               0               8              30
CFP (Certified Financial Planner)...........................              21               3               3              15
Financial adviser or financial advisor......................              78               7              11              60
Financial consultant........................................              25               2               0              23
Financial planner...........................................              44               6               1              37
Investment adviser or investment advisor....................              22               3               3              16
President or vice president.................................              20               0               2              18
--------------------------------------------------------------------------------------------------------------------------------------------------------

2. Investor Account Statistics
    Investors seek financial advice and services to achieve a number of
different goals, such as saving for retirement or children's college
education. As shown above in Figures 2 and 3, the number of retail
investors and their assets under management associated with investment
advisers has increased significantly, particularly since 2012. As of
December 2016, nearly $24.2 trillion is invested in retirement
accounts, of which $7.5 trillion is in IRAs.\540\ In 2016, a total of
43.3 million U.S. households have either an IRA or a brokerage account,
of which an estimated 20.2 million U.S. households have a brokerage
account and 37.7 million households have an IRA (including 72% of
households that also hold a brokerage account).\541\ Table 9 below
provides an overview of account ownership segmented by account type
(e.g., IRA, brokerage, or both) and investor income category based on
the Survey of Consumer Finances (SCF).\542\
---------------------------------------------------------------------------

    \540\ See ICI Research Perspective, The Role of IRAs in U.S.
Households' Saving for Retirement, 2016 (Jan. 2017), available at
https://www.ici.org/pdf/per23-01.pdf.
    \541\ The data is obtained from the Federal Reserve System's
2016 Survey of Consumer Finances (``SCF''), a triennial survey of
approximately 6,200 U.S. households and imputes weights to
extrapolate the results to the entire U.S. population. As noted,
some survey respondent households have both a brokerage and an IRA.
Federal Reserve, Survey of Consumer Finances (2016), available at
https://www.federalreserve.gov/econres/scfindex.htm. The SCF data
does not directly examine the incidence of households that could use
advisory accounts instead of brokerage accounts; however, some
fraction of IRA accounts reported in the survey could be those held
at investment advisers.
    \542\ Id. To the extent that investors have IRA accounts at
banks that are not also registered as broker-dealers, our data may
overestimate the numbers of IRA accounts held by retail investors
that could be subject to this proposed rulemaking.

                         Table 9--Ownership by Account Type in the U.S. by Income Group
                                          [As reported by the 2016 SCF]
----------------------------------------------------------------------------------------------------------------
                                                                                % Both
                         Income category                            % Brokerage     % IRA only    brokerage  and
                                                                       only                             IRA
----------------------------------------------------------------------------------------------------------------
Bottom 25%......................................................             1.2             7.6             2.4
25%-50%.........................................................             3.2            14.5             5.4
50%-75%.........................................................             4.1            21.4            11.4
75%-90%.........................................................             7.5            33.4            16.5
Top 10%.........................................................            12.0            24.7            43.9
Average.........................................................             4.4            18.3            11.6
----------------------------------------------------------------------------------------------------------------

    One question in the SCF asks what sources of information
households' financial decision-makers use when making decisions about
savings and investments. Respondents can list up to fifteen possible
sources from a preset list that includes ``Broker'' or ``Financial
Planner'' as well as ``Banker,'' ``Lawyer,'' ``Accountant,'' and a list
of non-professional sources.\543\ Panel A of Table 10 below presents
the breakdown of where households who have brokerage accounts seek
advice about savings and investments. The table shows that of those
respondents with brokerage accounts, 23% (4.7 million households) used
advice services of broker-dealers for savings and investment decisions,
while 49% (7.8 million households) took advice from a ``financial
planner.'' Approximately 36% (7.2 million households) sought advice
from other sources such as bankers, accountants, and lawyers. Almost
25% (5.0 million households) did not use advice from the above sources.
---------------------------------------------------------------------------

    \543\ The SCF specifically asks participants ``Do you get advice
from a friend, relative, lawyer, accountant, banker, broker, or
financial planner? Or do you do something else?'' (see Federal
Reserve, Codebook for 2016 Survey of Consumer Finances (2016),
available at https://www.federalreserve.gov/econres/files/codebk2016.txt). Other response choices presented by the survey
included ``Calling Around,'' ``Magazines,'' ``Self,'' ``Past
Experience,'' ``Telemarketer,'' and ``Insurance Agent,'' as well as
other choices. Respondents could also choose ``Do Not Save/Invest.''
The SCF allows for multiple responses, so these categories are not
mutually exclusive. However, we would note that the list of terms in
the question did not specifically include ``investment adviser.''
---------------------------------------------------------------------------

    Panel B of Table 10 below presents the breakdown of advice received
for households who have an IRA. 15% (5.7 million households) relied on
advice services of their broker-dealers, 48% (18.3 million households)
obtained advice from financial planners. Approximately 41% (15.5
million households) sought advice from bankers, accountants, or
lawyers, while the 25% (9.5 million households) used no advice or
sought advice from other sources.

  Table 10--Panel A: Sources of Advice for Households Who Have a Brokerage Account in the U.S. by Income Group
                                                      \544\
----------------------------------------------------------------------------------------------------------------
                                                                                % Taking
                                                     % Taking        % Taking       advice from    % Taking  no
                 Income category                    advice from     advice from      lawyers,        advice or
                                                      brokers        financial      bankers, or     from other
                                                                     planners       accountants       sources
----------------------------------------------------------------------------------------------------------------
Bottom 25%......................................           20.55           53.89           35.64           24.30
25%-50%.........................................           22.98           38.03           43.92           32.36
50%-75%.........................................           20.75           52.00           31.42           23.61
75%-90%.........................................           22.56           48.94           32.25           28.10
Top 10%.........................................           25.29           50.53           38.47           21.06
                                                 ---------------------------------------------------------------
    Average.....................................           23.02           49.02           35.99           24.94
----------------------------------------------------------------------------------------------------------------

      Table 10--Panel B: Sources of Advice for Households Who Have an IRA in the U.S. by Income Group \545\
----------------------------------------------------------------------------------------------------------------
                                                                                % Taking
                                                     % Taking        % Taking       advice from    % Taking  no
                 Income category                    advice from     advice from      bankers,        advice or
                                                      brokers        financial     accountants,     from other
                                                                     planners       or lawyers        sources
----------------------------------------------------------------------------------------------------------------
Bottom 25%......................................           12.14           38.30           43.69           31.85
25%-50%.........................................            9.79           43.82           40.67           32.74
50%-75%.........................................           14.93           45.20           41.23           25.23
75%-90%.........................................           14.68           52.14           41.65           24.26
Top 10%.........................................           21.40           55.40           40.03           18.56
                                                 ---------------------------------------------------------------
    Average.....................................           15.25           48.45           41.17           25.28
----------------------------------------------------------------------------------------------------------------

3. Investor Perceptions About Broker-Dealers and Investment Advisers
---------------------------------------------------------------------------

    \544\ Id.
    \545\ Id.
---------------------------------------------------------------------------

    Although many retail investors rely on broker-dealers and
investment advisers to help them achieve financial goals, evidence
indicates that many retail investors do not understand, or are confused
by, among other items, the different standards of conduct applicable to
broker-dealers and investment advisers, and are also confused and
potentially misled by the titles used by firms and financial
professionals. In the subsections below, we review in greater detail
five aspects of investor perceptions with respect to: (1) How investors
search for financial professionals and firms and; (2) the nature of the
relationship with their financial professional (investment adviser or
broker-dealer) and the meaning of company names and professional
titles; (3) the structure and level of fees in the industry; (4) the
existing conflicts of interest; (5) and the disciplinary history of the
financial professional or firm.
g. How Investors Select Financial Firms or Professionals
    A number of surveys show that retail investors predominantly find
their current financial firm or financial professional from personal
referrals by family, friends, or colleagues.\546\ For instance, the
RAND Study reported that 46% of survey respondents indicated that they
located a financial professional from personal referral, although this
percentage varied depending on the type of service provided (e.g., only
35% of survey participants used personal referrals for brokerage
services). After personal referrals, RAND survey participants ranked
professional referrals (31%), print advertisements (4%), direct
mailings (3%), online advertisements (2%), and television
advertisements (1%), as their source of locating individual
professionals. The RAND Study separately inquired about locating a
financial firm, which yielded substantially different results from the
selection of the financial professional.\547\ Respondents reported
selecting financial firm (of any type) based on: Referral from family
or friends (29%), professional referral (18%), print advertisement
(11%), online advertisements (8%), television advertisements (6%),
direct mailings (2%), with a general ``other'' category (36%).
---------------------------------------------------------------------------

    \546\ See RAND Study, supra at 5; 917 Financial Literacy Study,
supra note 20.
    \547\ The Commission notes that only one-third of the survey
respondents that responded to ``method to locate individual
professionals'' also provided information regarding locating the
financial firm.
---------------------------------------------------------------------------

    The 917 Financial Literacy Study provides similar responses,
although it allowed survey respondents to identify multiple sources
from which they obtained information that facilitated the selection of
the current financial firm or financial professional.\548\ In the 917
Financial Literacy Study,\549\ 51% of survey participants received a
referral from family, friends, or colleagues. Other sources of
information or referrals came from: referral from another financial
professional (23%), online search (14%), attendance at a financial
professional-hosted investment seminar (13%), advertisement (e.g.,
television or newspaper) (11.5%), other (8%), while approximately 4%
did not know or could not remember how they selected their financial
firm or financial professional. Twenty-five percent of survey
respondents indicated that the ``name or reputation of the financial
firm or financial professional'' affected the selection decision.
---------------------------------------------------------------------------

    \548\ See 917 Financial Literacy Study, supra note 20.
    \549\ The data used in the 917 Financial Literacy Study comes
from the Siegel & Gale Investor Research Report (Jul. 26, 2012),
available at https://www.sec.gov/news/studies/2012/917-financial-literacy-study-part3.pdf, at 249-250.
---------------------------------------------------------------------------

h. Nature of the Relationship
    Comment letters as well as several studies provide us with
information about retail investor confusion about the distinctions
among different types firms and financial professionals. Several

commenters in response to Chairman Clayton's recent Request for Comment
highlighted investor confusion about whether financial services
providers are subject to the fiduciary duty.\550\ Particularly, some
commenters tied investor confusion about the standard of care
applicable to financial service providers to the names or titles of
such firms and financial professionals.\551\ Similarly, during the
public comment process as part of the 913 Study, commenters indicated
that retail investors did not understand or found confusing the
distinctions between broker-dealers and investment advisers, for
example, in terms of services provided and applicable standards of
care.\552\ Investor advocate groups submitted comments that reiterated
the view that many market participants also believe that financial
professionals should act in investors' best interests.\553\ 913 Study
commenters also expressed beliefs that certain titles used by firms and
financial professionals are confusing to investors.\554\
---------------------------------------------------------------------------

    \550\ See, e.g., CFA 2017 Letter; PIABA 2017 Letter; IAA 2017
Letter; Pefin 2017 Letter.
    \551\ See Chamber 2017 Letter, at 10; Committee for the
Fiduciary Standard 2017 Letter, at 3; Pefin 2017 Letter, at 9.
    \552\ See 913 Study, supra note 3, at section III.A.
    \553\ Id. See also AFL-CIO 2017 Letter; AARP 2017 Letter.
    \554\ See, e.g., Comment letters on 913 Study, available at
https://www.sec.gov/comments/4-606/4-606.shtml. Comment letter of
Bert Oshiro (Aug. 29, 2010) (``Years ago, I was pretty sure who I
was dealing with based on their titles. . . Today it's a totally
different story. All kinds of products such as securities,
insurance, fee based products, bank accounts, loans, health
insurance, auto/homeowners insurance, etc. are sold by people
calling themselves: Financial advisors; financial consultants;
investment advisors; investment consultants; financial planners;
asset managers; financial services advisors; [and] registered
representatives. . . It has come to the point that I really don't
know who I'm dealing with.''); Comment letter of Larry J. Massung
(Aug. 29, 2010) (``I believe there is considerable confusion within
the general public with the fiduciary duty, responsibilities, and
titles of brokers, dealers and investment advisors''); and Comment
letter of Cecylia Escarcega (Aug. 30, 2010) (``Personally, I find
the titles confusing because the broker, dealer or investment
advisor typically does not tell me what their role is and the scope
of their fiduciary duty to me as an investor'').
---------------------------------------------------------------------------

    Further findings of investor confusion about the roles and titles
of financial professionals comes from studies conducted by Siegel &
Gale \555\ in 2004, RAND \556\ in 2008 and CFA in 2010.\557\ The Siegel
& Gale Study found that focus group participants did not understand
that the roles and legal obligations of broker-dealers differed from
investment advisers, and were further confused by different labels or
titles used by advice providers (e.g., financial planner, financial
advisor, financial consultant, broker-dealer, or investment adviser).
More specifically, participants in the Siegel & Gale Study focus groups
believed that brokers executed trades and were focused on ``near-term''
advice, while financial advisors and consultants provided many of the
same services as brokers, but also provided a greater scope of long-
term planning advice (e.g., portfolio allocation). ``Investment
adviser,'' on the other hand, was a term unfamiliar to many
participants, but financial professionals using this label were
perceived to provide similar services to financial advisors and
financial consultants. Financial planners were viewed to provide
services related to insurance and estate planning in addition to
investment advice, and encompassed long-term financial planning
including college, retirement, and other long-term savings and
investment goals. The Siegel & Gale Study focus group participants
assumed that financial advisors/consultants, investment advisers, and
financial planners provided planning services, while brokers, financial
advisors/consultants, and investment advisers provided trade execution
services.\558\ Further, the focus group participants generally did not
understand certain legal terms, such as ``fiduciary.''
---------------------------------------------------------------------------

    \555\ The Commission retained Siegel and Gale in 2004 to conduct
the focus group testing in order to determine how investors
distinguish the roles, legal obligations, and compensation
structures between broker-dealers and investment advisers. See
Siegel & Gale Study, supra note 549.
    \556\ The RAND Study contained two components: (1) An analysis
of business practices at broker-dealers and investment advisers
based on regulatory filings and interviews with stakeholders
(including members of the broker-dealer and investment adviser
industries); and (2) a survey of 654 households or focus group
testing on household investment behavior and preferences, experience
with financial service providers, and understanding of the different
types of providers. See RAND Study, supra note 5.
    \557\ See CFA Survey, supra note 5.
    \558\ The Commission notes that the results of the Siegel & Gale
Study relied on a small sample of focus group testing conducted over
a decade ago. While relevant to our understanding of investor
perception about broker-dealers and investment advisers, the results
of the study may not reliably reflect the current views of the
general population of U.S. retail investors.
---------------------------------------------------------------------------

    Similarly, the RAND Study generally concluded that investors did
not understand the differences between broker-dealers and investment
advisers and that common job titles contributed to investor
confusion.\559\ Further, participants responded similarly that
investment advisers and brokers are required to act in the client's
best interest. Similar to the Siegel and Gale Study, focus group
participants did not understand the term fiduciary, or how the
fiduciary standard differed from suitability. In addition, the RAND
Study noted that the confusion about titles, services, legal
obligations, and compensation persisted even after a fact sheet on
broker-dealers and investment advisers was provided to
participants.\560\
---------------------------------------------------------------------------

    \559\ RAND study participants ``commented that the
interchangeable titles and `we do it all' advertisements [by broker-
dealers] made it difficult to discern broker-dealers from investment
advisers.'' Although the RAND Study indicates that investors are
confused the services provided and the titles used by financial
professionals, more than 70% of participants also answered that they
were ``very satisfied with the service received from the firm,''
that ``they trust the firm acts in their best interest,'' and that
``the firm provides a valuable service.'' These numbers increased to
80% when the length of time spent at a firm was at least 10 years.
The Commission notes that the results of the RAND Study relied on
testing conducted nearly 10 years ago; therefore, the results of the
study may not reliably reflect the current views of the general
population of U.S. retail investors
    \560\ See RAND Study, supra note 5, at 111. The fact sheet
provided to RAND Study participants included information on the
definition of broker and investment adviser, including a description
of common job titles, legal duties and typical compensation.
Participants in the RAND Study focus groups indicated that they were
confused over common job titles of broker-dealers and investment
advisers, thought that because brokers are required to be licensed,
investment advisers were not as qualified as brokers, deemed the
term ``suitable'' too vague, and concluded that it would be
difficult to prove whether or not an investment adviser was not
acting in the client's best interest.
---------------------------------------------------------------------------

    Similar to the Siegel and Gale Study and the RAND Study, the CFA
Survey concluded that investors do not understand differences between
broker-dealers and investment advisers, or the standards of conduct
that apply to advice or recommendations made by these firms. For
example, approximately 34% of investors surveyed believed that
``offering advice'' was a primary service of broker-dealers.\561\ With
respect to conduct-related questions, 91% of those surveyed believed
that broker-dealers and investment advisers should follow the same
investor protection rules if providing the same sort of advisory
services, while 85% believed that the person providing advice should
put the retail customer's interest ahead of theirs and should disclose
fees and commissions earned or any conflicts of interest that could
affect the advice provided. More than two-thirds believed that a
fiduciary duty is owed to customers by broker-dealers, suggesting a
degree of investor confusion.\562\
---------------------------------------------------------------------------

    \561\ See CFA Study, supra note 5.
    \562\ In some circumstances, broker-dealers may owe a fiduciary
duty to their customers. For example, there is a body of case law
holding that broker-dealers that exercise discretion or control over
customer assets, or have a relationship of trust and confidence with
their customers, owe customers a fiduciary duty, or the scope of
obligations that attach by virtue of that duty. See, e.g., U.S. v.
Skelly, 442 F.3d 94, 98 (2d Cir. 2006) (fiduciary duty found ``most
commonly'' where ``a broker has discretionary authority over the
customer's account''); United States v. Szur, 289 F.3d 200, 211 (2d
Cir. 2002) (``Although it is true that there `is no general
fiduciary duty inherent in an ordinary broker/customer
relationship,' a relationship of trust and confidence does exist
between a broker and a customer with respect to those matters that
have been entrusted to the broker.'') (citations omitted); Leib v.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 461 F. Supp. 951, 953-
954 (E.D. Mich. 1978), aff'd, 647 F.2d 165 (6th Cir. 1981)
(recognizing that a broker who has de facto control over non-
discretionary account generally owes customer duties of a fiduciary
nature; looking to customer's sophistication, and the degree of
trust and confidence in the relationship, among other things, to
determine duties owed); Arleen W. Hughes, Exchange Act Release No.
4048 (Feb. 18, 1948) (Commission Opinion), aff'd sub nom. Hughes v.
SEC, 174 F.2d 969 (D.C. Cir. 1949) (noting that fiduciary
requirements generally are not imposed upon broker-dealers who
render investment advice as an incident to their brokerage unless
they have placed themselves in a position of trust and confidence,
and finding that Hughes was in a relationship of trust and
confidence with her clients).

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

i. Fees
    The 917 Financial Literacy Study showed that, prior to engaging an
investment adviser,\563\ approximately 76.4% of survey participants
indicated that disclosure of the fees and compensation of investment
advisers was an absolutely essential element to any disclosure.\564\
With respect to how investors prefer information about fees and
compensation to advisers, 23% of respondents preferred a table format
with examples, 21% preferred a bulleted format with examples, 20%
preferred a bulleted format, and 12% preferred a table format.\565\
---------------------------------------------------------------------------

    \563\ The 917 Financial Literacy Study, supra note 20, uses the
term financial intermediary when discussing the importance of
certain disclosures of firms or financial professionals.
    \564\ See 917 Financial Literacy Study, supra note 20, at 67.
    \565\ 23% of respondents also preferred the ``status quo''--
``the way it was presented'' in the example.
---------------------------------------------------------------------------

    In 2015, FINRA conducted an ``Investor Survey'' which included
questions about investors' understanding of fees charged for investment
services.\566\ Approximately 70% of survey participants reported that
they thought investment firm (generically referred to as ``adviser'' in
the study) compensation and account fees to be very clear, with less
than 4% stating that they thought compensation to be unclear. Between
54.7% and 57.6% of respondents indicated that they considered account
fees to be ``reasonable,'' while between 0% and 2.3% of respondents
indicated that account fees were not reasonable. Of investors that have
commission-based accounts, approximately 28% believed that commissions
did not affect advice given. Those percentages decline to 15% or less
when asked to consider whether selling incentives and third party
compensation had not affected the advice provided by investment firms.
---------------------------------------------------------------------------

    \566\ See FINRA Report on Conflicts of Interest, (Oct. 2013), at
6, available at http://www.finra.org/sites/default/files/Industry/p359971.pdf (``Investor Survey'').

                    Table 11--Investor Perception of Compensation to Financial Professionals
                                [As obtained from the 2015 FINRA Investor Survey]
----------------------------------------------------------------------------------------------------------------
                                                                                Advised:
                                                                   Unadvised (%)  Advised: asset    commission-
                                                                                fee (%)      based fee (%)
----------------------------------------------------------------------------------------------------------------
Advisor Compensation Clear?
    Very........................................................              NA            70.9            68.5
    Somewhat....................................................              NA            27.6            28.0
    Not.........................................................              NA             1.5             3.5
Account Fees Clear?
    Very........................................................            68.0            70.3            74.7
    Somewhat....................................................            29.0            29.7            23.5
    Not.........................................................             2.9               0             1.8
Account Fees Reasonable?
    Agree.......................................................            55.6            54.7            57.6
    Somewhat Agree..............................................            42.1            45.3            40.2
    Disagree....................................................             2.3               0             2.2
Commissions Affect Advice?
    Great Deal..................................................            58.3            21.8            29.7
    Somewhat....................................................            32.8            57.8            42.5
    Not At All..................................................             8.9            20.4            27.7
Selling Incentives Affect Advice?
    Great Deal..................................................            66.1            41.9            44.3
    Somewhat....................................................            28.4            43.7            40.6
    Not At All..................................................             5.5            14.4            15.1
Third Party Compensation Affects Advice?
    Great Deal..................................................            68.6            32.8            41.4
    Somewhat....................................................            26.3            56.4            45.3
    Not At All..................................................             5.1            10.8            13.4
----------------------------------------------------------------------------------------------------------------

    Academic evidence also indicates that retail investors exhibit
limited understanding of the fees and commissions of financial
products. Several academic studies show that even when disclosures are
provided to investors, investors experience difficulty in accounting
for and understanding how fees affect their financial choices.\567\
---------------------------------------------------------------------------

    \567\ Experimental evidence from the U.S. mutual fund market is
provided by, James J. Choi, David Laibson, & Brigitte C. Madrian,
Why Does the Law of One Price Fail? An Experiment on Index Mutual
Funds Review of Financial Studies 23(4): 1405-1432 (Nov. 14, 2009)
(``Choi Laibson Article'') (finding that experimental subjects fail
to minimize fees among four different actual S&P 500 index funds and
80-90% of the subjects in the study presented with simplified fee
disclosures still failed to select the lowest-priced options among
products with similar characteristics). Field-based evidence from
the payday loans market is provided by, Marianne Bertrand & Adair
Morse, Information Disclosure, Cognitive Biases, and Payday
Borrowing, The Journal of Finance 46(6): 1865-1893 (Nov. 14, 2011).
For a comprehensive survey of the literature see George Loewenstein,
Cass R. Sunstein, & Russell Golman, Disclosure: Psychology Changes
Everything, Annual Review of Economics 6: 391-419 (Aug. 2014)
(``Loewenstein Sunstein Article'').
---------------------------------------------------------------------------

j. Conflicts of Interest
    Studies have found that investors consider conflicts of interest to
be an important factor in the market for financial advice. For example,
in the 917 Financial Literacy Study,\568\ approximately 52.1% of survey
participants indicated that an essential component of any disclosure
would be their financial intermediary's conflicts of interest, while
30.7% considered information about conflicts of interest to be
important, but not essential. Investors also were asked to rate their
level of concern about potential conflicts of interest that their
adviser might have. Approximately 36% of the investors expressed
concerns that their adviser might recommend investments in products for
which its affiliate receives a fee or other compensation, while 57%
were concerned that their adviser would recommend investments in
products for which it gets paid by other sources. In addition to
conflicts directly related to compensation practices of financial
professionals, some investors were concerned about conflicts related to
the trading activity of these firms. For example, more than 26% of
participants were concerned that an adviser might buy and sell from its
account at the same time it is recommending securities to investors;
and more than 55% of investors were also concerned about their
adviser's engaging in principal trading.
---------------------------------------------------------------------------

    \568\ Section 917 of the Dodd-Frank Act further required the
Commission to conduct a study to identify the level of financial
literacy among retail investors as well as methods and efforts to
increase the financial literacy of investors. See 917 Financial
Literacy Study, supra note 20.
---------------------------------------------------------------------------

    Approximately 70% of the participants in the 917 Financial Literacy
Study indicated that they would read disclosures on conflicts of
interest if made available, with 48% requesting additional information
from their adviser, 41% increasing the monitoring of their adviser, and
33% proposing to limit their exposure of specific conflicts. The
majority of investors (70%) also wanted to see specific examples of
conflicts and how those related to the investment advice provided.
Academic research also suggests that information about conflicts of
interest could improve individual decisions.\569\
---------------------------------------------------------------------------

    \569\ See S. Sah & G. Loewenstein, Nothing to declare: Mandatory
and voluntary disclosure leads advisors to avoid conflicts of
interest, Psychological Science 25, 575-584 (2014).
---------------------------------------------------------------------------

k. Disciplinary History
    Survey evidence indicates that knowledge of a firm's and financial
professional's disciplinary history is among the most important items
for retail investors deciding whether to receive financial services
from a particular firm, according to one study.\570\ Despite this, most
investors do not actively seek disciplinary information for their
advisers and broker-dealers.\571\ A recent FINRA survey, however, found
that only 15% of survey respondents checked their financial
professional's background, although the Commission notes that the study
encompasses a wide group of advisers, such as debt counselors and tax
professionals.\572\ Another FINRA survey found that only 7% of survey
respondents use FINRA's BrokerCheck and approximately 14% of survey
respondents are aware of the Investment Adviser Public Disclosure
(IAPD) website.\573\
---------------------------------------------------------------------------

    \570\ See 917 Financial Literacy Study, supra note 20, at nn.
311 and 498 and accompanying text (Approximately 67.5% of the online
survey respondents considered information about an adviser's
disciplinary history to be absolutely essential, and about 20.0%
deemed it important, but not essential, and ``When asked how
important certain factors would be to them if they were to search
for comparative information on investment advisers, the majority of
online survey respondents identified the fees charged and the
adviser's disciplinary history as the most important factors.'').
    \571\ For example, the FINRA 2015 Investor Survey finds that
only 24% of investors are aware of Investor.gov; only 16% are aware
of BrokerCheck; only 14% are aware of the IAPD website, and only 7%
have used BrokerCheck. Investor Survey, supra note 566.
    \572\ 2009 National Survey Initial Report, supra note 275.
    \573\ See Investor Survey, supra note 566.
---------------------------------------------------------------------------

B. Form CRS Relationship Summary

1. Broad Economic Considerations
    We are proposing to require broker-dealers, investment advisers,
and firms that are dually registered to deliver a relationship summary
to retail investors.\574\ The economic tradeoffs involved in
disclosures made by financial firms and financial professionals are
complex and affected by a wide range of factors, which we consider in
more detail below. In this section, we discuss the characteristics of
disclosures that may effectively convey information that is useful to
retail investors when they are searching for a financial firm and to
facilitate matching between retail investors' expectations and the
choice of financial firm or financial professional.
---------------------------------------------------------------------------

    \574\ See supra Section II.
---------------------------------------------------------------------------

    Disclosure requirements provide benefits to participants in
financial markets because disclosing parties may lack private
incentives to voluntarily disclose or standardize relevant
information.\575\ Disclosure can benefit not only investors but also
the disclosing parties,\576\ as well as provide indirect benefits to
financial markets.\577\
---------------------------------------------------------------------------

    \575\ See, e.g., Confirmation Requirements and Point of Sale
Disclosure Requirements for Transactions in Certain Mutual Funds and
Other Securities, and Other Confirmation Requirement Amendments, and
Amendments to the Registration Form for Mutual Funds, Exchange Act
Release No. 8358 (Jan. 29, 2004) [69 FR 6437 (Feb. 10, 2004)] (``The
Commission believes that permitting investors to more readily obtain
information about distribution-related costs that have the potential
to reduce their investment returns and to give investors a better
understanding of some of the distribution-related arrangements that
create conflicts of interest for brokers, dealers, municipal
securities dealers, and their associated natural persons. The
disclosure of information about these costs and arrangements can
help investors make better informed investment decisions.''). See
also P. Healy & K. Palepu, Information asymmetry, corporate
disclosure, and the capital markets: A review of the empirical
corporate disclosure literature, Journal of Accounting and Economics
31, 405-440 (2001).
    \576\ See, Michael Jensen & William Meckling, Theory of the
firm: Managerial behavior, agency costs, and ownership structure,
Journal of Financial Economics 3, 305-360 (1976); Patel, S. and G.
Dallas, Transparency and disclosure: Overview of methodology and
study results, United States, Standard & Poor's, New York (2002); A.
Ferrell, Mandatory disclosure and stock returns: Evidence from the
over-the-counter market, The Journal of Legal Studies 36, 213-253
(2007). Regarding the effect of corporate disclosures on improved
corporate governance, see, e.g. B. Hermalin & M. Weisbach,
Transparency and corporate governance, NBER Working paper No. W12875
(2007); R. Lambert, C. Leuz, & R. Verrecchia, Accounting
information, disclosure, and the cost of capital, Journal of
Accounting Research 45, 385-420 (2007).
    \577\ See L. Holder-Webb, J. Cohen, L. Nath, & D. Wood, A survey
of governance disclosures among U.S. firms, Journal of Business
Ethics 83, 543-563 (2008); Z. Rezaee, Causes, consequences, and
deterrence of financial statement fraud, Critical Perspectives on
Accounting 16, 277-298 (2005).

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

    Although the majority of the information proposed for Form CRS may
be publicly available in a number of existing regulatory forms and
platforms, including, for example, Form ADV (and IAPD) or BrokerCheck,
or may be included in disclosures developed to meet disclosure
requirements under DOL regulations or exemptions, such as the BIC
Exemption, the Commission preliminary believes that all retail
investors would benefit from short summary disclosure that focuses on
certain aspects of a firm and its services to retail investors which
could be supplemented by additional disclosure. Like other public-
facing disclosures, the objective of Form CRS would be to provide
relevant and reliable information to investors. The relationship
summary would apply to a broad array of relationships, spanning
different firms as well as both retirement and non-retirement
accounts.\578\ By requiring both investment advisers and broker-dealers
to deliver to existing and prospective retail investors and file a
publicly available concise relationship summary that discusses, in one
place, both types of services and their differences, the proposed rules
for Form CRS would also help retail investors to compare certain
different types of accounts and firms.
---------------------------------------------------------------------------

    \578\ For comparison, the disclosure conditions under applicable
DOL regulations and exemptions apply only to financial firms and
financial professionals servicing IRAs and ERISA-covered retirement
plans and participants in such plans.
---------------------------------------------------------------------------

    Given that most of the information provided by Form CRS would
already have been made available by investment advisers through other
regulatory disclosures, and by some broker-dealers through contracts or
other voluntary disclosures, the focus of this economic analysis is on
the effects of the format and structure of the proposed Form CRS
disclosures. Studies have found that the format and structure of
disclosure may improve (or decrease) investor understanding of the
disclosures being made.\579\
---------------------------------------------------------------------------

    \579\ 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).
---------------------------------------------------------------------------

    Before elaborating on the characteristics of an effective
disclosure regime, we note that some studies undertaken outside the
market for financial services find that sometimes certain disclosures
may result in unintended consequences. In general, the structure of the
disclosure may affect the choices that investors make. Every disclosed
item not only presents a piece of new information to retail investors
but also provides a frame within which all other items are
evaluated.\580\ 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 events than by firms
with clean record. The effect of the disciplinary history information
would be moderated if this information is provided at the end of the
relationship summary.
---------------------------------------------------------------------------

    \580\ See Tversky, A., Kahneman, D., 1981. The framing of
decisions and the psychology of choice. Science 211, 453-458
(``Tversky Kahneman Article'').
---------------------------------------------------------------------------

    Existing research has also found that conflict of interest
disclosures can increase the likelihood that the disclosing party would
act on the conflict of interest.\581\ 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, or it can be caused by ``strategic biasing,'' aimed at
compensating the disclosing party for the anticipated loss of profit
due to the disclosure.\582\ Experimental evidence also suggests that
disclosure could turn some clients or customers into ``reluctant
altruists.'' \583\ 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.\584\ The above literature indicates
that conflicts of interest disclosures could undermine the intended
benefits of the disclosures for investors if investors become reluctant
altruists or feel an obligation to succumb to the panhandler effect.
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.\585\
---------------------------------------------------------------------------

    \581\ See, Daylian Cain, George Loewenstein & Don Moore, The
Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts of
Interest, Journal of Legal Studies 34: 1-25 (Jan. 2005) (``Cain 2005
Article''); Daylian Cain, George Loewenstein & Don Moore, When
Sunlight Fails to Disinfect: Understanding the Perverse Effects of
Disclosing Conflicts of Interest, Journal of Consumer Research 37:
1-45 (Aug. 27, 2010); Bryan Church & Xi Kuang, Conflicts of
Disclosure and (Costly) Sanctions: Experimental Evidence, Journal of
Legal Studies 38 2: 505-532 (Jun. 2009); Christopher Tarver
Robertson, Biased Advice, Emory Law Journal 60: 653-703 (Feb. 17,
2011). These papers study conflicts of interest in general,
experimental settings, not specialized to the provision of financial
advice.
    \582\ Although disclosures in general may cause negative
unintended consequences, existing rules and regulations for broker-
dealers and investment advisers, as well as proposed Regulation Best
Interest, are likely to moderate the effects of moral licensing or
strategic bias for financial professionals.
    \583\ See J. Dana, D. Cain & R. Dawes, What you don't know won't
hurt me: Costly (but quiet) exit in dictator games, Organizational
Behavior and Human Decision Processes 100:193-201 (2006).
    \584\ Daylian Cain, George Loewenstein & Don Moore, The burden
of disclosure: Increased compliance with distrusted advice, Journal
of Personality and Social Psychology, 104(2): 289-304 (2013)
(``Burden of Disclosure Article'').
    \585\ See id.
---------------------------------------------------------------------------

    Academic research has identified a set of characteristics,
including targeted and simple disclosures, salience, and
standardization, that may increase the effectiveness of a disclosure
regime. Adhering to these characteristics is expected to increase the
benefits of a disclosure document to consumers. These characteristics,
discussed below, frame our analysis of the economic impacts of the
proposed rule.\586\
---------------------------------------------------------------------------

    \586\ See Loewenstein Sunstein Article, supra note 567. The
paper provides a comprehensive survey of the literature relevant to
disclosure regulation.
---------------------------------------------------------------------------

    First, existing research demonstrates that individuals exhibit
limited ability to absorb and process information.\587\ These cognitive
limitations suggest that more targeted and simpler disclosures may be
more effective in communicating information to investors than more
complex disclosures. As discussed more thoroughly below, 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 narratives.\588\ Moreover, empirical evidence suggests
that simplification benefits consumers of disclosed information.\589\
These results appear to support requirements of simple disclosures,
which provide benefits to consumers of that information.
---------------------------------------------------------------------------

    \587\ See Nisbett RE & Ross L. Human Inference: Strategies and
Shortcomings of Social Judgment (1980). Englewood Cliffs, NJ:
Prentice Hall. David Hirshleifer & Siew Hong Teoh, Limited
attention, information disclosure, and financial reporting, Journal
of Accounting and Economics 36, 337-386 (Dec. 2003).
    \588\ See, e.g., S.B. Bonsall IV & B.P. Miller, The Impact of
Narrative Disclosure Readability on Bond Ratings and the Cost of
Capital, The Review of Accounting Studies 2 (2017) and A. Lawrence,
Individual Investors and Financial Disclosure, Journal of Accounting
& Economics 56, 130-47 (2013).
    \589\ See supra notes 35, 46--48 and accompanying text. See also
S. Agarwal, S. Chomsisengphet, N. Mahoney & J. Stroebel, Regulating
consumer financial products: evidence from credit cards, NBER
Working Paper 19484 (Jun. 2014) (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).
---------------------------------------------------------------------------

    A second characteristic of an effective disclosure is salience, or
the tendency to `stand out' or contrast with other information on a
page. Salience detection is a key feature of the 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.\590\ Within the
context of disclosures, more salient information, such as information
presented in bold text, would be more effective in attracting attention
than less salient information, such as information presented in a
footnote. There is also empirical evidence that visualization improves
individual perception of information.\591\ 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).\592\
---------------------------------------------------------------------------

    \590\ Daniel Kahneman, Thinking, Fast and Slow, New York:
Farrar, Strauss, Giroux (2013). Susan Fiske & Shelley E. Taylor,
Social cognition: From Brains to Culture, SAGE Publications Ltd; 3rd
ed. (2017).
    \591\ J. Hattie, Visible learning. A synthesis of over 800 meta-
analyses relating to achievement, Oxon: Routledge (2008)
(``Hattie'').
    \592\ I. Benbasat & A.S. Dexter, An Investigation of the
Effectiveness of Color and Graphical Presentation under Varying Time
Constraints, MIS Quarterly 10, 59-83 (Mar. 1986) (``Benbasat &
Dexter'').
---------------------------------------------------------------------------

    A third characteristic of effective disclosure is standardization.
People are generally able to make more coherent and rational decisions
when they have comparative information that allows them to assess
relevant trade-offs.\593\ Standardization could be particularly
important for the disclosure of certain quantitative aspects of
financial services, such as the level and structure of fees.
---------------------------------------------------------------------------

    \593\ See, e.g., JR Kling, S. Mullainathan, E. Shafir, LC
Vermeulen & MV Wrobel, Comparison friction: experimental evidence
from Medicare drug plans, Quarterly Journal of Economics 127, 199-
235 (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, GF Loewenstein, S. Blount & MH Bazerman,
Preference reversals between joint and separate evaluations of
options: a review and theoretical analysis, Psychological Bulletin
125, 576-590 (Oct. 2006).
---------------------------------------------------------------------------

    Finally, personalization may further enhance the effectiveness of
disclosure.\594\ This approach might involve, for example, adjusting
the presentation to take account of the receiver's interests,
expectations, or format preferences or to tailor the information based
on what the receiver already knows in order not to repeat existing
knowledge. Personalization is usually achieved at the expense of
standardization, however, and can be costly to create.
---------------------------------------------------------------------------

    \594\ See Loewenstein Sunstein Article, supra note 567.
---------------------------------------------------------------------------

    Current reporting and disclosure requirements for broker-dealers
and registered investment advisers including Form BD and Form ADV may
provide detailed information to investors. However, because these
existing reports and disclosures (which serve the purposes for which
they were created) are made in multiple, sometimes lengthy forms, and
made available at different websites or delivery methods, it can be
difficult for investors to grasp the most important features of the
financial services and products they receive. 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. The
relatively low financial literacy of many investors also makes it less
likely that they would be able to effectively compile this information
on their own and use it in their decision making. Furthermore, most
financial firms and professionals could lack the incentives and
resources to disclose the main aspects of their business practices to
their customers in the absence of the proposed requirements.
    In evaluating the broad economic issues related to disclosure, the
Commission preliminarily believes that all retail investors would
benefit from a short summary that focuses on certain aspects of the
firm and its financial professionals and its services. By requiring
both investment advisers and broker-dealers to provide a concise
relationship summary that discusses both types of services and their
differences, the relationship summary would help all retail investors
to understand these aspects of a particular firm, to compare different
types of accounts, and to compare one firm with other firms. The
relationship summary would also highlight, in one place, the services,
some categories of fees, specified conflicts of interest, and whether
the firm or its financial professionals currently have reportable
disciplinary events.
2. Economic Effects of the Relationship Summary
    This section analyzes the anticipated economic effects from the
proposed relationship summary to the directly affected parties: retail
investors, and broker-dealers and investment advisers that offer
brokerage or advisory services to retail investors.\595\
---------------------------------------------------------------------------

    \595\ Economic effects of the proposal on the market for
financial services, including on indirectly-affected parties such as
banks or insurers that are not regulated by the SEC, are considered
in the following section.
---------------------------------------------------------------------------

a. Retail Investors
    As noted above, substantial evidence suggests that retail investors
lack financial literacy and do not understand many basic financial
concepts, such as the implications of investment costs for investment
performance.\596\ This, in turn, supports the notion that a well-
functioning market for financial services may provide benefits to
investors by helping them obtain information and guidance from firms
and financial professionals and thereby make better investment
decisions. At the same time, however, evidence also suggests that
investors do not fully comprehend the nature of the business
relationships and responsibilities in the market which makes them
vulnerable to confusion and being misled by firms and financial
professionals; \597\ it also implies that any improvement of retail
investor understanding of their relationship with

financial professionals could improve investor's investment decisions.
---------------------------------------------------------------------------

    \596\ See 917 Financial Literacy Study, supra note 20.
    \597\ See 913 Study, supra note 3, at section III.A.; Siegel &
Gale Study, supra note 550; RAND Study, supra note 5.
---------------------------------------------------------------------------

    The content of the proposed relationship summary is intended to
alert retail investors to information that would help them to choose a
firm or a financial professional and prompt retail investors to ask
informed questions. It is also intended to facilitate comparisons
across firms that offer the same or substantially similar services.
Specifically, the relationship summary would provide information on the
relationships and services offered by investment advisers and broker-
dealers, the standards of conduct applicable to those services, certain
categories of fees and costs of the services offered, comparisons of
brokerage and investment advisory services (for standalone broker-
dealers and investment advisers),\598\ conflicts of interest, and some
additional information, including the existence of currently reportable
legal or disciplinary events. The Commission believes that the
information in the relationship summary could help alleviate investor
confusion and would promote effective communication between the firm
and its retail investors and assist investors in making an informed
choice when choosing an investment firm and professional and type of
account to help to ensure they receive services that meet their
preferences and expectations. Although the relationship summary applies
only to broker-dealers and registered investment advisers, its impact
could extend beyond the current and prospective clients of these
institutions and impact a larger set of investors through various
channels such as public filings and website posting. Both the content
and the form of the relationship summary are designed to increase the
likelihood that the disclosed information is consumed easily and
effectively by retail investors. We discuss the potential benefits and
costs of the relationship summary and its components in detail below.
---------------------------------------------------------------------------

    \598\ For purposes of the relationship summary, we propose to
define a standalone investment adviser as a registered investment
adviser that offers services to retail investors and (i) is not
dually registered as a broker-dealer or (ii) is dually registered as
a broker-dealer but does not offer services to retail investors as a
broker-dealer. We propose to define a standalone broker-dealer as a
registered broker-dealer that offers services to retail investors
and (i) is not dually registered as an investment adviser or (ii) is
dually registered as an investment adviser but does not offer
services to retail investors as an investment adviser. Proposed
General Instruction 9.(f) to Form CRS.
---------------------------------------------------------------------------

i. Structure of the Relationship Summary
    The structure of the relationship summary is designed to facilitate
retail investors' absorption of the provided information. The proposed
design intentionally restricts the length of the relationship summary,
whether in electronic or paper format, to four pages on 8\1/2\ x 11
inch paper if converted to PDF format, with a specified font size and
margin requirements. Existing research suggests that shorter
disclosures help investors absorb and process information.\599\ Shorter
disclosure would also facilitate a layered approach to disclosure. The
Commission acknowledges that a limit on overall document length (or
equivalent length for electronic disclosure) may entail limiting the
information provided through the relationship summary. However, based
on the studies described above, we preliminarily believe that limiting
the length of the relationship summary appropriately trades off the
benefits of additional detail against the costs of increased complexity
associated with longer disclosures. Similarly, while the required
standardization across the relationship summary limits the ability of
firms to provide customized information to potential retail investors,
we preliminarily believe these constraints are appropriate to
facilitate comparability.
---------------------------------------------------------------------------

    \599\ See supra Section IV.B.1.
---------------------------------------------------------------------------

    In addition, firms would be required to use short sentences, active
voice, and plain language throughout the relationship summary. Firms
would not be permitted to use legal jargon, highly technical business
terms, or multiple negatives. Existing research also shows that
visualization helps individuals absorb information more
efficiently.\600\ Consistent with this research, firms would be
permitted to use graphical presentations, and dual registrants would be
required in certain aspects, to use tables to simplify and highlight
the information. For example, dual registrants will be required to
provide a side-by-side tabular presentation of all relevant information
provided in the relationship summary.
---------------------------------------------------------------------------

    \600\ See commenters' feedback in the Financial Literacy Study,
supra note 20, at iv, xx, 21-22.
---------------------------------------------------------------------------

    Moreover, the disclosure would involve a certain degree of
standardization across firms. In particular, firms would be required to
use the same headings, prescribed wording, and present the information
under the headings in the same order. \601\ Additionally, firms would
be prohibited from adding any items to those prescribed by the
Commission and any information other than what the Instructions require
or permit. As discussed above, standardization facilitates comparisons
of content across disclosures.\602\ We believe that allowing only the
required and permitted information would promote standardization of the
information presented to retail investors, and would allow retail
investors to focus on information that we believe is particularly
helpful in deciding among firms. At the same time, we acknowledge that
standardization of disclosures not only limits personalization that may
be valuable to retail investors but also could result in disclosures
that are less precise. Further, all information in the relationship
summary must be true and not misleading. In particular, the
Instructions permit firms to omit or modify any prescribed statement
that is inapplicable to their business or would be misleading to a
reasonable retail investor. In addition, for certain items, firms will
have some flexibility in how they include the required information.
---------------------------------------------------------------------------

    \601\ See supra note 593.
    \602\ See supra Section IV.B.1.
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ii. Introduction
    The proposed Introduction of the relationship summary would
highlight to retail investors the type of accounts and services the
firm offers to retail investors, and the firm's SEC registration
status. In addition, the introduction would require prescribed wording
stating there are different ways for investors to get help with their
investments, and that they should carefully consider what type of
account and services would be right for them and that there are
suggested questions at the end of the disclosure. An introduction
designed in this manner may benefit retail investors by clarifying that
there are choices available in terms of accounts and services and that
the some services, firms, or financial professionals may be a better
fit than others for the investor. This in turn may trigger a closer
read of the relationship summary and perhaps also additional
information gathering by the investor that could lead to a more
informed choice of financial professional and better fit between the
investor's need and the type of accounts and services they use.
iii. Relationships and Services
    In the second section of the relationship summary, firms would
discuss specific information about the nature, scope, and duration of
its relationships and services, including the types of accounts and
services the firm offers, how often it offers investment advice, and
whether the firm monitors

the account. As noted above, the relationships and services of firms
can differ in nature, scope, and duration. The Commission believes that
a better understanding of the relationships and services could lower
search costs and the risk of mismatch for retail investors, by
facilitating cross-firm comparisons, and make it easier for them to
find a firm and a financial professional that most closely meet their
expectations, depending on how important different types of fee
structures, services, standards of conduct or other information points
are to them.
iv. Obligations to the Retail Investor--Standard of Conduct
    The third section of the relationship summary briefly describes in
plain language the firm's legal standard of conduct. As noted above,
studies show that many retail investors are confused about the standard
of conduct that applies to firms and financial professionals,\603\ and
the Commission believes that providing retail investors with a brief
description of legal obligations of firms and professionals could help
alleviate this confusion. Furthermore, to the extent this section makes
the issue of standard of conduct more salient to the investors, it may
encourage additional information gathering by the investors about the
standard of conduct, which could further increase investors'
understanding.
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    \603\ See, e.g., Siegel & Gale Study, supra note 5 and RAND
Study, supra note 5. See also CFA Survey, supra note 5.
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    Investor understanding of the obligations of their firms and
financial professionals with respect to each type of account could help
investors align their expectations with the expected conduct of their
firm or financial professional. For example, depending on their
preferences, some investors might find an advisory account more
appropriate. Other investors could prefer the services and standards of
conduct associated with a brokerage account. Thus, to the extent the
proposed disclosure of obligations in the relationship summary increase
investors understanding in this area, it may improve the match between
investors' preferences and expectations and the type of accounts and
services they select while preserving investor choice.
v. Summary of Fees and Costs
    The Commission is also proposing that firms include an overview of
specified types of fees and expenses that retail investors will pay in
connection with their brokerage and investment advisory accounts.\604\
This section would include a description of the principal type of fees
that the firm will charge retail investors as compensation for the
firm's advisory or brokerage services, including whether the firm's
fees vary and are negotiable, and factors that would help a reasonable
retail investor understand the fees that he or she is likely to pay. As
such, the improved disclosure of the categories of fees, including wrap
fees, could help improve retail investor's decision to engage a firm
and a financial professional.
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    \604\ See supra Section II.B.4.
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vi. Comparisons
    The Commission is also proposing to require standalone investment
advisers and standalone broker-dealers to provide comparisons to the
other type of firm. Standalone broker-dealers would include information
about the following: (i) The primary types of fees that investment
advisers charge; (ii) services generally provided by investment
advisers, (iii) advisers' standard of conduct; and (iv) certain
incentives advisers have based on the investment adviser's asset-based
fee structure. For investment advisers, this section would include
parallel categories of information regarding broker-dealers.
    The choice between a brokerage account and an advisory account in
part may determine the types of fees and costs and standard of conduct
associated with the account. Retail investors who are provided with
more information would be more likely to match their choice of the type
of account with their expectations; if retail investors do not
understand the differences between of broker-dealers and investment
advisers, they are less likely to be able to match their expectations
for financial services providers with their choices. Thus, the
Commission preliminary believes that having a clear explanation of
differences in the fees, scope of services, standard of conduct, and
incentives that are generally relevant to advisory and brokerage
accounts may help retail investors who are considering one such type of
relationship to compare how their preferences and expectations might be
better met with the other type of relationship.
vii. Conflicts of Interest
    The Commission is also proposing that firms summarize their
conflicts of interest related to certain financial incentives.
Specifically, firms would be required to disclose conflicts relating
to: (i) Financial incentives to offer to, or recommend that the retail
investor invest in, certain investments because (a) such products are
issued, sponsored, or managed by the firm or its affiliates, (b) third
parties compensate the firm when it recommends or sells the
investments, or (c) both; (ii) financial incentives to offer to, or to
recommend that the retail investor invest in, certain investments
because the manager or sponsor of those investments or another third
party (such as an intermediary) shares revenue it earns on those
products with the firm; and (iii) the firm buying investments from and
selling investments to a retail investor from the firm's account (i.e.,
principal trading). Including these disclosures prominently, in one
place, at or before the start of a retail investor's relationship with
a firm or financial professional could facilitate retail investors'
understanding of the incentives that may be present throughout the
course of the relationship. Such disclosure of financial incentives
could assist investors in matching their expectations when choosing a
firm or professional and type of account to help to ensure they receive
services that meet their expectations. In addition, to the extent that
the specified conflicts of interest disclosures could draw retail
investors' attention to conflicts, monitoring of firms and financial
professionals by retail investors could be improved.
    The first category of conflicts noted above makes the promotion of
own and third party products more salient for retail investors. The
possibility that an investor may request an explanation of a
transaction regarding a recommended investment or strategy, and
associated costs thereof, could serve as an additional disciplinary
device for firms and financial professionals and align better their
interests with the interests of retail investors. Similarly, the
disclosures in the relationship summary about revenue sharing
arrangements may induce retail investors to more carefully pay
attention to investments with such arrangements and request further
information. Principal trading could also make retail investors
vulnerable to transactions that transfer value from their accounts to
the accounts of the firm, and so the disclosure of principal trading
information could draw retail investors' attention to possible
conflicts that could emerge from principal transactions and generate
increased scrutiny of such transactions by investors.
    While the Commission preliminarily believes that disclosures of
conflicts of

interest in the relationship summary could match retail investor
expectations with the choices of firms and financial professionals,
some studies have found that disclosures of conflicts of interest, in
some cases, could undermine the motivations of people to behave
ethically or to take moral license in their actions.\605\ In the
context of providing investment advice, the perception that an investor
has been warned (via the disclosure) of a firm's and financial
professional's potential bias may make them believe that they are less
obligated to provide unbiased advice.\606\ Further, other studies have
suggested that disclosures of conflicts of interest could also make
firms and financial professionals appear more trustworthy and as a
result reduce the incentives for retail investors to examine additional
information more carefully.\607\ The Commission preliminarily believes,
however, that the securities laws and existing rules and regulations