Form CRS Relationship Summary; Amendments to Form ADV — SEC — US

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200, 240, 249, 275, and 279

[Release Nos. 34-86032; IA-5247; File No. S7-08-18] RIN 3235-AL27

Form CRS Relationship Summary; Amendments to Form ADV

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

SUMMARY: The Securities and Exchange Commission (the “Commission” or the “SEC”) is adopting new rules and forms as well as amendments to its rules and forms, under both the Investment Advisers Act of 1940 (“Advisers Act”) and the Securities Exchange Act of 1934 (“Exchange Act”) to require registered investment advisers and registered broker-dealers (together, “firms”) to provide a brief relationship summary to retail investors. The relationship summary is intended to inform retail investors about: The types of client and customer relationships and services the firm offers; the fees, costs, conflicts of interest, and required standard of conduct associated with those relationships and services; whether the firm and its financial professionals currently have reportable legal or disciplinary history; and how to obtain additional information about the firm. The relationship summary will also reference Investor.gov/CRS, a page on the Commission's investor education website, Investor.gov, which offers educational information to investors about investment advisers, broker-dealers, and individual financial professionals and other materials. Retail investors will receive a relationship summary at the beginning of a relationship with a firm, communications of updated information following a material change to the relationship summary, and an updated relationship summary upon certain events. The relationship summary is subject to Commission filing and recordkeeping requirements.

DATES:

Effective dates: The rules and form are effective September 10, 2019.

Compliance dates: The applicable compliance dates are discussed in section II.D.

FOR FURTHER INFORMATION CONTACT: : Gena Lai, James McGinnis, Elizabeth Miller, Sirimal R. Mukerjee, Olawalé Oriola, Alexis Palascak, Benjamin Tecmire, Roberta Ufford, Jennifer Porter (Branch Chief), Investment Adviser Regulation Office at (202) 551-6787 or sec.gov">IArules@sec.gov; Benjamin Kalish and Parisa Haghshenas (Branch Chief), Chief Counsel's Office at (202) 551-6825 or sec.gov">IMOCC@sec.gov, Division of Investment Management; Alicia Goldin, Emily Westerberg Russell, Lourdes Gonzalez (Assistant Chief Counsel), Office of Chief Counsel, Division of Trading and Markets, at (202) 551-5550 or sec.gov">tradingandmarkets@sec.gov, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is adopting new rule 17 CFR 275.204-5 [rule 204-5] under the Investment Advisers Act of 1940 [15 U.S.C. 80b] [1] and is adopting amendments to Form ADV to add a new Part 3: Form CRS [17 CFR 279.1] under the Advisers Act. The Commission is also adopting amendments to rules 17 CFR 275.203-1 [rule 203-1], 17 CFR 275.204-1 [rule 204-1], and 17 CFR 275.204-2 [rule 204-2] under the Advisers Act. The Commission is adopting new rule 17 CFR 240.17a-14 [rule 17a-14] [2] under the Securities

Exchange Act of 1934 and new Form CRS [17 CFR 249.641] under the Exchange Act. The Commission is also adopting amendments to rules 17 CFR 240.17a-3 [rule 17a-3] and 17 CFR 240.17a-4 [rule 17a-4] under the Exchange Act. The Commission is also adopting amendments to rule 17 CFR 200.800 [rule 800].

[1] 15 U.S.C. 80b. Unless otherwise noted, when we refer to the Advisers Act, or any paragraph of the Advisers Act, we are referring to 15 U.S.C. 80b, at which the Advisers Act is codified, and when we refer to rules under the Advisers Act, or any paragraph of these rules, we are referring to Title 17, part 275 of the Code of Federal Regulations [17 CFR 275], in which these rules are published.

[2] 15 U.S.C. 78a. Unless otherwise noted, when we refer to the Exchange Act, or any paragraph of the Exchange Act, we are referring to 15 U.S.C. 78a, at which the Exchange Act is codified, and when we refer to rules under the Exchange Act, or any paragraph of these rules, we are referring to Title 17, part 240 of the Code of Federal Regulations [17 CFR 240], in which these rules are published.

Table of Contents

I. Introduction II. Form CRS Relationship Summary

A. Presentation and Format

Limited Prescribed Wording
Standard Question-and-Answer Format and Other Presentation Instructions
Electronic and Graphical Formats, and Layered Disclosure
Conversation Starters
Presentation of Relationship Summaries by Dual Registrants and Affiliated Firms

B. Items

Introduction
Relationships and Services
Summary of Fees, Costs, Conflicts, and Standard of Conduct
Disciplinary History
Additional Information
Proposed Items Omitted in Final Instructions

C. Filing, Delivery, and Updating Requirements

Definition of Retail Investor
Filing Requirements
Delivery Requirements
Updating Requirements

D. Transition Provisions

E. Recordkeeping Amendments III. Disclosures About a Firm's Regulatory Status and a Financial Professional's Association IV. Economic Analysis

A. Introduction

B. Baseline

Providers of Financial Services
Investor Perceptions about the Marketplace for Financial Services and Disclosures
Investor Responses to Disclosures About Financial Professionals and Firms

C. Broad Economic Considerations

D. Economic Effects of the Relationship Summary

Retail Investors
Broker-Dealers and Investment Advisers (Registrants)
Impact on Efficiency, Competition, and Capital Formation
Alternatives to the Relationship Summary V. Paperwork Reduction Act Analysis

A. Form ADV

Respondents: Investment Advisers and Exempt Reporting Advisers
Changes in Average Burden Estimates and New Burden Estimates
Total Revised Burden Estimates for Form ADV

B. Rule 204-2 Under the Advisers Act

Changes in Burden Estimates and New Burden Estimates
Revised Annual Burden Estimates

C. Rule 204-5 Under the Advisers Act

Respondents: Investment Advisers
Initial and Annual Burdens

D. Form CRS and Rule 17a-14 Under the Exchange Act

Respondents: Broker-Dealers
Initial and Annual Burdens

E. Recordkeeping Obligations Under Exchange Act Rule 17a-3

F. Record Retention Obligations Under Exchange Act Rule 17a-4

Changes in Burden Estimates and New Burden Estimates
Revised Annual Burden Estimates VI. Final Regulatory Flexibility Analysis

A. Need for and Objectives of the Amendments

B. Significant Issues Raised by Public Comments

C. Small Entities Subject to the Rule and Rule Amendments

Investment Advisers
Broker-Dealers

D. Projected Reporting, Recordkeeping, and Other Compliance Requirements

Initial Preparation and Filing of the Relationship Summary
Delivery and Updating Requirements Related to the Relationship Summary
Recordkeeping Requirements Related to the Relationship Summary

E. Agency Action To Minimize Effect on Small Entities VII. Statutory Authority Text of the Rule and Form

I. Introduction

Individual investors rely on the services of broker-dealers and investment advisers when making and implementing investment decisions. Research continues to show that retail investors are confused about the services, fees, conflicts of interest, and the required standard of conduct for particular firms, and the differences between broker-dealers and investment advisers.[3] We are adopting a new set of disclosure requirements designed to reduce retail investor confusion in the marketplace for brokerage and investment advisory services and to assist retail investors with the process of deciding whether to engage, or to continue to engage, a particular firm [4] or financial professional and whether to establish, or to continue to maintain, an investment advisory or brokerage relationship.[5] Firms will deliver to retail investors a customer or client relationship summary (“relationship summary” or “Form CRS”) that provides succinct information about the relationships and services the firm offers to retail investors, fees and costs that retail investors will pay, specified conflicts of interest and standards of conduct, and disciplinary history, among other things.[6] The relationship summary will also link to Investor.gov/CRS on the Commission's investor education website, Investor.gov, which offers educational information to investors about investment advisers, broker-dealers, and individual financial professionals and other materials.

[3] Brian Scholl, et al., SEC Office of the Investor Advocate and RAND Corporation, The Retail Market for Investment Advice (2018), available at https://www.sec.gov/comments/s7-07-18/s70718-4513005-176009.pdf (“OIAD/RAND”) (finding that participant understanding of types of financial services and financial professionals continues to be low). The SEC's Office of Investor Advocate and the RAND Corporation prepared this research report regarding the retail market of investment advice prior to, and separate from, our rulemaking proposal. This report was included in the comment file at https://www.sec.gov/comments/s7-07-18/s70718-4513005-176009.pdf.

[4] For purposes of this release, the term “firm” includes sole proprietorships and other business organizations that are registered as (i) an investment adviser under section 203 of the Advisers Act; (ii) a broker-dealer under section 15 of the Exchange Act; or (iii) a broker-dealer under section 15 of the Exchange Act and as an investment adviser under section 203 of the Advisers Act.

[5] The requirements adopted here, with modifications as discussed in this release, were proposed in Form CRS Relationship Summary; Amendments to Form ADV; Required Disclosures in Retail Communications and Restrictions on the use of Certain Names or Titles, Investment Advisers Act Release No. 4888, Exchange Act Release No. 83063 (Apr. 18, 2018) [83 FR 23848 (May 23, 2018)] (“Proposing Release”).

[6] For investment advisers registered with the Commission, a new Form ADV Part 3 will describe the requirements for the relationship summary and it will be required by amended rule 203-1. For broker-dealers, Form CRS will be required by new rule 17a-14 under the Exchange Act. When we refer to Form CRS in this release, we are referring to Form CRS for both broker-dealers and investment advisers registered with the Commission. We are also adopting conforming technical and clarifying amendments to the General Instructions of Form ADV.

We proposed a version of a relationship summary on April 18, 2018.[7] The proposed relationship summary would have required information separated into the following sections: (i) Introduction; (ii) the relationships and services the firm offers to retail investors; (iii) the standard of conduct applicable to those services; (iv) the fees and costs that retail investors will pay; (v) comparisons of brokerage and investment advisory services (for standalone broker-dealers and investment advisers); [8] (vi) conflicts of

interest; (vii) where to find additional information, including whether the firm and its financial professionals currently have reportable legal or disciplinary history and who to contact about complaints; and (viii) key questions for retail investors to ask the firm's financial professional. The proposed instructions required firms to use standardized headings in a prescribed order throughout the disclosure and respond to the required items by using a mix of language prescribed in the instructions as well as their own wording in describing their services and offerings. The proposal limited the relationship summary to four pages or an equivalent length if in electronic format and also included three examples of how the relationship summary might look for a standalone broker-dealer, a standalone investment adviser, and a dual registrant.

[7] See Proposing Release, supra footnote 5.

[8] We proposed definitions for “standalone investment adviser” and “standalone broker-dealer”. See Proposed General Instruction 9.(f) to Form CRS. Given the streamlining and other revisions to the Form CRS instructions relative to the proposal, we believe that these proposed definitions are no longer needed and therefore are not adopting them. We use the terms throughout this release, however, for the avoidance of doubt, to indicate broker-dealers and investment advisers that are not dual registrants. We are adopting the proposed definition for “dual registrant” substantially as proposed. We are adding language in the definition of dual registrant in the final instructions to clarify that a dually registered firm is not considered a dual registrant for purposes of Form CRS and the final instructions if the dually registered firm does not provide both investment advisory and brokerage services to retail investors. See General Instruction 11.C to Form CRS; see infra footnotes 201-202 and accompanying text.

To better understand retail investors' views about the disclosures designed for them, the Commission engaged in broad outreach to investors and other market participants. As described further throughout the release, the Commission received substantial feedback on the proposed relationship summary in several forms. We received comment letters in connection with the Proposing Release from a variety of commenters including individual investors, consumer advocacy groups, financial services firms, investment professionals, industry and trade associations, state securities regulators, bar associations, and others.[9] Several of those commenters provided alternative mock-ups to illustrate their suggestions. Additionally, some commenters submitted reports of surveys or studies that they had conducted or engaged third parties to conduct in connection with the proposal. The Commission also received input and recommendations from its Investor Advisory Committee (“IAC”) on the proposed relationship summary to improve its effectiveness.[10]

[9] The comment letters are available in the comment file at https://www.sec.gov/comments/s7-08-18/s70818.htm.

[10] See Investor Advisory Committee, Recommendation of the Investor as Purchaser Subcommittee Regarding Proposed Regulation Best Interest, Form CRS, and Investment Advisers Act Fiduciary Guidance (Nov. 7, 2018), available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/iac110718-investor-as-purchaser-subcommittee-recommendation.pdf. (“IAC Form CRS Recommendation”). The majority of the IAC recommended that the Commission conduct usability testing of the proposed Form CRS disclosures and, if necessary, revise them to ensure that they enable investors to make an informed choice among different types of providers and accounts. In addition, when considering potential Commission rulemaking under section 913 of the Dodd-Frank Act, the IAC also recommended that the Commission adopt a uniform, plain English disclosure document to be provided to customers and potential customers of broker-dealers and investment advisers at the start of the engagement, and periodically thereafter, that covers basic information about the nature of services offered, fees and compensation, conflicts of interest, and disciplinary record. See Investor Advisory Committee, Recommendation of the Investor Advisory Committee: Broker-Dealer Fiduciary Duty (Nov. 22, 2013), available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/fiduciary-duty-recommendation-2013.pdf, as amended in https://www.sec.gov/spotlight/investor-advisory-committee-2012/iac112213-minutes.htm (“IAC Broker-Dealer Fiduciary Duty Recommendations”). We discuss these IAC findings and recommendations in several sections below. Under section 39 of the Exchange Act, the Commission is required to review, assess, and disclose the action, if any, the Commission intends to take with respect to the findings and recommendations of the IAC; however, the Commission is not required to agree or to act upon any such findings or recommendations. See 15 U.S.C. 78pp.

The Commission also solicited comments from individual investors through a number of forums in addition to the traditional requests for comment in the Proposing Release. The Commission used a “feedback form” designed specifically to solicit input from retail investors with a set of questions requesting both structured and narrative responses, and received more than 90 responses from individuals who reviewed and commented on the sample proposed relationship summaries published in the proposal.[11] Seven investor roundtables were held in different locations across the country to solicit further comment from individual investors on the proposed relationship summary, and we received in-person feedback from almost 200 attendees in total.[12]

[11] The feedback forms are available in the comment file at https://www.sec.gov/comments/s7-08-18/s70818.htm (“Feedback Forms”). When we refer to Feedback Form commenters, we include those who completed and submitted a Feedback Form with a relevant response or comment answering at least one of the questions on the form. To simplify discussion of comments received on the Feedback Forms, staff aggregated and summarized these comments in an appendix to this release (see Appendix C, the “Feedback Forms Comment Summary”), and references to individual Feedback Forms in this release use short-form names defined in the Feedback Forms Comment Summary.

[12] The transcripts from the seven investor roundtables, which took place in Atlanta (“Atlanta Roundtable”), Baltimore (“Baltimore Roundtable”), Denver (“Denver Roundtable”), Houston (“Houston Roundtable”), Miami (“Miami Roundtable”), Philadelphia (“Philadelphia Roundtable”), and Washington, DC (“Washington, DC Roundtable”), are available in the comment file at https://www.sec.gov/comments/s7-08-18/s70818.htm#transcripts.

Further, the Commission's Office of the Investor Advocate engaged the RAND Corporation (“RAND”) to conduct investor testing of the proposed relationship summary.[13] RAND conducted a survey of over 1,400 individuals through a nationally representative panel to collect information on the opinions, preferences, attitudes, and level of self-assessed comprehension regarding the sample dual-registrant relationship summary in the proposal. RAND also conducted qualitative interviews of a smaller sample of individuals to ascertain comprehension of the relationship summary and gain feedback from interview participants, which allowed RAND to obtain insights to complement its survey.[14] On November 7, 2018, the Office of the Investor Advocate made the report on that testing available in the comment file to allow the public to consider and comment on the supplemental information.[15] The Commission received several letters in response to the inclusion of the RAND 2018 report in the comment file.[16]

[13] Angela A. Hung, et al., RAND Corporation, Investor Testing of Form CRS Relationship Summary (2018), available at https://www.sec.gov/about/offices/investorad/investor-testing-form-crs-relationship-summary.pdf (“RAND 2018”).

[14] RAND conducted a total of 31 in-person interviews with investors recruited using guidelines designed to achieve a sample that had a broad range of educational background, racial and ethnic characteristics, gender, age and experience working with financial professionals. In describing the design of qualitative interviews, RAND explains that interviews included some general questions about comprehension and helpfulness of the form, which provided a window into participants' understanding of concepts introduced in the relationship summary, but were not designed to serve as a full assessment of participants' objective understanding of the relationship summary. See RAND 2018, supra footnote 13.

[15] See Investor Testing of the Proposed Relationship Summary for Investment Advisers and Broker-Dealers, Securities and Exchange Commission Press Release 2018-257 (Nov. 7, 2018), available at https://www.sec.gov/news/press-release/2018-257.

[16] See, e.g., Comment Letter of Investment Adviser Association (Dec. 4, 2018); Comment Letter of Ron A. Rhodes (Dec. 6, 2018); Comment Letter of AFL-CIO, et al. (Dec. 7, 2018) (“AFL-CIO Letter”); Comment Letter of Betterment (Dec. 7, 2018) (“Betterment Letter II”); Comment Letter of Consumer Federation of America (Dec. 7, 2018) (“CFA Letter II”); Comment Letter of Financial Services Institute (Dec. 7, 2018) (“FSI Letter II”); Comment Letter of Public Investors Arbitration Bar Association (Dec. 7, 2018); Comment Letter of Consumer Reports (Feb. 15, 2019) (“Consumer Reports Letter”).

As noted, some commenters submitted reports of surveys and studies to the comment file, and the design and scope of these varied considerably. Two reports described online surveys of

larger sample sizes—one based on the sample proposed dual-registrant relationship summary [17] and another based on the proposed sample standalone investment adviser relationship summary.[18] A group of commenters submitted two reports of usability testing of the sample proposed dual-registrant relationship summary based on a small number of long-form interviews.[19] One of the two surveys, and the two interview-based studies, included questions designed to ascertain comprehension and tested alternate relationship summary designs with changes to some of the proposed prescribed wording and presentation from the proposal.[20] Finally, two different commenters submitted surveys of retail investors' views about disclosure communications provided by firms and their relationships with financial professionals, which did not test any version of the proposed relationship summary.[21]

[17] Comment Letter of Cetera Financial Group (Nov. 19, 2018) (“Cetera Letter II”) (attaching report of Woelfel Research Inc. (“Woelfel”)). Woelfel, an independent research firm, conducted internet interviews in June 2018 with a sample of 800 adults aged 25 and over, including individuals that had a current relationship with a financial professional and individuals who did not have a current financial professional relationship. Respondents were asked to read the sample dual-registrant relationship summary included in the proposal and answer a series of questions about the document overall and for specific sections. Id.

[18] Comment Letter of Betterment (Aug. 7, 2018) (“Betterment Letter I”) (attaching report of Hotspex, Inc. (“Hotspex”)). Hotspex, an independent research firm, conducted online surveys with 304 current or potential U.S. investors ages 18 and over in June 2018. The survey tested the standalone investment adviser relationship summary prepared following the instructions and sample design of the proposal (the “SEC Form”) and a redesigned version developed by Betterment. Id. Respondents reviewed and answered questions about only one version; 154 responded to questions on the SEC Form. Id.

[19] Kleimann Communication Group, Inc., Final Report on Testing of Proposed Customer Relationship Summary Disclosures, Submitted to AARP, Consumer Federation of America, and Financial Planning Coalition (Sept. 10, 2018), available at https://www.sec.gov/comments/s7-08-18/s70818-4341455-173259.pdf (“Kleimann I”) (results of 15 90-minute qualitative interviews focusing on how consumers interacted with the sample dual-registrant relationship summary as proposed); Kleimann Communication Group, Inc., Report on Development and Testing of Model Client Relationship Summary, Presented to AARP and Certified Financial Planner Board of Standards, Inc. (Dec. 5, 2018), available at https://www.sec.gov/comments/s7-07-18/s70718-4729850-176771.pdf (“Kleimann II”) (results of testing alternate designs of the proposed dual-registrant relationship summary in 18 one-on-one qualitative interviews).

[20] See Betterment Letter I (Hotspex), supra footnote 18 (online survey included ten true-false questions designed to test investor comprehension of the standalone investment adviser relationship summary as proposed relative to a version redesigned by Betterment); Kleimann I, supra footnote 19 (interview questions designed to elicit responses that could demonstrate two levels of cognitive skills); Kleimann II, supra footnote 19.

[21] Comment Letter of Charles Schwab & Co., Inc. (Aug. 6, 2018) (“Schwab Letter I”) (attaching report of Koski Research (“Koski”)). Koski, an independent research firm, conducted an online survey of a national sample of 1000 investors in June 2018 to measure investor understanding of fiduciary duty and best interest standards for investment advice and obtain input from retail investors on method, frequency and content of disclosure communications. Id.; Comment Letter of the Center for Capital Markets Competitiveness of the U.S. Chamber of Commerce (Sept. 5, 2018) (“CCMC Letter”) (attaching report of investor polling (“investor polling”)). CCMC commissioned online polling of 801 investors in May 2018 to examine investors' perspectives on working with financial professionals and gauge priorities regarding new regulatory requirements. Id.

The Commission appreciates the time and effort of these commenters who submitted surveys and studies. The Commission has carefully considered this input. The varying designs and scope of these surveys and studies limits us from drawing definitive conclusions, and we do not view any one of the surveys and studies submitted by commenters, or the RAND 2018 report, as dispositive. However, these surveys and studies submitted by commenters, together with the results of the RAND 2018 report, input from individual investors at our roundtables and on Feedback Forms, and other information offered by other commenters, have informed our policy choices. Throughout this release we discuss observations reported in the RAND 2018 report and in surveys and studies submitted by commenters, and how these observations informed our policy choices as well as the costs and benefits of such choices.

Overall, we believe that feedback we have received from or on behalf of retail investors through the RAND 2018 report, surveys and studies submitted by commenters, and input received at roundtables and on Feedback Forms, demonstrate that the proposed relationship summary would be useful for retail investors and provide information, e.g., about services, fees and costs, and standard of care, that would help investors to make more informed choices when deciding among firms and account options. For example, among the RAND 2018 survey respondents, nearly 90% said that the relationship summary would help them make more informed decisions about types of accounts and services and more than 80% said it would help them compare accounts offered by different firms.[22] RAND 2018 survey participants rated information about the firm's relationship and services and fees and costs to be among the most informative.[23] In other surveys, large majorities of respondents also reacted positively to the relationship summary and the types of information that would be provided.[24] In the RAND 2018 qualitative interviews, it was observed that participants could learn new information from the proposed relationship summary.[25] Similarly, other surveys and studies that assessed investor comprehension observed that investors learned important information by reviewing the relationship summary.[26] Over 70% of individuals submitting Feedback Forms commented that they found the relationship summary to be “useful,” with more than 80% rating the relationship summary sections describing relationships and services, obligations, and fees and costs as “very useful” or “useful.” [27] Investor roundtable participants also reacted

positively and indicated that they found the relationship summary to be useful.[28] A significant percentage of RAND 2018 survey participants agreed that the relationship summary would facilitate conversations between retail investors and their financial professionals, and other surveys and studies reported similar observations.[29] Investor roundtable participants and comments on Feedback Forms also indicated that the relationship summary could facilitate conversations between retail investors and their financial professionals in a beneficial way.[30]

[22] RAND 2018, supra footnote 13.

[23] RAND 2018, supra footnote 13 (a majority of respondents rated both of the relationships and services section and fees and costs sections of the relationship summary as one of two sections that are “most informative”).

[24] Cetera Letter II (Woelfel), supra footnote 17 (more than 80% of respondents rated all of the nine topics covered by the relationship summary as “very” or “somewhat” important; 88% rated fees and costs and the firm's obligations as “very” or “somewhat” important; 61% said the relationship summary had provided the necessary information to help decide whether a brokerage relationship or an advisory relationship is best); Betterment Letter I (Hotspex), supra footnote 18 (finding that around 90% of survey respondents found the proposed relationship summary “very useful” or “somewhat useful”); see also CCMC Letter (investor polling), supra footnote 21 (when the concept of the proposed relationship summary was described, 62% of participants said they would be interested in reading the document and 72% agreed that the new document will “boost transparency and help build stronger relationships between me and my financial professional”).

[25] RAND 2018, supra footnote 13 (concluding from qualitative interviews that “[p]articipants demonstrated evidence of learning new information from the relationship summary” even though interview discussions revealed areas of confusion).

[26] See Kleimann I, supra footnote 19 (although the authors concluded that, overall, participants had difficulty with “sorting out similarities and differences,” the study reports that “nearly all participants easily identified a key difference between Brokerage Accounts and Advisory accounts as the fee structure” and that “most participants understood that both Brokerage Accounts and Advisory Accounts could have financial relationships with other companies that could be potential conflicts with clients' best interests.”); see also Betterment Letter I (Hotspex), supra footnote 18 (83% of respondents correctly identified as “true” a statement that “some investment firms have a conflict of interest because they benefit financially from recommending certain investments” when viewing a version of the standalone adviser relationship summary constructed based on the instructions set forth in the proposal”).

[27] See Feedback Forms Comment Summary, supra footnote 11 (summary of answers to Questions 1 and 2). In addition, more than 70% of commenters on Feedback Forms rated all of the other sections of the proposed relationship summary as “very useful” or “useful.” Id.

[28] See e.g., Houston Roundtable, at 19 (“I think your idea of having . . . a short four page . . . is really helpful”), at 27 (reacting positively to the idea of the relationship summary but asking that updated versions indicate the changed content), and at 35 (agreeing that a disclosure such as the relationship summary is needed); Atlanta Roundtable, at 28 (stating that the proposed sample relationship summary is “a very good form” and “concise” and “easy to read and clear” but needs to be in a form that can be compared with other relationship summaries).

[29] RAND 2018, supra footnote 13 (approximately 76% of participants agreed that they would use the relationship summary as the basis for a conversation with an investment professional; in qualitative interviews, participants said they liked all of the questions and they would ask questions in meeting with a financial service provider); see also Kleimann I, supra footnote 19 (many investors responded that they would use key questions when speaking with their brokers); Betterment Letter I (Hotspex), supra footnote 18 (93% of respondents viewing a version of the proposed standalone relationship summary indicated that they were very or somewhat likely to ask the suggested questions.).

[30] Houston Roundtable (several investors responding that key questions would be helpful conversation starters, one commenter remarking that the Key Questions were “very, very good”); Feedback Forms Comment Summary, supra footnote 11 (summary of responses to Question 7) (over 75% of commenters indicated that the Key Questions are useful). Eleven Feedback Forms included specific comments agreeing that the Key Questions would encourage discussions with financial professionals. See, e.g., Hawkins Feedback Form (“Useful information for the investor to have before engaging in a conversation with an investment firm. Giving some examples of types of questions to ask would be beneficial.”); Asen Feedback Form (“The Relationship Summary (and not the individual BD or RIA account opening forms) is the opportunity to have that important conversation and “educate” the customer.”); Baker Feedback Form (“key questions are very useful as they give words to an unsophisticated client”).

Many other commenters supported the concept of a short disclosure document for retail investors that would serve as part of a layered disclosure regime,[31] and agreed that that the relationship summary would facilitate conversations between retail investors and their financial professionals in a beneficial way.[32] However, some commenters argued that the relationship summary is duplicative of other disclosures and is unnecessary.[33] Others cautioned against over-reliance on disclosure efforts to address all issues related to the different business models and the applicable standard of conduct for broker-dealers and investment advisers.[34]

[31] See, e.g., Comment Letter of AARP (Aug. 7, 2018) (“AARP Letter”); Comment Letter of Consumers Union (Oct. 19, 2018) (“Consumers Union Letter”); Comment Letter Type B; Comment Letter of the North American Securities Administrators Association, Inc. (Aug. 23, 2018) (“NASAA Letter”); Comment Letter of the Securities Industry and Financial Markets Association (Aug. 7, 2018) (“SIFMA Letter”); Comment Letter of Triad Advisors, LLC (Jul. 26, 2018) (“Triad Letter”); Comment Letter of Investacorp, Inc. (Jul. 26, 2018) (“Investacorp Letter”); Comment Letter of Ladenburg Thalmann Financial Services Inc. (Jul. 26, 2018) (“Ladenburg Letter”); Comment Letter of KMS Financial Services, Inc. (Jul. 27, 2018) (“KMS Financial Letter”); Comment Letter of Securities America, Inc. (Jul. 27, 2018) (“Securities America Letter”).

[32] See, e.g., Comment Letter of Commonwealth Financial Network (Aug 7, 2018) (“CFN Letter”) (“Form CRS may also drive conversations that help potential clients and advisors determine which type of relationship (brokerage or advisory) is most appropriate.”); CCMC Letter (concluding from investor polling that “[t]he SEC's proposed Form CRS could be a good way to start a conversation with investors.”); Comment Letter of the Financial Services Institute (Aug. 7, 2018) (“FSI Letter I”) (“The greatest benefit of these disclosures will come in the conversations they facilitate between the client and their financial professionals”); Comment Letter Wells Fargo & Company (Aug. 7, 2018) (“Wells Fargo Letter”) (“the basic premise that a brief overview document designed to provide a high-level understanding of important information to clients (with directions to more detailed information) that can be used to prompt more detailed conversations with financial professionals is a good one”). Triad Letter (“The greatest benefit of the CRS will come in the conversations it facilitates between the client and their Financial Professional. . . .”); Ladenburg Letter (same); KMS Financial Letter (same).

[33] Some commenters stated that Form CRS would be duplicative of the Disclosure Obligation required by Regulation Best Interest. See, e.g., Triad Letter; Investacorp Letter; Ladenburg Letter; KMS Financial Letter; Securities America Letter; FSI Letter I; Comment Letter of Securities Service Network, LLC (Aug. 6, 2018); Comment Letter of Cambridge Investment Research, Inc. (Aug. 7, 2018) (“Cambridge Letter”). Others argued that Form CRS is duplicative of other Form ADV disclosures. See, e.g., Comment Letter of MarketCounsel (Aug. 7, 2018) (“MarketCounsel Letter”); Comment Letter of the Investment Adviser Association (Aug. 6, 2018) (“IAA Letter I”); Comment Letter of Gerald Lopatin (Jul. 30, 2018). One commenter expressed concern that because the relationship summary would be duplicative of Form ADV and Form BD, retail customers would be less likely to read the more comprehensive disclosures. See Comment Letter of Financial Engines (Aug. 6, 2018) (“Financial Engines Letter”).

[34] See Comment Letter of Integrated Financial Planning Solutions (Jul. 20, 2018) (“IFPS Letter”) (“Clients do not have the ability to understand the disclosure material that is still written only by and for lawyers.”); Comment Letter of Sen. Elizabeth Warren (Aug. 7, 2018) (“Warren Letter”) (arguing that “the [Commission] shouldn't rely on disclosure alone to protect consumers”); Consumers Union Letter (“[W]hile we support simple, understandable disclosures, we caution against placing too much reliance on disclosure to protect investors.”); Consumer Reports Letter.

Nearly all commenters (including commenters on Feedback Forms) and investors participating in roundtables, suggested modifications to the proposed relationship summary, as did observations reported in the RAND 2018 report and surveys and studies submitted to the comment file. Suggested changes generally pertained to: Appropriate placement of educational material; length and format; use of prescribed wording; comprehensibility; additional flexibility for firms; and delivery requirements (including electronic delivery). For example, some commenters and observations from the RAND 2018 survey and other surveys and studies indicated that the proposed relationship summary could be difficult to understand, particularly the proposed disclosures on fees, conflicts of interest, and standards of conduct.[35] Many commenters preferred a shorter, one-to-two page document relying more heavily on layered disclosure, such as by using more hyperlinks and other cross-references to more detailed disclosure.[36] Many commenters from both industry and investor groups argued that some of the prescribed wording would not be accurate or applicable in relation to the different services and business models of all firms or could lead to confusing or

misleading disclosures.[37] Various commenters advocated for more flexibility for firms to use their own wording to describe their services more accurately.[38] Many commenters favored the use of a question-and-answer format, suggesting, for example, that focusing a document on investors' questions helps them to feel that the document is relevant to them and encourages them to read it.[39] Some commenters viewed parts of the relationship summary as educational, such as the sections comparing broker-dealers and investment advisers, describing the applicable standard of conduct, and containing key questions investors should ask, and advocated that the Commission should develop and provide educational material separately from firm-specific disclosures, such as in an additional disclosure layer or on the Commission's website.[40] Several individuals submitting Feedback Forms also were supportive of links to additional educational information.[41]

[35] See RAND 2018, supra footnote 13 (among other findings, the percentages of respondents indicating that the fees and costs, conflicts of interest, and standards of conduct sections were either “difficult” or “very difficult” to understand were 35.5%, 33.5%, and 22.9%, respectively); Kleimann I, supra footnote 19 (noting that participants had difficulty “sorting out similarities and differences between Broker-Dealer Services and Investment Adviser Services. Both the formatting and language contributed to the confusion.”); Betterment Letter I (Hotspex), supra footnote 18 (showing that survey participants had difficulty understanding differences in standard of care and did not find the section on conflicts in the standalone adviser relationship summary to be useful); see also Comment Letter of John Wahh (Apr. 23, 2018) (“Wahh Letter”) (relationship summary is “impenetrable”); Comment Letter of David John Marotta (Apr. 26, 2018) (“Marotta Letter”) (disclosures would be too confusing to clients); Comment Letter of John H. Robinson (Aug. 6, 2018) (“Robinson Letter”) (expressing concern that relationship summary is too text-heavy for consumers to read and will be ineffective in resolving investor confusion); Comment Letter of CFA Institute (Aug. 7, 2018) (“CFA Institute Letter I”) (“[A]s proposed, CRS is too wordy and technically written for the average investor to understand.”).

[36] See, e.g., AARP Letter; Comment Letter of Better Markets (Aug. 7, 2018) (“Better Markets Letter”); Comment Letter of the Bank of America (Aug. 7, 2018) (“Bank of America Letter”); Comment Letter of the Committee on Capital Markets Regulation (Jul. 16, 2018) (“CCMR Letter”); Comment Letter of LPL Financial LLC (Aug. 7, 2018) (“LPL Financial Letter”); Schwab Letter I. Cf. RAND 2018, supra footnote 13 (finding at least a plurality of respondents would keep the length of each section “as is”; however, when asked “Is the Relationship Summary too long, too short, or about right?”, 56.9% of respondents answered “too long” and only 41.2% responded “about right”).

[37] See, e.g., Comment Letter of the Vanguard Group, Inc. (Aug. 7, 2018) (“Vanguard Letter”) (explaining instances in which the prescribed wording would be inaccurate or not sufficiently nuanced for some of its services); Comment Letter of the American Council of Life Insurers (Aug. 3, 2018) (“ACLI Letter”) (“[M]any of the statements mandated in the Proposed Rule are inaccurate from the perspective of a life insurer-affiliated broker-dealer); IAA Letter I (expressing concern that the proposed prescribed language describing legal standards of conduct would result in less accurate understanding and greater confusion for investors); FSI Letter I (“[S]ome of the prescribed disclosure language is highly problematic, will add to investor confusion, and would negatively impact [firms'] client relationships.”); AARP Letter (expressing concern that some of the prescribed language is too technical and likely to confuse retail investors); Comment Letter of the Insured Retirement Institute (Aug. 7, 2018) (“IRI Letter”) (expressing concern that the prescribed language would not permit descriptions of services offered outside of brokerage accounts, such as recommendations of variable annuities). One commenter asserted that prescribed wording requiring firms to compare themselves adversely with their competitors could raise First Amendment concerns. See Comment Letter of the Consumer Federation of America (Aug. 7, 2018) (“CFA Letter I”) (arguing that certain language requiring firms to compare their own services unfavorably to those of their competitors may raise First Amendment concerns, and that Proposed Item 5, Comparisons to be provided by standalone investment advisers and standalone broker-dealers, should be eliminated entirely); see also infra footnotes 77-80 and accompanying text. Although not explicitly raising First Amendment concerns, another commenter also opposed requiring firms to describe services of other types of financial professionals. See IAA Letter I (“In our view, it is not appropriate to require firms to include statements about business models other than their own.”). But see Comment Letter of AFL-CIO, Consumer Federation of America, et. al. (Apr. 26, 2019) (“AFL-CIO, CFA Letter”) (arguing that allowing firms more flexibility in their disclosure will result in a failure to clearly convey important information, and such information would not be comparable from firm to firm).

[38] See, e.g., ACLI Letter (“Firms should have the flexibility in the Form CRS to accurately describe their business model and what their clients can expect from the relationship”); NASAA Letter (“[F]irms should have some level of flexibility in crafting their own Form CRS so that it is tailored for the different types of customers they service.”); Letter from Members of Congress (Aug. 8, 2019) (“The SEC should develop a disclosure form that ensures firms have the flexibility to provide information that the average investor will understand.”); IAA Letter I (advocating that firms be given flexibility to draft their own descriptions of their principal services and conflicts of interest); FSI Letter I (suggesting that the prescribed wording regarding the extent and frequency of monitoring be removed or customized using the firm's own wording); IRI Letter (firms need more latitude to describe their relationships and services and fees and costs, given their variability; one-size-fits-all disclosures are insufficient); Comment Letter of T. Rowe Price (Aug. 10, 2018) (“T. Rowe Letter”) (firms should have the flexibility to tailor their disclosures to make it clearer and more readable without potentially confusing investors); Vanguard Letter (suggesting that the Commission clarify that all of the prescribed disclosures may be modified to accurately describe the nature of firms' services and conflicts of interest given their business models); Comment Letter of CUNA Mutual Group (Aug. 7, 2018).

[39] See, e.g., CFA Letter I. Many of the mock-ups submitted by commenters used a question-and-answer format. See Comment Letter of Fidelity Brokerage Services LLC (Aug. 7, 2018) (“Fidelity Letter”); IAA Letter I; LPL Financial Letter; Comment Letter of Primerica (Aug. 7, 2018) (“Primerica Letter”); Schwab Letter I; SIFMA Letter; Wells Fargo Letter. For the purposes of this release, we view the substance and design of all mock-ups that commenters provided within their comment letters as comments on our proposed form, and the mock-ups have informed our approach to the relationship summary, as discussed below throughout.

[40] See, e.g., Comment Letter of the American Securities Association (Aug. 7, 2018) (“ASA Letter”); Primerica Letter; ACLI Letter; IAA Letter I; Comment Letter of Pickard Djinis and Pisarri LLP (Aug. 14, 2018) (“Pickard Djinis and Pisarri Letter”); Comment Letter of L.A. Schnase (Jul. 30, 2018) (“Schnase Letter”); CFA Letter I; LPL Financial Letter.

[41] See, e.g., Daunheimer Feedback Form (“I would like to see a list of applicable websites for discerning disciplinary websites or anything else that would additionally educate a consumer.”); Asen Feedback Form (“Might want to consider hyperlinking key words for ease of definition lookup.”); Baker Feedback Form (responding to a question on the Additional Information section, commented “Helpful also were the website links, i.e., sec.gov, investor.gov, BrokerCheck.Finra.org.”); Smith2 Feedback Form (“would like to see a link included a site or sites that contain general investment information. Types of investments, risks, time horizons . . .”).

Although some commenters argued that the relationship summary is duplicative of other disclosures and is unnecessary,[42] we believe that the relationship summary has a distinct purpose and will provide a separate and important benefit relative to other disclosures. The relationship summary is designed to help retail investors select or determine whether to remain with a firm or financial professional by providing better transparency and summarizing in one place selected information about a particular broker-dealer or investment adviser. The format of the relationship summary also allows for comparability among the two different types of firms in a way that is distinct from other required disclosures. Both broker-dealers and investment advisers must provide disclosures on the same topics under standardized headings in a prescribed order to retail investors, which should benefit retail investors by allowing them to more easily compare services by comparing different firms' relationship summaries.[43] We do not believe that existing disclosures provide this level of transparency and comparability across investment advisers, broker-dealers, and dual registrants. The relationship summary also encourages retail investors to ask questions and highlights additional sources of information. All of these features should make it easier for investors to get the facts they need when deciding among investment firms or financial professionals and the accounts and services available to them. As noted above, the relationship summary will complement additional rules and guidance that the Commission is adopting concurrently to enhance protections for retail investors and is not designed to address all investor protection issues related to different business models and legal obligations of broker-dealers and investment advisers.[44]

[42] See supra footnote 33.

[43] Several individuals submitting Feedback Forms said that more firm-specific information that could be easily compared would be helpful. See, e.g., Lee1 Feedback Form (“The information should let me compare firms. . . . Make it short, more useful (so I can compare services and firms).”); Anonymous13 Feedback Form (“Firm specific info would be nice on this document.”); Bhupalam Feedback Form (“I would like to see additional information regarding specific firm rather than a general description.”).

[44] See supra footnote 34.

Further to this purpose, in response to the comment letters and other feedback, we modified the instructions to reorganize and streamline the relationship summary, to enable more accurate descriptions tailored to what firms offer, and to help improve investor understanding of the disclosures provided. The instructions we are adopting are consistent with and designed to fulfill the original goals of the proposal, including the creation of relationship summaries that will highlight certain information in one place for retail investors in order to help them select or decide whether to remain with a firm or financial professional, encourage retail investors to engage in meaningful and individualized conversations with their financial professionals, and empower them to easily find additional information. Although certain prescribed generalized

comparisons between brokerage and investment advisory services have been removed from the final instructions, we believe the revised instructions will result in more meaningful comparisons among firms.

The key changes of the relationship summary and instructions we are adopting include the following: [45]

[45] If any of the provisions of these rules, or the application thereof to any person or circumstance, is held to be invalid, such invalidity shall not affect other provisions or application of such provisions to other persons or circumstances that can be given effect without the invalid provision or application.

Standardized Question-and-Answer Format and Less Prescribed Wording. Instead of declarative headings as proposed, the final instructions for the relationship summary will require a question-and-answer format, with standardized questions serving as the headings in a prescribed order to promote consistency and comparability among different relationship summaries. The headings will be structured and machine-readable, to facilitate data aggregation and comparison. Under the standardized headings, firms will generally use their own wording to address the required topics. Thus, the final instructions contain less prescribed language, which creates more flexibility in providing accurate information to investors. Investment advisers and broker-dealers will be limited to two pages and dual registrants will be limited to four pages (or an equivalent length if in electronic format).[46]

[46] For clarification purposes, one page is equivalent to a single-side of text on a sheet of paper, rather than two sides of the same paper.

Use of Graphics, Hyperlinks, and Electronic Formats. To help retail investors easily digest the information, the instructions will specifically encourage the use of charts, graphs, tables, and other graphics or text features in order to explain or compare different aspects of the firm's offerings. If the chart, graph, table, or other graphical feature is self-explanatory and responsive to the disclosure item, additional narrative language that may be duplicative is not required. For electronic relationship summaries, the instructions encourage online tools that populate information in comparison boxes based on investor selections. The instructions permit, and in some instances require, a firm to cross-reference additional information (e.g., concerning services, fees, and conflicts), and will require embedded hyperlinks in electronic versions to further facilitate layered disclosures. Firms must use text features to make the required cross-references more noticeable and prominent in relation to other discussion text.

Introduction With Link to Commission Information. The relationship summary will include a more streamlined introductory paragraph that will provide a link to Investor.gov/CRS, a page on the Commission's investor education website, Investor.gov, which offers educational information about investment advisers, broker-dealers, and individual financial professionals and other materials. In order to highlight the importance of these materials, the introduction also will note that brokerage and advisory services and fees differ and that it is important for the retail investor to understand the differences.

Combined Fees, Costs, Conflicts of Interest, and Standard of Conduct Section. We are integrating the proposed fees and costs section with the sections discussing the conflicts of interest and standards of conduct. We are also expanding the discussion of fees and making several other changes to help make the disclosures clearer for retail investors. The relationship summary will cover the same broad topics as proposed, including a summary of fees and costs, a description of ways the firm makes money, certain conflicts of interest, and standards of conduct. In addition, firms will include disclosure about financial professionals' compensation.

Separate Disciplinary History Section. Firms will be required to indicate under a separate heading whether or not they or any of their financial professionals have reportable disciplinary history and where investors can conduct further research on these events, instead of including this information under the Additional Information section as proposed.

Conversation Starters. The proposed Key Questions to Ask have generally been integrated into the relationship summary sections either as question-and-answer headings or as additional “conversation starters” to provide clearer context for the questions. Retail investors can use these questions to engage in dialogue with their financial professionals about their individual circumstances. The discussion topics raised by certain other proposed key questions have been incorporated into the relationship summary through otherwise-required disclosure.

Elimination of Proposed Comparisons Section. We are eliminating the proposed requirement that broker-dealers and investment advisers include a separate section using prescribed wording that in a generalized way described how the services of investment advisers and broker-dealers, respectively, differ from the firm's services. We encourage, but do not require, dual registrants to prepare a single relationship summary that discusses both brokerage and investment advisory services. Whether dual registrants prepare a single or two separate relationship summaries to describe their brokerage and investment advisory services, they must present information on both services with equal prominence and in a manner that clearly distinguishes and facilitates comparison between the two. The material provided on Investor.gov offers educational information about investment advisers, broker-dealers, and individual financial professionals and other materials.

Delivery. As proposed, investment advisers must deliver a relationship summary to each new or prospective client who is a retail investor before or at the time of entering into an investment advisory contract with the retail investor. In a change from the proposal, broker-dealers must deliver the relationship summary to each new or prospective customer who is a retail investor before or at the earliest of: (i) A recommendation of an account type, a securities transaction, or an investment strategy involving securities; (ii) placing an order for the retail investor; or (iii) the opening of a brokerage account for the retail investor. We also are revising the instructions to provide greater clarity on the use of electronic delivery, while generally maintaining the guidelines that were proposed.

We designed the final disclosure requirements in light of comments, input from individual investors through roundtables and on Feedback Forms, and observations reported in the RAND 2018 report and other surveys and studies, that suggest retail investors benefit from receiving certain information about a firm before the beginning of a relationship with that firm, but they prefer condensed disclosure so that they may focus on information that they perceive as salient to their needs and circumstances, and prefer having access to other “layers” of additional information rather than receiving a significant amount of information at once. Together, all of the required disclosures will assist a retail investor to make an informed choice regarding whether a brokerage or investment advisory relationship, as well as whether a particular broker-dealer or investment adviser, best suits his or her particular needs and

circumstances. The relationship summary will complement additional rules and guidance that the Commission is adopting concurrently to enhance protections for retail investors.[47]

[47] See Regulation Best Interest, Exchange Act Release No. 86031 (June 5, 2019) (adopting rule 15l-1 under the Exchange Act (“Regulation Best Interest”)) (“Regulation Best Interest Release”). Along with adopting Regulation Best Interest, the Commission is clarifying standards of conduct for investment advisers. See Commission Interpretation Regarding Standard of Conduct for Investment Advisers, Advisers Act Release No. 5248 (June 5, 2019) (“Fiduciary Release”). The Commission is also providing guidance about when a broker-dealer's advisory services are solely incidental to the conduct of the business of a broker or dealer. See Commission Interpretation Regarding the Solely Incidental Prong of the Broker-Dealer Exclusion to the Definition of Investment Adviser, Advisers Act Release No. 5249 (June 5, 2019) (“Solely Incidental Release”).

Some commenters responding to the RAND 2018 report noted that the RAND 2018 survey and qualitative interviews did not objectively test investor comprehension, and they pointed to observations from RAND 2018 interviews that suggested that some interview participants failed to understand differences in the legal standards that apply to brokerage and advisory accounts and did not understand the meaning of the word “fiduciary” for example.[48] They argued that we should conduct more usability testing before adopting Form CRS and Regulation Best Interest.[49]

[48] See CFA Letter II (noting that the testing conducted for the RAND 2018 Report is limited and does not provide more detailed information, such as transcripts of the in-depth interviews, to present fully the level of investor understanding); Comment Letter of CFA Institute (May 16, 2019) (“CFA Institute Letter II”) (“The RAND Report is clear that its survey was not designed to measure objective comprehension . . . Nor did it provide respondents with alternatives that could have allowed them to express preferences for certain formats or language.”). See also AFL-CIO Letter; Consumer Reports Letter; Comment Letter of PIABA (Dec. 7, 2018).

[49] See, e.g., AFL-CIO Letter (“If the Commission chooses to maintain different standards for brokers and advisers, it must clearly delineate what the differences are . . . This would require rethinking the Form CRS and re-testing to ensure that it achieves these goals . . .”); CFA Letter II (“make the [RAND 2018] report the start, not the end, of an iterative process of testing and revision needed to develop disclosure that works . . .”); AFL-CIO, CFA Letter (stating “. . . unless the Commission retests the revised disclosure, it won't have any way to know whether the revised version solves the problems that earlier testing has identified.”); Consumer Reports Letter (“SEC must test and retest Form CRS disclosures . . . and continue to publish the results of its testing before the form is made final”); CFA Institute Letter II. Others commented on the results of the RAND 2018 report but did not suggest delaying adoption of Form CRS. See, e.g., Comment Letter of Charles Schwab & Co. Inc. (Dec. 7, 2018) (“Schwab Letter II”) (“The Commission should acknowledge and act on consensus findings to improve the Form CRS”); Betterment Letter II (noting that the RAND 2018 report “demonstrates that Form CRS serves a valuable function”). See also FSI Letter II (encouraging the Commission to “continue investor testing of Form CRS after the final rule is in place”).

We disagree. The amount of information available from the various investor surveys and investor testing described in this release, including those submitted by commenters, as well as the comment letters and other input submitted to the Commission for this rulemaking, is extensive. We considered all of this information thoroughly, leveraging our decades of experience with investor disclosures, when evaluating changes to the relationship summary from the proposal. The perceived usefulness of the relationship summary, as shown by observations in the RAND 2018 report, surveys and studies submitted by commenters, and input from individual investors at our roundtables and in Feedback Forms, demonstrates that, even as proposed, the relationship summary would benefit investors by providing information that would help investors make more informed choices when deciding among firms and account options.[50] Large majorities of participants in the RAND 2018 survey and in other surveys supported the specific topics, such as services, fees, conflicts and standards of conduct, that we require firms to address in the relationship summary.[51] Even though the RAND 2018 qualitative interviews and another interview-based study observed that interview participants could have some gaps in understanding, these studies still observed that interview participants could learn new important information from the relationship summary as proposed.[52]

[50] See supra footnotes 22 to 30 and accompanying text. We note that the Department of Labor did not describe or reference usability testing in adopting its now vacated rule broadening the definition of fiduciary investment advice under the Employee Retirement Income Security Act of 1974 as amended (“ERISA”) and the related Best Interest Contract Exemption (“BIC Exemption”). The BIC Exemption required certain disclosures to be provided to a retirement investor and included on a financial institution's public website. See DOL, Best Interest Contract Exemption, 81 FR 21002, 21045-52 (Apr. 8, 2016).

[51] See supra footnotes 23 to 24 and accompanying text; see also Schwab Letter (Koski), supra footnote 21 (reporting that retail investors say it is most important for firms to communicate about “costs I will pay for investment advice,” a “description of advice services,” the “obligations the firm and its representatives owe me” and any “conflicts of interest related to the advice I receive”); CCMC Letter (investor polling), supra footnote 21 (reporting as issues that “matter most” to investors, “explaining fees and costs,” explaining conflicts of interest” and “explaining own compensation”).

[52] See RAND 2018, supra footnote 13 (describing that participants in qualitative interviews had difficulty reconciling the information provided in the obligations section and conflicts of interest section and other areas of confusion, but concluding that “[p]articipants demonstrated evidence of learning new information from the relationship summary”); Kleimann I, supra footnote 19 (although study author concluded that, overall, participants had difficulty with “sorting out similarities and differences,” the study reports that “nearly all participants easily identified a key difference between Brokerage Accounts and Advisory accounts as the fee structure;” “[p]articipants expected to pay for transactions in a Brokerage Account or the quarterly fee for an Advisory Account;” “most participants understood that both Brokerage Accounts and Advisory Accounts could have financial relationships with other companies that could be potential conflicts with clients' best interests” and “[nearly all participants saw the Key Questions as essential . . . straightforward and raised important questions that they themselves might not have thought to ask.”); see also Betterment Letter I (Hotspex) supra footnote 18 (83% of respondents correctly identified as “true” a statement that “some investment firms have a conflict of interest because they benefit financially from recommending certain investments” when viewing a version of the standalone adviser relationship summary constructed based on the instructions set forth in the proposal).

In addition, as noted above and discussed in further detail below, we are making a number of modifications designed to improve the relationship summary relative to the proposal, which are informed by these and other observations reported by RAND 2018 and other surveys and studies, as well as by investor feedback at roundtables and in Feedback Forms and the other comment letters we have received. For example, we are substantially revising our approach to disclosing standard of conduct and conflicts of interest to make this information clearer to retail investors, including (among other changes) eliminating the word “fiduciary” and requiring firms—whether broker-dealers, investment advisers, or dual registrants—to use the term “best interest” to describe their applicable standard of conduct.[53] Further, as compared to the proposal, modifications adopted in the final relationship summary instructions require less prescribed wording, and instead, firms will generally use their own wording to address required topics, which creates flexibility in providing accurate information to investors. We believe that this modification substantially limits the practicability and benefit of additional usability testing because there is no single version of the relationship summary (or a limited set of form versions) that may be used to gauge investor comprehension given firms' flexibility to tailor their relationship summary.[54]

Therefore, we believe that any anticipated benefit from continued rounds of investor usability testing does not justify the cost to investors of delaying a rulemaking designed to increase investor protection.

[53] See infra, Section II.B.3.

[54] In this regard, the RAND 2018 report and surveys and studies submitted by commenters generally were based on sample versions of the relationship summary that we included in the proposal. Alternate designs tested by commenters generally used the all of the same topics (e.g., a description of service and the relationship, fees and costs, standard of care, conflicts, additional information and key questions) as the proposed sample versions, with changes using different versions of prescribed wording and formatting designed to be more appealing to readers. See Kleimann II, supra footnote 19 (describing alternative Form CRS design assumptions) and Betterment Letter I (Hotspex) supra footnote 18 (describing approach to optimizing the Form CRS). Given modifications that we are adopting to the Form CRS instructions that provide firms more flexibility to use their own wording to describe service offerings, fees and costs and their conflicts of interest and more flexibility in formatting as compared to the proposal, we are not preparing sample or illustrative versions of the relationship summary that could be used to repeat such surveys and testing, and we do not believe that we would be able to develop sample versions that would be representative given the diversity among firms in their service and product offerings.

Accordingly, we believe that the totality of input received through comments (including Feedback Forms), outreach at roundtables and through the OIAD/RAND and RAND 2018 reports, as well as surveys and studies submitted by commenters, fully supports our consideration and adoption of the relationship summary, with modifications informed by this input as discussed more fully below. However, to help ensure that the relationship summary fulfills its intended purpose, we have directed our staff to review a sample of relationship summaries that are filed with the Commission beginning after June 30, 2020, when firms first file their relationship summaries, and to provide the Commission with the results of this review. The Commission and its staff are also reviewing educational materials provided on Investor.gov and intend to develop additional content in order to continue to improve the information available to investors about working with investment advisers, broker-dealers, individual financial professionals, and investing.

In the Proposing Release, we proposed certain disclosures to be included in all print or electronic retail investor communications by broker-dealers, investment advisers, and their financial professionals (the “Affirmative Disclosures”). We have determined not to adopt the Affirmative Disclosures, as we discuss further below. In our view, the combination of the disclosure requirements in Form CRS and Regulation Best Interest should adequately address the objectives of the proposed Affirmative Disclosures.

II. Form CRS Relationship Summary

A. Presentation and Format

The relationship summary is designed to be a short and accessible disclosure for retail investors that helps them to compare information about firms' brokerage and/or investment advisory offerings and promotes effective communication between firms and their retail investors.[55] The proposed instructions included requirements on length, formatting, and content. The proposal also provided three examples of what a relationship summary might look like for a standalone broker-dealer, standalone investment adviser, and dual registrant. In providing feedback on the proposed sample relationship summaries, commenters on Feedback Forms and participants in the RAND 2018 survey and other surveys and studies provided by commenters indicated that the proposed relationship summary could be too dense and difficult to read.[56] They suggested using simpler terms and more white space, among other changes.[57] Commenters also encouraged the use of design principles that would result in a more visually appealing and accessible disclosure.[58] In addition, the IAC recommended, through a majority vote, uniform, simple, and clear summary disclosures to retail investors.[59] We have incorporated many of these suggestions into the instructions.

[55] Form CRS defines “relationship summary” as “[a] disclosure prepared in accordance with these Instructions that you must provide to retail investors” and also references Advisers Act rule 204-5 and Exchange Act rule 17a-14. Firms that do not have any retail investors to whom they must deliver a relationship summary are not required to prepare or file one. See General Instructions to Form CRS, Advisers Act rule 204-5, Exchange Act rule 17a-14(a).

[56] See Feedback Forms Comment Summary, supra footnote 11 (summary of responses to Questions 1 and 4) (33 commenters (35%) answered “Somewhat” or “No” in either of Question 3(a) (Do you find the format of the Relationship Summary easy to follow?) or Question 3(c) (Is the Relationship Summary easy to read?); comments responding to Question 4 (“Are there topics in the relationship summary that are too technical or that could be improved?”); 41 Feedback Forms (44%) indicated in response to Question 4 or another question that the relationship summary was too technical or suggested one or more topics that could be improved); see also RAND 2018, supra footnote 13 (on average, 24% of respondents described any given section as difficult or very difficult, more than 30% described the fees and costs section as difficult or very difficult; but qualitative interview discussions revealed that there were areas of confusion for participants, including differences between account types or financial professionals); Betterment Letter I (Hotspex) supra footnote 18 (only 22% of respondents reviewing a version of the standalone adviser relationship summary said information was easy to understand; only 18% said the format was appealing); Kleimann I, supra footnote 19 (finding that participants were confused). Cf. Cetera Letter II (Woelfel), supra footnote 17 (more than 75% of respondents strongly or somewhat agreed that individual topics covered by the relationship summary were described clearly). See also comments discussed supra footnote 35.

[57] Comment Letter of Front Street Consulting (Jun. 8, 2018) (stating that disclosure must be readable and understandable using plain language); Kleimann II, supra footnote 19 (describing design and content principles for a redesigned relationship summary, noting that “[h]eading and white space allow readers to have an overview of the content, see the overall structure of the content, and choose which parts most interest them . . .”); IAA Letter I (recommending flexibility for innovative use of design techniques including “using more white space, and using visuals like icons and images”); Fidelity Letter (discussing designed relationship summary using “key design elements that are informed by our experienced employees whose focus is on graphic design and applying design thinking techniques to customer facing products”). Schwab Letter I (Koski), supra footnote 21 (reporting that the “majority of retail investors surveyed want communications that are relevant to them (91%), short and to the point (85%), and visually appealing (79%)”); Schwab Letter II (stating that combined results of RAND 2018 and its own survey indicate that the Form CRS should be shorter, organized around questions, focus on “fees/costs” and “services/relationships” and contain “hyperlinks”); Betterment Letter I (Hotspex), supra footnote 18 (providing suggestions for streamlining and focusing the content requirements and improving the visual layout and format of the relationship summary to improve its effectiveness).

[58] See, e.g., Betterment Letter II (“The form should better implement design principles that have been shown to facilitate visual appeal and comprehension.”); Schwab Letter I (citing to a presentation given by Kleimann Communication Group, Inc., at an IAC meeting on June 14, 2018); IAA Letter I (arguing that more visually dynamic and engaging design would make the relationship summary more effective and likely to be read).

[59] See IAC Form CRS Recommendation, supra footnote 10 (reiterating a recommendation from the IAC Broker-Dealer Fiduciary Duty Recommendations in 2013 to “adopt a uniform, plain English disclosure document to be provided to customers and potential customers of broker-dealers and investment advisers that covers basic information about the nature of services offered, fees and compensation, conflicts of interest, and disciplinary record” and recommending that the Commission work with a design expert and test the relationship summary for effectiveness).

We are changing the instructions to require a question-and-answer format, give additional support for electronic formats, provide guidance that firms should include white space, and implement other design features to make the relationship summary easier to read.[60] We are requiring firms to use standardized headings in a prescribed order to preserve comparability, while permitting greater flexibility in other aspects of the relationship summary's wording and design to enhance the relationship summary's accuracy, usability, and effectiveness.[61] The final instructions will require limited prescribed wording compared to the

proposal and will permit firms to use their own wording to describe most topics. We also are not requiring firms to discuss the sub-topics required within each section in a prescribed order, as proposed.[62] Dual registrants [63] and affiliated brokerage and investment advisory firms also will have flexibility to decide whether to prepare separate or combined relationship summaries. These changes are intended to enhance the relationship summary's clarity, usability, and design, and to promote effective communication and understanding between retail investors and their firms and financial professionals. We describe these changes in more detail below.

[60] General Instruction 2.A. to Form CRS. (“You should include white space and implement other design features to make the relationship summary easy to read.”).

[61] See, e.g., Items 2.B. and 3.C.(ii) of Form CRS.

[62] See Proposed General Instruction 1.(b) to Form CRS (“Unless otherwise noted, you must also present the required information within each item in the order listed.”).

[63] Form CRS defines “dual registrant” as “A firm that is dually registered as a broker or dealer registered under section 15 of the Exchange Act and an investment adviser registered under section 203 of the Advisers Act and offers services to retail investors as both a broker-dealer and an investment adviser.” General Instruction 11.C. to Form CRS. This definition varies from the one proposed in that it includes only those investment advisers registered with the SEC, rather than with the States. For the avoidance of doubt, it also includes the statutory registration provisions for broker-dealers and investment advisers.

We are also adopting some parts of the instructions that address presentation and formatting as proposed. The instructions state that the relationship summary should be concise and direct, and firms must use plain English and take into consideration retail investors' level of financial experience, as proposed.[64] Firms also are not permitted to use multiple negatives, or legal jargon or highly technical business terms unless firms clearly explain them, as proposed. In a change from the proposal, the instructions will not permit use of legal jargon or technical terms without explaining them in plain English, even if the firm believes that reasonable retail investors will understand those terms.[65] Several commenters suggested that the relationship summary avoid the use of jargon (e.g., terms like “asset-based fee” and “load” in the fees section),[66] and several roundtable participants and participants in the RAND 2018 interviews and another study said that they did not understand certain technical terms.[67] Roundtable participants and commenters on Feedback Forms asked that the relationship summary include definitions or a glossary.[68] In addition, the IAC recommended that a document such as the relationship summary use plain English and a concise format.[69] As a result, we are instructing firms to avoid using legal jargon and highly technical terms in the relationship summary unless they are able to explain the terms in the space of the relationship summary. We believe this simpler approach obviates the need for firms to justify what they believe a reasonable retail investor would or would not understand. Firms would have the flexibility to use their own wording, including legal or highly technical terms as long as they explain them, or may prefer to use simpler terms, given the space limitations of the relationship summary. Additionally, we have added a cover page for Form CRS under the Exchange Act (17 CFR 249.640) only, displaying a currently valid OMB control number and including certain statements relating to federal information law and requirements, and the SEC's collection of information.[70]

[64] See General Instruction 2.A. to Form CRS (providing that firms should (i) use short sentences and paragraphs; (ii) use definite, concrete, everyday words; (iii) use active voice; (iv) avoid legal jargon or highly technical business terms unless firms clearly explain them; and (v) avoid multiple negatives. Firms must write their responses to each item as if speaking to the retail investor, using “you,” “us,” “our firm,” etc.). Delivery of the relationship summary will not necessarily satisfy the additional requirements that broker-dealers and investment advisers have under the federal securities laws and regulations or other laws or regulations. See General Instruction 2.D. to Form CRS; Proposed General Instruction 3 to Form CRS.

[65] General Instruction 2.A. to Form CRS. Compare to Proposed General Instruction 2 to Form CRS (“. . . avoid legal jargon or highly technical terms unless you clearly explain them or you believe that reasonable retail investors will understand them . . .”).

[66] CFA Letter I; AARP Letter; IAA Letter I.

[67] See, e.g., Miami Roundtable; Houston Roundtable; Philadelphia Roundtable; RAND 2018, supra footnote 13 (in qualitative interviews participants asked for definitions of “transaction-based fee,” “asset-based fee,” and struggled with terms such as “mark-up,” “mark-down,” “load,” surrender “charges” and “wrap fee”); see also Kleimann I, supra footnote 19.

[68] See, e.g., Philadelphia Roundtable, at 64 (participant recommending a glossary at the end of the relationship summary); Washington, DC Roundtable, at 31 (“You might want to consider a glossary of terms.”); Feedback Forms Comment Summary, supra footnote 11 (summary of comments to Question 4) (10 comments asked for a definition or a better explanation of the term “fiduciary,” seven asked for definitions of terms such as transaction-based fee, asset-based fee or wrap fee); see also Anonymous 18 Feedback Form (“A glossary would be nice—not in “legalize” [sic] language”).

[69] See IAC Broker-Dealer Fiduciary Duty Recommendations, supra footnote 10; and IAC Form CRS Recommendation, supra footnote 10.

[70] Under the Advisers Act, Form CRS is Part 3 of Form ADV, which already contains a cover page.

Limited Prescribed Wording

The proposed instructions would have required firms to include prescribed wording throughout many sections of the relationship summary. In particular, the fees and costs, standard of conduct, and the comparison section for standalone broker-dealers and investment advisers included a number of required statements, many that differed for broker-dealers, investment advisers, and dual registrants.[71] The introduction, conflicts of interest, and key questions sections also included some required statements.[72] In response to comments (as described more fully below) we are largely eliminating the prescribed wording and replacing those statements with instructions that generally allow firms to describe their own offerings with their own wording.

[71] See infra discussion at Sections II.B.3 (fees and costs and standard of conduct) and II.B.6 (proposed items omitted in final instructions).

[72] See infra discussion at Sections II.B.1 (introduction) and II.B.3 (conflicts of interests) and supra Section II.A.4 (conversation starters).

For example, the proposed instructions would have required broker-dealers to state, “If you open a brokerage account, you will pay us a transaction-based fee, generally referred to as a commission, every time you buy or sell an investment” and “The fee you pay is based on the specific transaction and not the value of your account.” [73] Broker-dealers also would have stated “The more transactions in your account, the more fees we charge you. We therefore have an incentive to encourage you to engage in transactions.” [74] Instead the final instructions will require broker-dealers to describe the principal fees and costs that retail investors will incur, including their transaction-based fees, and summarize how frequently the fees are assessed and the conflicts of interest they create.[75]

[73] Proposed Items 2.B.1. and 4.B.1. of Form CRS.

[74] Proposed Item 4.B.5. of Form CRS.

[75] See Items 3.A. through 3.C. of Form CRS.

Many commenters requested more flexibility for firms to provide accurate descriptions of their services.[76] Some

argued that the mix of prescribed and firm-authored wording required by the proposed instructions would be inaccurate, contribute to investor confusion, or be ineffective for investors, particularly language that some commenters considered “boilerplate.” [77] Observations reported in the RAND 2018 qualitative interviews and other surveys and studies also showed that investors had difficulty understanding, were confused by, or misinterpreted some of the prescribed wording.[78] A range of commenters asserted that the proposed prescribed wording could be inaccurate or inapplicable.[79] For example, various providers of insurance products explained that references to brokerage or investment advisory accounts were not consistent with their business models and could confuse retail investors because customers generally purchase insurance products directly from the issuer, without needing to open a brokerage account.[80] One commenter expressed concern that some of the prescribed wording could constitute impermissible compelled speech that could raise First Amendment concerns.[81] That same commenter, with others, also opposed providing firms with more flexibility than proposed to implement the relationship summary, arguing that more flexibility could impair comparability.[82]

[76] See, e.g., IAA Letter I; Comment Letter of Massachusetts Mutual Life Insurance Company (Aug. 7, 2018) (“MassMutual Letter”); Comment Letter of the Association for Advanced Life Underwriting (Aug. 7, 2018) (“AALU Letter”); Comment Letter of Prudential Financial, Inc. (Aug. 7, 2018) (“Prudential Letter”); Comment Letter of Mutual of America Life Insurance Company (Aug. 3, 2018) (“Mutual of America Letter”); Comment Letter of John Hancock Life Insurance Company (U.S.A.) (Aug. 3, 2018) (“John Hancock Letter”); ACLI Letter; Comment Letter of New York Life Insurance Company (Aug. 7, 2018) (“New York Life Letter”); Comment Letter of Transamerica (Aug. 7, 2018) (“Transamerica Letter”); Vanguard Letter. See also Betterment Letter I, supra footnote 18 (arguing that investor survey conducted by Hotspex showed that its more customized version of the relationship summary facilitated investor understanding). Some individuals submitting Feedback Forms also preferred more firm-specific information. See, e.g., Anonymous 13 Feedback Form (“Firm-specific info would be nice on this document.”); Bhupalam Feedback Form (“I would like to see additional information regarding specific firm rather than a general description.”); Christine Feedback Form (“I'm interested in my individual advisor's orientation—small cap, mid cap, large cap or mix growth vs. value foreign, domestic or mix fundamental or quantitative long term or short term”).

[77] ASA Letter (“[T]he mix of prescribed and customized language will only create more confusion and complexity, as well as legal risk for financial institutions.”); Primerica Letter (“This mix of prescribed and flexible disclosure would ultimately result in a patchwork of new disclosures that fail to comprehensively describe a particular firm's business model in a way that is accessible and digestible by retail investors.”); IAA Letter I (“Many firms would . . . be compelled to explain to prospective clients how and why their business is different from the boilerplate descriptions and why the comparisons are not applicable. The boilerplate language may thus detract from a firm's ability to explain its own services and make it harder for investors to understand those services.”).

[78] E.g., RAND 2018, supra footnote 13 (describing that, in qualitative interviews, participants noted some words or phrases that needed further definition and some misunderstood differences between account types and professionals); Kleimann I, supra footnote 19; Betterment Letter I (Hotspex) supra footnote 18 (finding that investors had difficulty understanding certain key information on the SEC sample version of standalone investment adviser relationship summary); see also Kleimann II, supra footnote 19 (investors misconstrued the legal standard in alternative versions of prescribed wording used in a redesigned version of the relationship summary); Feedback Forms Comment Summary, supra footnote 11 (summary of responses to Question 4) (41 Feedback Forms included narrative responses that indicated that one or more topics were too technical or could be improved; of these, 20 indicated that the relationship summary language was too technical, wordy, confusing or should be simplified; 23 indicated that information on fees and costs was too technical or needed to be more clear; 23 suggested that information in sections on relationships and services and obligations needed clarification, and 14 suggested clarification or more information about conflicts of interest).

[79] See, e.g., IAA Letter I; ACLI Letter; AARP Letter; SIFMA Letter; FSI Letter I; Triad Letter; Vanguard Letter.

[80] See, e.g., Comment Letter of the Committee of Annuity Insurers (Aug. 7, 2018) (“Committee of Annuity Insurers Letter”) (“The use of the term brokerage account may be confusing to retail investors purchasing and owning annuities, as annuities are typically held' directly by an insurance company.”); ACLI Letter; IAA Letter I; FSI Letter I; Comment Letter of Lincoln Financial Group (Nov. 13, 2018) (“Lincoln Financial Group Letter”) (“Sales of variable annuities, and variable life insurance products, typically do not involve the opening of a brokerage account and are not conducted in a brokerage account.”).

[81] See CFA Letter I, supra footnote 37.

[82] See AFL-CIO, CFA Letter.

We recognize that extensive use of prescribed wording in certain contexts could add to investor confusion and may not accurately or appropriately capture information about particular firms. Accordingly, the final instructions permit firms, within the parameters of the instructions, to describe their services, investment offerings, fees, and conflicts of interest using their own wording. This approach should enable firms to reflect accurately what they offer to retail investors, should result in disclosures that are more useful to retail investors, and should mitigate concerns relating to the mix of prescribed and firm-authored wording, and the extensive use of prescribed wording, that the proposed instructions required.

Although we are allowing more flexibility so that firms can describe their offerings more accurately, firms still will be required to discuss required topics within a prescribed order, as discussed below.[83] This approach will facilitate transparency, consistency, and comparability of information across the relationship summaries of different firms, helping retail investors to focus on information that we believe would be particularly helpful in deciding among firms, financial professionals, services, and accounts—namely: Relationships and services; fees, costs, conflicts, and required standard of conduct; disciplinary history; and how to get additional information. We believe that more tailored, specific, and distinct information in the required topic areas also will better serve the educational purpose by facilitating more robust substantive comparisons across firms.

[83] See, e.g., General Instructions 1.A and 1.B., and 2.B. to Form CRS.

This approach addresses—and mitigates—First Amendment concerns. Generally, the instructions no longer require any specific speech.[84] Rather, they permit firms to use their own words to impart accurate information to investors. In certain circumstances, however, we are continuing to require firms to use prescribed wording. For example, the final instructions require firms to use standardized headings and conversation starters, which are in the form of questions that investors are encouraged to ask.[85] These elements are organizational (the headings) or intended to prompt a discussion by the investor (the conversation starters).[86] The final instructions also require firms to include prescribed statements describing their required standard of conduct when providing recommendations or advice.[87] Requiring firms to provide a consistent articulation of their required legal obligations in this regard will reduce and minimize investor confusion, as compared with allowing firms to state their required standard of conduct using their own wording.[88] These statements are designed to require the disclosure of purely factual information about the standard of conduct that applies to the provision of recommendations by broker-dealers and the provision of advice by investment advisers under their respective legal regimes.[89] Finally, the instructions require firms to include a prescribed, factual statement regarding the impact of fees and costs on investments, and a prescribed statement encouraging retail investors to understand what fees and costs they are paying.[90] As explained further below,

the final instructions provide that if a required disclosure or conversation starter is inapplicable to a firm's business or specific wording required by the instructions is inaccurate, firms may omit or modify it.[91]

[84] For example, the final instructions no longer require the proposed Comparisons section or other prescribed wording that could be perceived as requiring firms to compare their owns services unfavorably to those of their competitors. See infra Section II.B.6.

[85] See infra Sections II.A.2 and II.A.4.

[86] See infra Sections II.A.2. and II.A.4.

[87] Item 3.B.(i) of Form CRS. See infra Section II.B.3.b.

[88] See infra Sections II.A.2 and II.B.3.b.

[89] See Milavetz, Gallop & Milavetz, P.A. v. United States, 559 U.S. 229, 249-50 (2010) (upholding against First Amendment challenge a requirement that lawyers disclose their “legal status” and “the character of the assistance provided”); Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626, 651 (1985) (upholding required disclosure of factual information about terms of service); Pharm. Care Mgmt. Ass'n v. Rowe, 429 F.3d 294, 310 (1st Cir. 2005) (upholding requirement that pharmacy benefit managers disclose conflicts of interest and financial arrangements).

[90] See Item 3.A.(iii) of Form CRS (requiring firms to state, “You will pay fees and costs whether you make or lose money on your investments. Fees and costs will reduce any amount of money you make on your investments over time. Please make sure you understand what fees and costs you are paying.”). See also infra footnotes 424-425 and accompanying text.

[91] See General Instruction 2.B to Form CRS. We are adopting this provision to ensure that firms are not compelled to include wording in their relationship summaries that is misleading or inaccurate in the context of their business models. This provision may apply in limited circumstances. For example, the headings and conversation starters prescribed by the final instructions are worded at a highly generalized level and cover selected key topics that are broadly applicable to broker-dealers and investment advisers and their relationships with retail investors, irrespective of business model (i.e., relationships and services the firm offers to retail investors, fees and costs that retail investors will pay, specified conflicts of interest and standards of conduct, and disciplinary history).

As in the proposal, the final instructions include parameters for the scope of information expected within the relationship summary, though we are modifying the requirements to clarify the scope further in light of commenter concerns. First, all information in the relationship summary must be true and may not omit any material facts necessary in order to make the disclosures, in light of the circumstances under which they were made, not misleading.[92] The proposed instructions required all information in the relationship summary to be true and prohibited firms from omitting any material facts necessary to make the disclosures required by the instructions and the applicable item not misleading, but did not include the clause “in light of the circumstances under which they were made.” [93] Commenters raised concerns with respect to the applicability of this standard to a short document with strict page limits that is meant to provide only a brief summary of information.[94]

[92] General Instruction 2.B. to Form CRS (“All information in your relationship summary must be true and may not omit any material facts necessary in order to make the disclosures required by these Instructions and the applicable Item, in light of the circumstances under which they were made, not misleading.”). Cf. Proposed Instruction 3 to Form CRS (“All information in your relationship summary must be true and may not omit any material facts necessary to make the disclosures required by these Instructions and the applicable item not misleading.”).

[93] Proposed General Instruction 3 to Form CRS.

[94] See, e.g., LPL Financial Letter (raising concerns that the relationship summary raises the risk of liability for material omissions given its page limits and required level of detail); CCMC Letter (“The page and length limitations imposed by the proposed regulation, coupled with the required disclosure that is mandated by the proposed rules, present a substantial risk of liability for omissions that may be necessary only to ensure the disclosure meets the Commission's strict formatting requirements.”); Fidelity Letter (stating that firms “would find it very challenging to summarize their offerings within the four-page limit and other content and formatting constraints of the form as proposed, let alone to do so in a manner that provides sufficient detail to convey meaningful information to investors, and is sufficiently accurate to avoid creating liability for a misstatement”).

We continue to believe that firms should include only as much information as is necessary to enable a reasonable investor [95] to understand the information required by each item.[96] As discussed below, we believe that investors will benefit from receiving a relationship summary containing high-level information that they will be more likely to read and understand, with the ability to access more detailed information.[97] As a result, we recognize a firm's relationship summary by itself is a summary of the information required to inform retail investors about the services a firm provides along with its fees, costs, conflicts of interest, and standard of conduct. We also believe that the disclosure provided in the relationship summary should be responsive and relevant to the topics covered by the final instructions,[98] and not omit information that is required to be disclosed or necessary to make the required disclosure not misleading.[99] We are sensitive to commenters' concerns, however, regarding expectations for the scope of required information within page limits. In this regard, the instructions continue to provide, as proposed, that firms may not include a disclosure in the relationship summary other than a disclosure that is required or permitted by the instructions and the applicable item,[100] and that all the information contained in the relationship summary must be true.[101]

[95] The proposed instructions referred to a “reasonable retail investor.” For example, under the proposed instructions, firms would have been able to omit or modify prescribed wording or other statements required to be part of the relationship summary if such statements were inapplicable to a firm's business or would have been misleading to a “reasonable retail investor.” See Proposed General Instruction 3 to Form CRS. The final instructions no longer make reference to a “reasonable retail investor.” By eliminating the reference to a “reasonable retail investor,” we are clarifying that we did not intend at the proposal, and do not intend now, to introduce a new standard under the federal securities laws, which generally refer to what a “reasonable investor” would consider important in making a decision. See infra footnotes 95-105 and accompanying text. References to a “reasonable retail investor” in the proposed instructions were meant to clarify how the operative Instruction or Item would apply in the context of a retail investor. Because new rule 17a-14 under the Exchange Act and new rule 204-5 under the Advisers Act require firms to deliver relationship summaries to retail investors in accordance with such rules, we do not believe such clarifications are necessary.

[96] General Instruction 2.A. to Form CRS. The instructions remind firms to use not only short sentences as proposed, but also short paragraphs. General Instruction 2.A.(i) to Form CRS.

[97] See infra Section II.A.3.

[98] Firms should keep in mind the applicability of the antifraud provisions of the federal securities laws, including section 206 of the Advisers Act, section 17(a) of the Securities Act, and section 10(b) of the Exchange Act and rule 10b-5 thereunder, in preparing the relationship summary, including statements made in response to the relationship summary's “conversation starters.” See infra Section II.B.2.c.

[99] This approach is consistent with the approach the Commission has taken with respect to disclosure more broadly. See, e.g., rule 408(a) under Regulation C [17 CFR 230.408(a)] (“In addition to the information expressly required to be included in a registration statement, there shall be added such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading”); Exchange Act rule 12b-20 [17 CFR 240.12b-20] (“In addition to the information expressly required to be included in a statement or report, there shall be added such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made not misleading”); see also Commission Statement and Guidance on Public Company Cybersecurity Disclosures, Securities Act Release No. 82746 (Feb. 21, 2018) [83 FR 8166 (Feb. 26, 2018)] (stating that the “Commission considers omitted information to be material if there is a substantial likelihood that a reasonable investor would consider the information important in making an investment decision or that disclosure of the omitted information would have been viewed by the reasonable investor as having significantly altered the total mix of information available”); TSC Industries v. Northway, 426 U.S. 438, 449 (1976) (stating a fact is material “if there is a substantial likelihood that a reasonable shareholder would consider it important” in making an investment decision or if it “would have been viewed by the reasonable investor as having significantly altered the total mix' of information made available” to the shareholder); Basic, Inc. v. Levinson, 485 U.S. 224, 240 (1988) (stating that “materiality depends on the significance the reasonable investor would place on the withheld or misrepresented information”); Securities and Exchange Com'n v. Texas Gulf Sulphur, 258 F. Supp. 262, 279 (S.D.N.Y. 1966) (stating that “[a]n insider's liability for failure to disclose material information which he uses to his own advantage in the purchase of securities extends to purchases made on national securities exchanges as well as to purchases in face-to-face' transactions”); Cochran v. Channing Corporation, 211 F. Supp. 239, 242 (S.D.N.Y. 1962) (stating that the “Securities Exchange Act was enacted in part to afford protection to the ordinary purchaser or seller of securities. Fraud may be accomplished by false statements, a failure to correct a misleading impression left by statements already made or, as in the instant case, by not stating anything at all when there is a duty to come forward and speak”).

[100] General Instruction 1.B. to Form CRS; see also Proposed General Instruction 1.(d) to Form CRS.

[101] General Instruction 2.B. and 2.C. to Form CRS; see also Proposed General Instruction 3 to Form CRS.

In a change from the proposal, and to address commenters' concerns, the final instructions provide that the information contained in the relationship summary may not omit any material facts necessary in order to make the disclosures, in light of the circumstances under which they were

made, not misleading.[102] We have added the phrase “in light of the circumstances under which they were made” to clarify that the content included or not included in the relationship summary should be viewed, for example, in light of the fact that the disclosure is intended to be a summary, that firms must adhere to the page limit, and that there will be links to additional information. Any information contained in the relationship summary or omitted facts will not be viewed in isolation in respect of determining whether such information would have been viewed by a reasonable investor as having significantly altered the total mix of information available.[103] As discussed below, firms will provide additional detail and context through layered disclosure. For example, the instructions require firms to include specific references or a link to additional information as part of the relationships and services and fees and conflicts sections.[104] In other instances, the instructions encourage firms to reference or link to additional information to supplement their required disclosures.[105] While this change from the proposal is drawn from other areas of the federal securities laws,[106] Form CRS is not intended to create a private right of action.

[102] Id.

[103] See rule 10b-5 under the Exchange Act [17 CFR 240.10b-5]; supra footnote 99 and accompanying text; see also footnote 469 and accompanying text.

[104] See infra Section II.A.3.

[105] See, e.g., General Instruction 3.A. to Form CRS (“You are encouraged to use charts, graphs, tables, and other graphics or text features in order to respond to the required disclosures. . . . You also may include: (i) A means of facilitating access to video or audio messages, or other forms of information (whether by hyperlink, website address, Quick Response Code (“QR code”), or other equivalent methods or technologies); (ii) mouse-over windows; (iii) pop-up boxes; (iv) chat functionality; (v) fee calculators; or (vi) other forms of electronic media, communications, or tools that designed to enhance a retail investor's understanding of the material in the relationship summary.”).

[106] See supra footnotes 99 and 103 and accompanying text.

Second, firms may omit or modify required disclosures or conversation starters that are inapplicable to their business, or specific wording required by the final instructions that is inaccurate.[107] The proposed instructions permitted firms to omit or modify required disclosures that were inapplicable to their business or would be misleading to a reasonable retail investor.[108] We modified the proposed instruction to provide a more concrete requirement allowing firms to omit or modify prescribed wording, rather than using a broader standard referencing a reasonable retail investor. This instruction is intended to ensure that no statements are misleading or inaccurate in the context of a firm's particular services or business. Rather, the objective of the Commission is to ensure that required disclosures are purely factual and provide investors with an accurate portrayal of the firm's services and operations.

[107] General Instruction 2.B. to Form CRS.

[108] See Proposed General Instruction 3 to Form CRS (“If a statement is inapplicable to your business or would be misleading to a reasonable retail investor, you may omit or modify that statement.”).

Finally, given that firms will use mostly their own wording, we are adding instructions that remind firms that their responses must be factual and provide balanced descriptions to help retail investors evaluate the firm's services.[109] For example, firms may not include exaggerated or unsubstantiated claims, vague and imprecise “boilerplate” explanations, or disproportionate emphasis on possible investments or activities that are not made available to retail investors.[110] The relationship summary is designed to serve as disclosure, rather than marketing material, and should not unduly emphasize aspects of firms' offerings that may be favorable to investors over those that may be unfavorable.

[109] General Instruction 2.C. to Form CRS.

[110] General Instruction 2.C. to Form CRS.

Standard Question-and-Answer Format and Other Presentation Instructions

As with the proposed instructions, the final instructions require firms to present information under standardized headings and to respond to all the items in the final instructions in a prescribed order.[111] Instead of using declarative headings as proposed, however, the headings will be in the form of questions.[112] This change responds to feedback from surveys and studies [113] and commenters,[114] including many submitting their own mock-ups of the relationship summary that suggested or used a question-and-answer format in their own documents. Several commenters noted that the question-and-answer format is a more effective design for consumer disclosures because it focuses on questions to which a consumer wants answers and allows a consumer to skim quickly and understand where to get more information.[115] Based on consideration of these comments, we are both incorporating the format generally and are utilizing several of the question headings suggested by commenters in mock-ups, as discussed in each item below.

[111] General Instruction 1.B. to Form CRS.

[112] See generally Items 2.A., 3.A., 3.B., 3.C, and 4.A to Form CRS.

[113] See e.g.; RAND 2018, supra footnote 13 (reporting that about 60% of survey respondents preferred a question-and-answer format over the sample relationship summary format presented in the survey). Kleimann I, supra footnote 19 (“Participants liked the Key Questions section, but wanted the questions to be answered within the document.”).

[114] IAA Letter I (“A [question-and-answer] format will help keep the relationship summary short and should also remove the onus of the retail investor having to ask questions. This format would encourage further conversation, particularly if the Commission requires firms to point investors to additional information-- including comparison information and other key questions—on the SEC's website.”); Schwab Letter I (citing Kleimann Communication Group, Inc., Making Disclosures Work for Consumers (Jun. 14, 2018), available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/iac061418-slides-by-susan-kleimann.pdf, and contemporaneous discussions); Schwab Letter II (“Form CRS should be organized around questions”); Fidelity Letter (redesigned relationship summary with a question-and-answer format).

[115] See Kleimann II, supra footnote 19 (“Readers ask questions when they read, especially of functional documents . . . . For good design, we want to build upon this tendency by identifying the key questions investors should or are likely to ask and featuring them prominently in the text, thus easing the cognitive task for readers.); Schwab Letter I (“[Q]uestions that a consumer has . . . should be the organizing principle.”); see also CFA Letter I.

In addition to the standardized headings, we continue to believe that a prescribed order of topics facilitates comparability of different firms' relationship summaries. Commenters generally supported or did not oppose the premise of a prescribed order of topics.[116] Some commenters did, however, suggest changes to the organization or inclusion of topics, either explicitly in their comment letters, implicitly by the design of their own mock-ups, or both.[117] Results of

surveys and studies that assessed comprehension of the sample proposed relationship summaries demonstrated the importance of context and revealed confusion caused by the placement of some information. For example, the RAND 2018 qualitative interviews suggested that investors were confused by and had difficulty reconciling the conflicts and standard of conduct sections, which were separated by the fees and comparisons sections.[118] Another study suggested that the appearance of fee information in three separate sections and separation of the fees and conflicts sections by the comparisons section inhibited understanding of the connection between fees and conflicts.[119] As discussed further below, we are combining the proposed Fees and Costs, Conflicts of Interest, and Standard of Conduct sections into one, to address these comments.[120] In addition, in response to suggestions that we provide more flexibility for how firms describe their services so that they can more accurately convey the information, the final instructions do not require firms to present the information within each section in the order listed.[121] Therefore, firms are free to discuss the required sub-topics within each item in an order that they believe best promotes accurate and readable descriptions of their business.

[116] See, e.g., Trailhead Consulting Letter (supporting a standardized order of topics to facilitate comparability); Fidelity Letter (“[W]e urge the SEC to consider prescribing content and topics, but not specific language . . .”).

[117] See, e.g., CFA Letter I (suggesting changes to the order of the disclosures and the design of the relationship summary); IAA Letter I (suggesting a different order of topics and elimination of the Comparisons section, including by submitting its own mock-up); Comment Letter of Charles Schwab & Co., Inc. (Feb. 26, 2019) (“Schwab Letter III”) (providing sample Form CRS instructions that permit flexibility as to the order of sub-topics under each topic). On Feedback Forms, 57 (about 60%) commenters responded “yes” when asked whether information was in the appropriate order; 8 commenters suggested moving the Key Questions to be first or closer to the front of the document. See Feedback Forms Comment Summary, supra footnote 11 (summary of responses to Questions 3(b) and 7). A few commenters on Feedback Forms suggested moving the Additional Information section forward. See Durgin Feedback Form, Salkowitz Feedback Form, Starmer2 Feedback Form, Anonymous14 Feedback Form, and a few suggested changes to the order of discussion of obligations and conflicts. See Anonymous28 Feedback Form, Asen Feedback Form, Lee2 Feedback Form.

[118] See RAND 2018, supra footnote 13.

[119] See Kleimann I, supra footnote 19, at 30 (participants “had difficulty building knowledge and relating one piece to another when it was separated by physical space.”).

[120] See Item 3 of Form CRS.

[121] See Proposed General Instruction 1.(b) to Form CRS (“Unless otherwise noted, you must also present the required information within each item in the order listed.”).

The final instructions provide for page limits to promote brevity, as proposed. The proposed instructions limited the length of the relationship summary to four pages for both standalone firms and dual registrants.[122] The final instructions provide that for dual registrants that include their brokerage services and advisory services in a single relationship summary, the relationship summary must not exceed four pages in paper format, or the equivalent if delivered electronically.[123] For broker-dealers [124] and investment advisers [125] a relationship summary in paper format must not exceed two pages, or the equivalent if delivered electronically.[126] Dual registrants that prepare separate relationship summaries for their brokerage and advisory services are limited to two pages each, or the equivalent if delivered electronically.[127] Unlike the proposed instructions, the final instructions do not prescribe paper size, font size, and margin width, providing instead that they should be reasonable.[128] For example, we believe that 8\1/2\” x 11” paper size, at least an 11 point font size, and a minimum of 0.75” margins on all sides, as proposed, could be considered reasonable, but other parameters could also be reasonable. The objective of the proposed paper, font, and margin size limitations was to make the relationship summary easy to read. We expect that a visually engaging and effective design, including in electronic format, could achieve the same objective without the prescriptive limitations.

[122] Proposed General Instruction 1.(c) to Form CRS.

[123] General Instruction 1.C. to Form CRS.

[124] Proposed Form CRS defined “standalone broker-dealer” as “a broker or dealer registered under section 15 of the Exchange Act that offers services to retail investors and (i) is not dually registered as an investment adviser under section 203 of the Advisers Act or (ii) is dually registered as an investment adviser under section 203 of the Advisers Act but does not offer services to retail investors as an investment adviser.” We are not adopting this definition because we believe using the term “broker-dealer” is sufficient for the final instructions. The final instructions provide that Form CRS applies to broker-dealers registered under section 15 if the Exchange Act. See supra footnote 8.

[125] Proposed Form CRS defined “standalone investment adviser” as “an investment adviser registered under section 203 of the Advisers Act that offers services to retail investors and (i) is not dually registered as a broker or dealer under Section 15 of the Exchange Act or (ii) is dually registered as a broker or dealer under Section 15 of the Exchange Act but does not offer services to retail investors as a broker-dealer.” We are not adopting this definition because we believe using the term “investment adviser” is sufficient for the final instructions. See supra footnote 8. Furthermore, the final instructions specify that Form CRS applies to investment advisers registered under section 203 of the Advisers Act.

[126] General Instruction 1.C. to Form CRS.

[127] General Instruction 1.C. to Form CRS. We discuss additional considerations and requirements for dual registrants and affiliates in Section II.A.5 below.

[128] General Instruction 1.C. to Form CRS.

Many commenters preferred a shorter, one-to-two page document more heavily relying on layered disclosure with increased use of hyperlinks and other cross-references to more detailed disclosure.[129] Commenters also said that investors are more likely to read a shorter document.[130] Several commenters submitted mock-ups that were shorter than four pages.[131] Others indicated that the length of Form CRS was acceptable but should not exceed four pages.[132] On the other hand, certain commenters suggested that the length of the relationship summary may be too short to appropriately describe firms' insurance services or products.[133] One commenter said that it would be challenging for dual registrants to summarize all of their offerings within the four-page limit.[134] Investor feedback from surveys, studies, roundtables, and Feedback Forms also did not show consistent results. For example, 57% of the RAND 2018 survey respondents indicated that the proposed relationship summary was too long, 41% said it was about right, and roughly 2% said it was too short.[135] In section-by-section questioning, however, the most common response from RAND 2018 survey respondents was to keep the section length as is.[136] Similarly, some roundtable participants provided feedback that the proposed length was right at the maximum, “about right,” or “good,” [137] whereas others would have preferred a shorter document.[138] About

40% of commenters on Feedback Forms said that relationship summary was an appropriate length, while about 30% indicated a preference for a shorter document.[139]

[129] See, e.g., Schwab Letter I (“Form CRS should simply be a short navigation aid to the existing Form ADV Part 2 disclosure” for investment advisers or “to additional information readily available on the firm's website or enclosed with the account documentation” for broker-dealers.); FSI Letter I (“While we support the Commission's efforts to ensure concise disclosure by limiting the required Form CRS to four pages (or its electronic equivalent), we suggest an even shorter document (perhaps as short as one page) with hyperlinks to more detailed disclosures.”); see also AARP Letter; Better Markets Letter; Comment Letter of the Teachers Insurance and Annuity Association of America (Aug. 7, 2018) (“TIAA Letter”); Bank of America Letter; CCMR Letter; LPL Financial Letter; Kleimann II, supra footnote 19 (“Form CRS should be as short as possible.”).

[130] See Fidelity Letter; see also Schwab Letter I (Koski), supra footnote 21 (85% of survey participants answered that they would be more likely to read disclosure that is short and to the point with links to more information; 61% answered that they would be less likely to read a document that is longer and more comprehensive, but 31% answered that they would be more likely to read a longer and more comprehensive disclosure); Comment Letter of Glen Strong (Jul. 27, 2018).

[131] See, e.g., Schwab Letter I; Fidelity Letter; IAA Letter I.

[132] See Cambridge Letter; Comment Letter of Morningstar, Inc. (Aug. 7, 2018) (“Morningstar Letter”); Trailhead Consulting Letter.

[133] See, e.g., ACLI Letter; MassMutual Letter.

[134] See Fidelity Letter.

[135] RAND 2018, supra footnote 13.

[136] RAND 2018, supra footnote 13; see also Cetera Letter II (Woelfel), supra footnote 17 (when asked generally how the relationship summary could be improved, 10% of survey respondents said relationship summary could be shorter).

[137] Washington, DC Roundtable, at 18, 26.

[138] See Philadelphia Roundtable, at 5, 19 (noting that lengthy disclosure “actually prevents investor interest and really understanding more. If something like [the relationship summary] can replace the 200 pages and then you have access to the 200 pages if you want them, that's a better system”).

[139] See Feedback Forms Comment Summary (summary of responses to Question 6), supra footnote 11.

In light of commenter and investor feedback, we have determined that the relationship summary should be no more than four pages, and that in many cases a document shorter than four pages is appropriate. As proposed, both standalone firms and dual registrants were subject to a four-page limit, even though a dual registrant may have to include more disclosures discussing its advisory business and brokerage business as compared with standalone firms. Upon further consideration of the comments advocating for a more streamlined disclosure that includes more white space, we are adopting a four-page limit for dual registrants that prepare one combined relationship summary, to permit them to capture all of the required information within twice as much space as for standalone firms. If dual registrants and affiliated [140] standalone firms choose to prepare separate relationship summaries for their brokerage and investment advisory services, each relationship summary should not exceed two pages.[141] The two-page limit will help to facilitate comparison of the dual registrant's services, as investors can easily review the separate relationship summaries side-by-side, and will encourage firms to focus on succinctly and clearly explaining the required information. Some commenters, including providers of insurance products, supported a longer relationship summary or expressed concern that four pages would not be enough to allow for a summary of all of their offerings.[142] We believe that the elimination of certain sections (such as the comparison section) [143] and most of the prescribed wording from the relationship summary, along with the flexibility firms will have under the final instructions to describe services with their own wording, and to omit or modify required disclosures or conversation starters that are inapplicable to their business or specific wording that is inaccurate, should help to alleviate the concerns of those who advocated for the relationship summary to be longer.

[140] Form CRS defines an “affiliate” as “Any persons directly or indirectly controlling or controlled by you or under common control with you.” General Instruction 11.A. to Form CRS.

[141] General Instruction 1.C. to Form CRS (“Dual registrants and affiliates that prepare separate relationship summaries are limited to two pages for each relationship summary. . . . If delivered electronically, the relationship summary must not exceed the equivalent of two pages or four pages in paper format, as applicable.”).

[142] See supra footnotes 133-134 and accompanying text.

[143] See infra Section II.B.6 (Proposed Items Omitted in Final Instructions).

Electronic and Graphical Formats, and Layered Disclosure

We are adding instructions that clarify our support for firms wishing to use electronic media in preparing the relationship summary for retail investors.[144] The proposed instructions would have permitted firms to add embedded hyperlinks within the relationship summary in order to supplement required disclosures [145] and would have required firms to use hyperlinks for any document that is cross-referenced in any electronic relationship summary.[146] The proposed instructions also permitted firms to use various graphics or text features to explain the required information but did not reference whether they should be electronic- or paper-based.[147]

[144] Delivery is discussed in Section II.C. Firms may deliver electronic versions of the relationship summary in accordance with the final instructions and the Commission's guidance regarding electronic delivery. See General Instructions 10.B. through 10.D. to Form CRS.

[145] Proposed General Instruction 1.(g) to Form CRS (“You may add embedded hyperlinks within the relationship summary in order to supplement required disclosures, for example, links to fee schedules, conflicts disclosures, the firm's narrative brochure required by Part 2A of Form ADV, or other regulatory disclosures.”).

[146] Proposed General Instruction 1.(g) to Form CRS (“In a relationship summary that is posted on your website or otherwise provided electronically, you must use hyperlinks for any document that is cross-referenced in the relationship summary if the document is available online.”).

[147] Proposed General Instruction 1.(f) to Form CRS (“You may use charts, graphs, tables, and other graphics or text features to respond to explain the required information, so long as the information: (i) Is responsive to and meets the requirements in these instructions (including space limitations); (ii) is not inaccurate or misleading; and (iii) does not, because of the nature, quantity, or manner of presentation, obscure or impede understanding of the information that must be included. When using interactive graphics or tools, you may include instructions on their use and interpretation.”).

Many commenters supported electronic formats, including in connection with layered disclosure.[148] One commenter endorsed electronic, including mobile, formats as inherently easier to navigate and use in a layered approach and asserted that the relationship summary would be more engaging to investors, and thus more effective as a disclosure, if the Commission encouraged more creative use of electronic formats.[149] Research submitted by commenters and feedback from our investor roundtables indicated that investors preferred a more visually appealing disclosure.[150] Commenters recommended a more visually-focused and designed experience, and many mock-ups that commenters submitted used graphics and other design features extensively.[151] In addition, the IAC has recommended exploring the use of layered disclosure in certain contexts.[152] The IAC has also recommended that the Commission “continue to explore methods to encourage a transition to electronic delivery that respect investor preferences and that increase, rather than reduce, the likelihood that investors will see and read important disclosure documents.” [153] Some commenters also expressed support for the IAC's recommendation relating to electronic delivery.[154]

[148] See, e.g., IAA Letter I (“Each key point should be made as simply and succinctly as possible, and the investor should then be pointed clearly and directly to specific additional plain English disclosure explaining the point . . . . This approach would also provide firms with the flexibility they need to use innovative design and delivery techniques.”).

[149] See IAA Letter I.

[150] See Betterment Letter I (Hotspex), supra footnote 18 (reporting study authors' conclusions that survey respondents found a version of the standalone adviser relationship summary “more appealing and understandable,” where Betterment revised the form to “[i]mprove visual hierarchy (e.g., layout, shading, shorten and standardize paragraph lengths to improve legibility, appeal and retention of information”); Schwab Letter I (Koski), supra footnote 21(79% of survey respondents said they are more likely to read disclosure that is “visually appealing and did not seem like a legal document”); Washington, DC Roundtable, at 20; Atlanta Roundtable, at 35.

[151] See, e.g., CFA Letter I; Fidelity Letter (citing to Stanford Law School Design Principles, Use visual design and interactive experiences, to transform how you present legal info to lay people, available at http://www.legaltechdesign.com/communication-design); Betterment Letter I (mock-up); SIFMA Letter; IAA Letter I; Schwab Letter I; see also Kleimann II, supra footnote 19 (describing design assumptions for a redesigned version of the relationship summary).

[152] See IAC Broker-Dealer Fiduciary Duty Recommendations, supra footnote 10 (in connection with the disclosure of disciplinary history, the Commission “should look at whether it might be beneficial to adopt a layered approach to such disclosures, with the goal of developing a more abbreviated, user-friendly document for distribution to investors”).

[153] Investor Advisory Committee, Recommendation of the Investor as Purchaser Subcommittee: Promotion of Electronic Delivery and Development of a Summary Disclosure Document for Delivery of Investment Company Shareholder Reports (Dec. 7, 2017), available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/recommendation-promotion-of-electronic-delivery-and-development.pdf (“IAC Electronic Delivery Recommendation”).

[154] See, e.g., FSI Letter I; Cambridge Letter; Comment Letter of the Institute for Portfolio Alternatives (Aug. 7, 2018) (“Institute for Portfolio Alternatives Letter”).

Accordingly, we are adopting and adding provisions to the proposed

instructions to encourage the use of electronic formatting and graphical, text, online features and layered disclosures in preparing their relationship summaries.[155] Key elements of the final instructions include the following:

[155] We created a separate section in the instructions focused on electronic and graphical formats that includes these instructions. Proposed General Instruction 1.(f) to Form CRS (“You may use charts, graphs, tables, and other graphics or text features to explain the required information, so long as the information: (i) Is responsive to and meets the requirements in these instructions (including space limitations); (ii) is not inaccurate or misleading; and (iii) does not, because of the nature, quantity, or manner of presentation, obscure or impede understanding of the information that must be included. When using interactive graphics or tools, you may include instructions on their use and interpretation.”).

The instructions encourage (rather than just permit, as proposed) firms to use graphics or text features to respond to the required disclosures, or to make comparisons among their offerings, including by using charts, graphs, tables, text colors, and graphical cues, such as dual-column charts.[156] If the chart, graph, table, or other graphical feature is self-explanatory and responsive to the disclosure item, additional narrative language that may be duplicative is not required. For a relationship summary provided electronically, the instructions further encourage online tools that populate information in comparison boxes based on investor selections.[157]

[156] See General Instruction 3.A. to Form CRS (“You are encouraged to use charts, graphs, tables, and other graphics or text features to respond to the required disclosures. You are also encouraged to use text features, text colors, and graphical cues, such as dual-column charts, to compare services, account characteristics, investments, fees, and conflicts of interest.”).

[157] See General Instruction 3.A. to Form CRS (“For a relationship summary that is posted on your website or otherwise provided electronically, we encourage online tools that populate information in comparison boxes based on investor selections.”).

The instructions reference a non-exhaustive list of electronic media, communications, or tools that firms may use in their relationship summary.[158] We are including an instruction that, in a relationship summary that is posted on a firm's website or otherwise provided electronically, firms must provide a means of facilitating access (e.g., hyperlinking) to any information that is referenced in the relationship summary if the information is available online.[159] For relationship summaries delivered in paper format, firms may include URL addresses, QR codes, or other means of facilitating access to such information.[160] This instruction permits layered disclosure through paper disclosures and hybrid paper and electronic deliveries, while supporting some investors' preference for paper.

[158] General Instruction 3.A. to Form CRS (“You also may include: (i) A means of facilitating access to video or audio messages, or other forms of information (whether by hyperlink, website address, Quick Response Code (“QR code”), or other equivalent methods or technologies); (ii) mouse-over windows; (iii) pop-up boxes; (iv) chat functionality; (v) fee calculators; or (vi) other forms of electronic media, communications, or tools designed to enhance a retail investor's understanding of the material in the relationship summary.”).

[159] General Instruction 3.B. to Form CRS. (“In a relationship summary that is posted on your website or otherwise provided electronically, you must provide a means of facilitating access to any information that is referenced in the relationship summary if the information is available online, including, for example, hyperlinks to fee schedules, conflicts disclosures, the firm's narrative brochure required by Part 2A of Form ADV, or other regulatory disclosures.”).

[160] General Instruction 3.B. to Form CRS. (“In a relationship summary that is delivered in paper format, you may include URL addresses, QR codes, or other means of facilitating access to such information.”).

The instructions provide guidance that firms may include instructions on the use and interpretation of interactive graphics or tools, as proposed.[161] We believe that these features can make the relationship summary more engaging, accessible, and effective in communicating to retail investors.[162]

[161] General Instruction 3.C. to Form CRS. Instructions that firms provide on the use and interpretation of interactive graphics or tools would not be subject to the page limitation for relationship summaries under General Instruction 1.C to Form CRS, but should be succinct, consistent with General Instruction 2.A.

[162] Similar to the proposed instructions, the final instructions include the caveat that these graphical and text features and electronic media, communications, or tools, (i) must be responsive to and meet the requirements in these instructions for the particular item in which the information is placed; and (ii) may not, because of the nature, quantity, or manner of presentation, obscure or impede understanding of the information that must be included. General Instruction 3.C. to Form CRS. Cf. Proposed General Instruction 1.(f) to Form CRS (“You may use charts, graphs, tables, and other graphics or text features to explain the required information, so long as the information: (i) Is responsive to and meets the requirements in these instructions (including space limitations); (ii) is not inaccurate or misleading; and (iii) does not, because of the nature, quantity, or manner of presentation, obscure or impede understanding of the information that must be included.”). We deleted the reference in the proposed instructions to “is not inaccurate or misleading” because it is covered by another instruction.

The instructions replace the term “hyperlink” with the more evergreen concept of “a means of facilitating access,” which will include hyperlinks as well as website addresses, QR Codes, or other equivalent methods or technologies.[163] Expanding the types of technology referenced in the instructions will make them more relevant as new technologies continue to be developed.

[163] See, e.g., General Instruction 3.A. to Form CRS (“You also may include: (i) A means of facilitating access to video or audio messages, or other forms of information (whether by hyperlink, website address, Quick Response Code (“QR code”), or other equivalent methods or technologies”); General Instruction 3.B. to Form CRS (“In a relationship summary that is posted on your website or otherwise provided electronically, you must provide a means of facilitating access to any information that is referenced in the relationship summary if the information is available online, including, for example, hyperlinks to fee schedules, conflicts disclosures, the firm's narrative brochure required by Part 2A of Form ADV, or other regulatory disclosures.).” Cf. Proposed General Instruction 1.(g) to Form CRS (“In a relationship summary that is posted on your website or otherwise provided electronically, you must use hyperlinks for any document that is cross-referenced in the relationship summary if the document is available online.”).

A number of commenters suggested different approaches for whether we would treat the relationship summary as “incorporating by reference” information provided in additional disclosures or materials that are hyperlinked to or otherwise accessible from the relationship summary.[164] Some of these commenters suggested that we treat certain hyperlinked information as “incorporated by reference.” [165] Other commenters recommended that firms should be permitted, but not necessarily required, to incorporate in the relationship summary additional information provided in other documents.[166]

[164] See, e.g., Comment Letter of Cetera Financial Group (Aug. 7, 2018) (“Cetera Letter I”); IRI Letter; Schwab Letter I; Schwab Letter III (providing sample Form CRS instructions permitting incorporation of materials by reference); Comment Letter of The National Society of Compliance Professionals (Aug. 7, 2018) (“NSCP Letter”); Schnase Letter; LPL Financial Letter.

[165] Schwab Letter I (with respect to broker-dealers, Form CRS should navigate investors to additional information readily available on the firm's website or enclosed with account information, and the additional information would be considered incorporated by reference); NSCP Letter (firms should be permitted to incorporate by reference public disciplinary disclosure events); Schnase Letter (“Firms that follow the SEC rules in filing, posting and linking should get the full anti-fraud benefit of the information in the Firm Brochure being deemed “delivered” when the Relationship Summary is delivered, without having to resort to arcane and outmoded language and concepts such as “incorporation by reference.”).

[166] See Cetera Letter I (suggesting that firms “should be permitted to incorporate other information in Form CRS by reference without reproducing the specified information in its' [sic] entirety, so long as the location is reasonably accessible to the public and the other sources of information are sufficient to meet the standards of Form CRS”); IRI Letter (the Commission should “permit (but not require) firms to use incorporation by reference to satisfy particular components of the disclosures required under Regulation Best Interest and/or Form CRS. In other words, if an investor already receives a particular piece of information in an existing disclosure document (including disclosures required under the federal securities laws, SEC or FINRA rules, ERISA, or DOL rules) the firm should be permitted to merely reference that existing document (with sufficient information for investors to locate or obtain that document.”).

As discussed above, we support the use of layered disclosure and believe that investors will benefit greatly from receiving a relationship summary containing high-level information that they will be more likely to read and understand, with the ability to access more detailed information. Layered disclosure is an approach that can balance the goal of keeping the relationship summary short and accessible with the goal of providing retail investors with fulsome and specific information. The relationship summary is intended to be a self-contained document, however, and firms should be able to meet the instructions' requirements by providing generalized and summary responses to each item, without relying on incorporation by reference to other documents providing additional information. In contrast with other disclosure obligations such as prospectuses and registration statements, a firm could not satisfy the disclosure requirements set forth in the relationship summary instructions by incorporating another document (such as the Form ADV Part 2A brochure) by reference.

At the same time, we recognize the communicative value of layered disclosure. The instructions provide, as discussed above, that firms may [167] (and in some cases must) [168] cross-reference other documents and use hyperlinks or other tools to give more details about the topic. Where firms link to content outside the relationship summary disclosure, whether on a permissive or mandatory basis, the information may not substitute for providing any narrative descriptions that the instructions require, and the additional information should be responsive and relevant to the topic covered by the instruction. Firms should be mindful that the antifraud standards under the federal securities laws apply to linked information, as with other securities law disclosures.

[167] See, e.g., General Instruction 3.A. to Form CRS (“You also may include: (i) A means of facilitating access to video or audio messages, or other forms of information (whether by hyperlink, website address, Quick Response Code (“QR code”), or other equivalent methods or technologies); (ii) mouse-over windows; (iii) pop-up boxes; (iv) chat functionality; (v) fee calculators; or (vi) other forms of electronic media, communications, or tools designed to enhance a retail investor's understanding of the material in the relationship summary.”).

[168] See, e.g., Item 3.A.(iii) of Form CRS (“You must include specific references to more detailed information about your fees and costs that, at a minimum, include the same or equivalent information to that required by the Form ADV, Part 2A brochure (specifically Items 5.A., B., C., and D.) and Regulation Best Interest, as applicable.”).

All together we believe encouraging the use of electronic and graphical formatting online features, and layered disclosures will permit firms to create innovative disclosures that engage investors. 4. Conversation Starters

Consistent with the proposal, the relationship summary will be required to contain suggested follow-up questions for retail investors to ask their financial professional. The relationship summary, however, will not include a separate section of “Key Questions to Ask,” at the end of the relationship summary, as proposed. Instead, firms will be required to integrate those “key questions” for retail investors to ask their financial professionals throughout the relationship summary as headings to items or as “conversation starters.”

The proposed relationship summary would have required firms to include ten questions, as applicable to their particular business, under the heading “Key Questions to Ask” after a statement that the retail investors should ask their financial professional the key questions about a firm's investment services and accounts.[169] In addition, we proposed to allow firms to include up to four additional frequently asked questions.[170]

[169] See Proposed Item 8 of Form CRS.

[170] See id.

Most comment letters that discussed the “Key Questions to Ask” section generally did not support the proposed approach of including a separate section of up to fourteen questions at the end of the relationship summary. Commenters who proposed keeping a key questions section typically suggested significant substantive or stylistic alterations.[171] In a separate approach, many commenter mock-ups included topics and questions from “Key Questions to Ask” in a question-and-response format throughout the relationship summary.[172] Several commenters suggested that the key questions be removed from the relationship summary and placed on the Commission's website with other educational materials.[173]

[171] See, e.g., CFA Institute Letter I (suggesting interspersing questions through sections of Form CRS rather than including at the end); SIFMA Letter (suggesting that firms only be required to answer “four to five” questions to make the communication “shorter and more meaningful” to investors).

[172] See, e.g., IAA Letter I; Comment Letter of the Institute for the Fiduciary Standard (Aug. 6, 2018) (“IFS Letter”); LPL Financial Letter; Schwab Letter I.

[173] See, e.g., ACLI Letter; IAA Letter I; LPL Financial Letter. One commenter representing investors argued that the Commission was better-placed to provide information on topics covered in the “Key Questions to Ask” section because financial professionals would have “room for obfuscation” in their discussions with retail investors. See CFA Letter I.

Observations reported in the RAND 2018 report and other surveys and studies, and individual investor feedback at roundtables and on Feedback Forms generally indicated, that retail investors found the key questions helpful, however. In the RAND 2018 survey, the “Key Questions to Ask” section received the highest support of all sections to “keep as is” when investors were asked if they would add more detail, keep as is, shorten, or delete the section, and a majority of RAND 2018 survey respondents also indicated that they were either “very comfortable” or “somewhat comfortable” with asking each of the key questions.[174] Surveys and studies submitted by commenters also indicated that most investors who reviewed one of the proposed sample relationship summaries found the suggested questions to be useful and said they were likely to ask the questions.[175] In addition, the “Key Questions to Ask” section received the most “very useful” ratings from commenters who submitted Feedback Forms, and narrative comments on several Feedback Forms specifically indicated that the questions would encourage discussion with financial professionals.[176] Similarly, investors at

Commission-held roundtables indicated that they viewed the questions as helpful.[177]

[174] See RAND 2018, supra footnote 13. RAND 2018 also reports that, in qualitative interviews, “[m]ost interview participants said that they liked all of the questions, that they would ask these questions in meeting with a financial service provider, and did not suggest dropping any of the questions.”

[175] See Betterment Letter I (Hotspex) supra footnote 18 (82% of respondents viewing a version of the investment-adviser relationship summary found the suggested questions to be very or somewhat useful and 93% were very or somewhat likely to ask the questions); Cetera Letter II (Woelfel) supra footnote 17 (85% of survey participants who viewed the sample dual-registrant relationship summary found the key questions to be “very” or “somewhat” important to cover, and 84% “strongly” or “somewhat” agreed that the key questions described their topics clearly); Kleimann I, supra footnote 19 (“Nearly all participants saw the Key Questions as essential. They felt the questions were straight forward and raised important questions . . . Many said they would use the set of questions in their next exchange with their broker or adviser.”).

[176] See Feedback Forms Comment Summary, supra footnote 11 (51 commenters (55%) responded to Question 2(g) that the Key Questions section was “very useful” and 28 (30%) responded that the Key Questions section was “useful”; in comparison, other sections were scored as “very useful” in the range of 31% to 44%; similarly, more than 75% of Feedback Forms included a narrative response to Question 7 or other response indicating that the Key Questions were useful; 11 narrative responses included specific comments agreeing that the Key Questions would encourage discussions with financial professionals; and two others stated more generally that the relationship summary would encourage dialogue).

[177] See, e.g., Atlanta Roundtable (three investors responded positively to a question as to whether the key questions were helpful, with no dissent to that view); Houston Roundtable (one investor responding that “the questions for me are very, very good.”).

In light of comments, we believe that including questions for investors to ask their financial professionals is an important component of the relationship summary. Several commenter mock-ups showed questions throughout the relationship summary grouped by subject matter rather than at the end of the document. Investor studies showed that proximity and context are important for questions an investor may have for a financial professional.[178] In addition, some commenters' Feedback Forms requested that questions be placed earlier in the relationship summary document; one specifically suggested that we put the questions with “the appropriate section [with] each section to which it applies.” [179] We have determined to follow a similar approach by replacing the Key Questions to Ask section with specified “conversation starters” throughout the document. We are also using some of the proposed questions as topic headings.

[178] See Kleimann I, supra footnote 19; Kleimann II, supra footnote 19 (each recommending question-and-answer format in part to place relevant information together).

[179] See Feedback Forms Comment Summary, supra footnote 1111 (summary of responses to Question 7); Hoggan Feedback Form (“Maybe you should question at the end of each section—to help frame the issue”); see also Hawkins Feedback Form (commenting on obligations section that “[g]iving some examples of types of questions to ask would be beneficial”).

There are required questions as conversation starters in each section other than the Introduction.[180] These conversation starters are intended to cover the same topics as the proposed key questions and in many cases are substantially similar in wording to the proposed key questions.[181] For each conversation starter, firms must use text features to make the conversation starters more noticeable and prominent in relation to the other discussion text. For example, they may use larger or different font; a text box around the heading or questions; bolded, italicized, or underlined text; or lines to offset the questions from other sections.[182] We believe the questions will be more helpful to investors when included throughout the document with formatting highlighting the conversation starters and organizing the conversation starters together with the firm's disclosures about a particular topic, providing retail investors clearer context for each question. However, if a required conversation starter is inapplicable to the firm's business, the firm may omit or modify that conversation starter.[183] With these changes, we believe that the conversation starters will better help retail investors initiate and engage in useful and informative conversations with their investment professionals.

[180] See Items 2.D. (relationships and services); 3.A.(iv) and 3.B.(iii) (fees, costs, conflicts, and standard of conduct); 4.D.(ii) (disciplinary history); and 5.C. (additional information) of Form CRS.

[181] For example, the proposed Key Question 6 (“How will you choose investments to recommend for my account?”) has been included in the final relationship summary as a conversation starter to the Relationships and Services section (“How will you choose investments to recommend to me?”). For discussion of additional conversation starter questions, see infra Section II.A.4 See also Proposed Item 8.6 of Form CRS and Item 2.D.(iv) of Form CRS.

[182] See General Instruction 4.A. to Form CRS.

[183] See General Instruction 2.B. to Form CRS.

As proposed, investment advisers that provide only automated investment advisory services or broker-dealers that provide services only online without a particular individual with whom a retail investor can discuss the conversation starters must include a section or page on their website that answers each of the conversation starter questions and must provide in the relationship summary a means of facilitating access (e.g., by providing a hyperlink) to that section or page.[184] For example, a firm could include a hyperlink, QR Code, or some other equivalent methods or technologies that would enable a retail investor to access that information. One commenter requested clarification that all firms could provide retail investors with the answers to each key question in writing, and then investors could call a call center for follow-up questions.[185] All firms could choose to provide written answers to conversation starters, but the final instructions will only require written responses in these limited circumstances to ensure that retail investors receive responses when they do not have access to a financial professional to ask questions. We continue to believe that the requirement as adopted will encourage investor engagement and make the conversation starters useful where there is no firm representative to answer the question in-person (or by telephone) for the retail investor. In addition, as proposed, if the firm provides automated investment advisory or brokerage services, but also makes a financial professional available to discuss the firm's services with a retail investor, the firm must make the financial professional available to discuss the conversation starters with the retail investor.[186]

[184] General Instruction 4.B. to Form CRS. As proposed, such advisers or broker-dealers would have provided a hyperlink in the relationship summary to the appropriate section or page. See Proposed Item 8 of Form CRS. In response to comments supporting electronic access more broadly, we broadened the instruction to allow for other means of facilitating access. We also changed the term “automated advice” from the proposed instructions to “automated investment advisory services” in the final instructions to underscore the ongoing nature of the investment advisory relationship.

[185] See LPL Financial Letter.

[186] General Instruction 4.B. to Form CRS.

Six of the proposed key questions will continue to have analogous “conversation starter” questions in the final Form CRS, which we discuss in each applicable section below.[187] These questions cover services, fees and costs, conflicts, disciplinary information, and information about appropriate contact persons. As described below, we revised the wording for all of these questions.

[187] See infra Sections II.B.2 (relating to Item 2.D. of Form CRS), II.B.3.a (relating to Item 3.A.(iv) of Form CRS), II.B.3.b (relating to Item 3.B.(iii) of Form CRS); II.B.4 (relating to Item 4.D.(ii) of Form CRS), and II.B.5 (relating to Item 5.C. of Form CRS).

We did not replace four of the key questions with analogous “conversation starter” questions; the topics raised by these key questions will be addressed in other ways in the relationship summary. First, we have replaced the question requesting financial professionals to “do the math for me” with a different conversation starter.[188] Commenters raised specific concerns about this question for operational and recordkeeping reasons.[189] We are

instead requiring that firms include a conversation starter question prompting retail investors to ask their financial professional to help them understand how the fees and costs might affect their investments and the potential impact of fees and costs on a $10,000 investment.[190] As we note below, our intent with the proposed “Do the math for me” question was that it serve as a prompt to encourage retail investors to ask about the hypothetical amount they would pay per year for an account, what would make the fees more or less, and what services they would receive for those fees. The question was not intended to require firms to generate individualized cost estimates for each particular retail investor. We believe that the newly worded conversation starter makes that more clear. Additionally, the required discussion of fees, costs, and conflicts, together with the conversation starter question, will better serve as an initial basis for understanding how fees affect investment returns and the fees that they will pay than the “Do the math for me” key question.[191]

[188] See Proposed Item 8.2 of Form CRS (“Do the math for me. How much would I pay per year for an advisory account? How much for a typical brokerage account? What would make those fees more or less? What services will I receive for those fees?”).

[189] See, e.g., Comment Letter of Edward D. Jones and Co., L.P. (Aug. 7, 2018) (“Edward Jones Letter”) (“[G]iven the range of services available, it would be very difficult for financial professionals to fully address this question at the outset of the [customer] relationship, particularly for investors selecting transaction-based services.”); SIFMA Letter (“[M]ost firms do not currently have systems in place to allow the financial professionals to answer questions such as customer-specific `Do the math for me' requests.”); John Hancock Letter (“We further believe that the costs and operational hurdles associated with providing personalized fee information have been underestimated, and encourage the SEC to provide that any “do the math”-type questions may be answered through the use of examples.”). In part to avoid recordkeeping requirements on behalf of a financial professional, one commenter suggested reframing the questions as reflecting questions back to an investor with a prompt to ask the representative for help if the investor was unsure as to a response to the questions. See Primerica Letter.

For additional discussion of recordkeeping, see infra Section II.E.

[190] See Item 3.A.(iv) of Form CRS.

[191] See infra Section II.B.3.

Two other proposed key questions regarding costs associated with an account and how firms make money [192] covered information that the relationship summary as adopted requires to be disclosed under the section on fees, costs, conflicts, and standard of conduct.[193] Specifically, firms must (i) summarize the principal fees and costs that retail investors will incur from their services (including how frequently they are assessed and the conflicts of interest they create) and (ii) describe any other fees related to their brokerage or investment advisory services in addition to those principal fees that the retail investor will incur.[194] Additionally, the new conversation starter question included in Item 3 is intended to elicit similar points of discussion with the following wording: “Help me understand how these fees and costs might affect my investments. If I give you $10,000 to invest, how much will go to fees and costs, and how much will be invested for me?” Finally, unlike the proposal, the relationship summary must include a description of the ways in which the firm and its affiliates make money from brokerage or investment advisory services and investments it provides to retail investors as well as material conflicts of interest.[195] As a result of these disclosure requirements, the separate questions from the proposal are not necessary.

[192] See Proposed Items 8.3 (“What additional costs should I expect in connection with my account?”) and 8.4 (“Tell me how you and your firm make money in connection with my account. Do you or your firm receive any payments from anyone besides me in connection with my investments?”) of Form CRS.

[193] See Item 3 of Form CRS. The Item 3.C. disclosure combined with the conversation starter included therein would similarly cover information intended to be discussed in response to the fifth proposed key question (“What are the most common conflicts of interest in your advisory and brokerage accounts? Explain how you will address those conflicts when providing services to my account.”). See infra Section II.B.3.b.

[194] See Items 3.A.(i) and 3.A.(ii) of Form CRS; see also infra Section II.B.3.

[195] See Item 3.B.(ii) of Form CRS; see also infra Section II.B.3.

Finally, we are not adopting a conversation starter question analogous to the proposed key question asking “How often will you monitor my account's performance and offer investment advice?”, because the Relationships and Services section of the adopted relationship summary requires disclosure about the services and advice or recommendations that firms offer and whether or not they monitor accounts, including the frequency and any material limitations on any such monitoring.[196]

[196] See Item 2.B.(i) of Form CRS (“Explain whether or not you monitor the performance of retail investors' investments, including the frequency and any material limitations. Indicate whether or not the services described in response to this Item 2.B.(i) are offered as part of your standard services.”); see also infra Section II.B.2.

Presentation of Relationship Summaries by Dual Registrants and Affiliated Firms

We are modifying the proposed instructions in order to encourage a dual registrant to prepare one combined relationship summary discussing both its brokerage and advisory services, but a dual registrant will be permitted to provide two separate relationship summaries, each describing one type of service.[197] The proposal would have required a dual registrant to prepare one relationship summary, presenting most of the required items under standardized headings and in a tabular format, with brokerage services described in one column and advisory services described in another.[198] We also are adding a new instruction permitting affiliates to prepare a single relationship summary describing both brokerage and investment advisory services that they offer or to prepare separate relationship summaries, one for each type of service.[199] In comparison, the proposed instructions did not permit affiliates to deliver one combined relationship summary, but did allow them to state that they offer retail investors their affiliates' brokerage or advisory services, as applicable.[200]

[197] General Instruction 5.A. to Form CRS.

[198] Proposed General Instruction 1.(e) to Form CRS.

[199] General Instruction 5.B. to Form CRS.

[200] Proposed Item 2.D. of Form CRS. This disclosure only applied in the context of an affiliate of the firm. This item was not intended to describe disclosure of a financial professional's outside business activities, such as an outside investment advisory business of a broker-dealer registered representative. Cf. Comment Letter of Northwestern Mutual Life Insurance Company (Aug. 7, 2018) (“Northwestern Mutual Letter”) (interpreting Proposed Item 3 to prohibit the mention of affiliate services).

We are not adopting the definitions of “standalone broker-dealer” and “standalone investment adviser” as proposed, because they are no longer necessary given the streamlining of the instructions relative to the proposal.[201] Under the final instructions, however, we are defining a dual registrant as “[a] firm that is dually registered as a broker-dealer under section 15 of the Exchange Act and an investment adviser under section 203 of the Advisers Act and offers services to retail investors as both a broker-dealer and an investment adviser”, substantially as proposed. To clarify, a firm that is dually registered as both a broker-dealer and an investment adviser but does not offer both brokerage and investment advisory services to retail investors would not fall within the definition of dual registrant. For example, a firm that is dually registered and offers investment advisory services to retail investors, but offers brokerage services only to institutional customers, would be required to prepare, file, and deliver the relationship summary only in accordance with the obligations of an investment adviser offering services to retail investors.[202]

[201] See supra footnote 8.

[202] See also Advisers Act Rule 204-5; Exchange Act Rule 17a-14(a); General Instructions to Form CRS (“If you do not have any retail investors to whom you must deliver a relationship summary, you are not required to prepare or file one.”); General Instruction 11.C to Form CRS.

Dual Registrants. Investor studies and surveys showed mixed results in connection with the dual-column, combined relationship summary. For example, when presented with screen shots of each separate section in dual-column format, 85% of RAND 2018 survey respondents indicated that the side-by-side comparison format helped them decide whether a broker-dealer or investment adviser account would be right for them, but during qualitative interviews, some participants had difficulty with the two column

format.[203] On Feedback Forms, some indicated that they liked the side-by-side or grid presentation.[204] One Feedback Form commenter said the dual-column format was confusing, however.[205] An interview-based study also indicated that both the formatting and the language in the dual-column format in our proposed sample relationship summary contributed to investor confusion about differences between broker-dealers' and investment advisers' services.[206] Both industry representatives and commenters representing investors also expressed concerns about the proposed formatting requirements for dual registrants' relationship summaries.[207] Two commenters supported using visual formatting to help investors understand the options dual registrants provide, but argued that the proposed content or design should be changed.[208]

[203] See RAND 2018, supra footnote 13, at 22; see also id., at 46 (“Some participants grasped that the document was organized into two columns, each corresponding to an account type. Some others did not realize this immediately but grasped it once it was pointed out by an interviewer.”).

[204] See, e.g., Anonymous03 Feedback Form (“a side by side chart with u's [sic] to say which type of account offers which service”); Anonymous14 Feedback Form (“recommend chart structure”); Anonymous28 (“Presenting the differences in parallel columns gives the best chance for people new ot [sic] investing to understand what is involved”); Baker Feedback Form (“the double column format, comparing the two classes, was clear and easy to follow”); and Smith1 Feedback Form (“I like the side by side comparisons”).

[205] See Anonymous02 Feedback Form (“Maybe a bit hard to read the columns.”).

[206] See Kleimann I, supra footnote 19, at 30-31 (“Most participants tried to read the CRS by looking first at one column, usually the Broker Dealer Services, and then at the second column . . . when they turned to the second column they then tried to match the bullets . . . . Sometimes this matching was relatively easy to do, as in the Types of Relationships and Services section because the bullets aligned almost exactly. They struggled and found the misaligned bullets confusing in subsequent sections . . . Some participants simply took information from the first bullet they read or from bolded words or phrases.”).

[207] See AARP Letter; CFA Letter I; TIAA Letter; Fidelity Letter; MassMutual Letter; LPL Financial Letter; SIFMA Letter; Comment Letter of BlackRock, Inc. (Aug. 7, 2018) (“BlackRock Letter”) (expressing concern that investors may be confused if dual registrants were required to disclose all of their advisory and brokerage services in a single relationship summary); see also Schwab Letter II (“Dual-registrant firms recommend flexibility because of real-world concerns that the side-by-side comparison will not be effective.”).

[208] See AARP Letter (“[a]lthough the visual formatting is helpful, the substantive information laid out within the table remains technical and is likely to be confusing to the average retail investor”); CFA Letter I (emphasizing that investors must see all available options in order to make an informed decision, and that the Commission consult with disclosure design experts toward developing a form that is most likely to result in informed investor choice.”).

Several commenters suggested letting dual registrants choose whether to prepare one combined relationship summary or two separate ones.[209] Commenters argued that providing information about both brokerage and investment advisory services as proposed would confuse investors.[210] Another suggested requiring dual registrants to prepare and deliver different relationship summaries to retail investors depending on whether the investors enter into an advisory or brokerage relationship, and to highlight the availability and link to the relationship summary of the other type of service.[211] One commenter argued that dual registrants needed flexibility to maintain two separate disclosures to allow each financial professional associated with the dual registrant to provide a tailored disclosure to his/her customer, without including services that he/she is not licensed to provide.[212]

[209] See Schwab Letter III (providing sample Form CRS instructions that permit dual registrants either to prepare a single, comparative relationship summary, or two separate relationship summaries describing each type of service and providing links to each other); TIAA Letter; Fidelity Letter; MassMutual Letter; LPL Financial Letter; SIFMA Letter; BlackRock Letter.

[210] See, e.g., TIAA Letter (a combined relationship summary would confuse customers of dually registered firms that provide only one type of service and would overwhelm them with information not relevant to the relationship); LPL Financial Letter; SIFMA Letter; BlackRock Letter.

[211] See IAA Letter I.

[212] See MassMutual Letter.

We encourage dual registrants to prepare a single disclosure, designed in a manner that facilitates comparison between their brokerage and advisory services. Informed by comments, we have determined that two separate disclosures might be appropriate, depending on the different ways firms and their financial professionals offer services and on the particular facts and circumstances. For example, financial professionals with licenses to offer services as a representative of a broker-dealer and investment adviser may offer services through a dual registrant, affiliated firms, or unaffiliated firms, or only offer one type of service notwithstanding their dual licensing.[213] Financial professionals who are not dually licensed may offer one type of service through a firm that is dually registered. Accordingly, the final instructions permit dual registrants and affiliates to prepare a single relationship summary, or alternatively, two separate ones, to describe their brokerage and investment advisory services in a way that accurately reflects their business models and will be the most helpful to retail investors. The instructions explicitly encourage preparation of a single relationship summary, however, given that a number of investors and commenters reacted positively to this presentation.[214]

[213] See, e.g., LPL Financial Letter.

[214] See, e.g., RAND 2018, supra footnote 13 (reporting that 85% of survey respondents found the side-by-side comparison format to be helpful for purposes of deciding between a broker-dealer and investment adviser); see also CFA Letter I (stating it supported using one document to provide comparing brokerage and investment advisory services); Fidelity Letter (stating that a single Form CRS for a dual-registered firm could accomplish its objective); Schnase Letter (supporting the idea of having a unique form for dual registrants).

A firm preparing a single relationship summary will be required to employ design elements of its own choosing to promote comparability; however, we are not prescribing the two-column format, as proposed. We agree that making retail investors aware of a range of options is important to help them make an informed choice,[215] but we recognize the potential limits of a tabular format, as illustrated by results from some investor studies and surveys,[216] and we have concluded that firms are generally in a better position than the Commission to determine a format and design that facilitates comparison of their specific brokerage and investment advisory services. Whether a firm prepares a single relationship summary or two separate ones, the final instructions require a firm to present the information with equal prominence and in a manner that clearly distinguishes and facilitates comparison of the two types of services.[217] For example, a firm could use a tabular format; text features such as text boxes; bolded, italicized, or underlined text; or lines to clearly indicate similarities and differences in its services.

[215] See supra footnote 208 and accompanying text; infra footnote 1046 and accompanying text (discussing studies concerning the availability and presentation of comparative information on decision making).

[216] See supra footnotes 203-206 and accompanying text.

[217] General Instruction 5.A. to Form CRS.

While we are providing this flexibility, we believe investors should see a range of options. Accordingly, the final instructions provide that a firm preparing two separate relationship summaries must provide a means of facilitating access to each relationship summary (e.g., include cross-references or hyperlinks) and deliver both with equal prominence and at the same time to each retail investor, whether or not that retail investor qualifies for those retail services or accounts.[218] We disagree with commenters suggesting that dual registrants should have the option to deliver to retail investors a relationship summary describing only one type of service if, for example, that

investor does not qualify for one of the services.[219] Retail investors should be able to learn about and compare the range of options a firm offers to retail investors, even if the financial professional does not believe that the retail investor meets the requirements for or is considering certain services at that time. For example, a retail investor may initially seek ongoing advice through an advisory account, but after learning about both brokerage and advisory services and speaking with a financial professional, may decide that a brokerage account is a better choice. Or a retail investor may not qualify for certain accounts at the time of receiving the relationship summary, e.g., by not being able to meet an account opening minimum, but may qualify for them in the future, or may qualify for a particular service at one firm but not another. Furthermore, a retail investor may initially make the financial professional aware of only certain asset holdings (for example, he or she approaches a firm to rollover an IRA). On that basis, the firm may believe the investor only qualifies for certain of the firm's services. However, the investor may also have substantial other asset holdings and thus qualify for a variety of accounts that the firm offers. Knowing about the alternative brokerage and investment advisory options that a firm offers will help retail investors to compare firms' offerings and consider whether to adjust the relationship or services as investors' financial circumstances change.

[218] General Instruction 5.A. to Form CRS.

[219] See IAA Letter I; Fidelity Letter.

Affiliate Services. As discussed above, the proposed instructions did not permit affiliates to prepare a combined relationship summary, but did permit firms with affiliates offering retail investors brokerage or advisory services to disclose these services.[220] Several commenters recommended that affiliates should have the same flexibility to prepare one or two relationship summaries as dual registrants.[221] We agree that this flexibility is appropriate for affiliates and are modifying the instructions to permit, but not require, delivery of a single relationship summary. Affiliates preparing a single relationship summary will provide the same comparative benefits for investors as dual registrants doing so. As with dual registrants, some affiliated firms market their services together and have financial professionals who hold licenses through each firm. We recognize, however, that not all affiliates operate in the same way. Some affiliated firms operate independently, do not market their services together, and do not share financial professionals. The different ways in which financial professionals affiliate with firms to provide services also warrant this flexibility. For example, some commenters noted that many financial professionals are licensed representatives of a brokerage firm and are also licensed through an affiliated investment advisory firm or an unaffiliated investment advisory firm (sometimes as a sole proprietor) separately registered with the Commission or one or more States.[222] Depending on the relationship among affiliates and their financial professionals, a single relationship summary or two separate summaries may be more appropriate.[223]

[220] Proposed Item 2.D. of Form CRS.

[221] See Fidelity Letter; LPL Financial Letter (“[D]ual-hatted financial professionals may either (i) provide brokerage and advisory services on behalf of LPL or (ii) provide brokerage services on behalf of LPL while providing advisory services on behalf of an unaffiliated RIA that is separately registered . . . . [In the latter case, an investor] would receive a dual registrant relationship summary from LPL and a standalone investment adviser relationship summary from the RIA” without knowing which entity would be providing advisory services.”). Other commenters suggested that the instructions clarify whether the requirements for dual registrants apply to affiliated broker-dealers and investment advisers. Comment Letter of State Farm Mutual Automobile Insurance Company (Aug. 6, 2018) (“State Farm Letter”) (“[T]he SEC did not provide a template or otherwise discuss whether affiliated broker-dealers and investment advisers can use blended or combined Form CRS”); Cambridge Letter (requesting that the Commission clarify that all references to dual registrants are applicable to broker-dealers and registered investment advisers organized under a single corporate structure as affiliated entities).

[222] See, e.g., LPL Financial Letter.

[223] One commenter described arrangements in which a dual-hatted financial professional may provide brokerage services on behalf of a dual registrant and advisory services on behalf of an unaffiliated investment adviser. The commenter expressed concern that an investor may be confused if the dual registrant's and unaffiliated investment adviser's relationship summaries both describe investment advisory services. See LPL Financial Letter. We believe the flexibility for dual registrants and affiliated firms to prepare combined or separate relationship summaries under the final instructions should address this concern, and firms can determine which presentations are most helpful for investors.

Many dually licensed financial professionals offer services on behalf of two affiliates, similar to dually licensed financial professionals offering services for a dual registrant. One commenter requested that the Commission provide clarity that all references to dual registrants apply to broker-dealers and investment advisers organized under a single corporate structure as affiliated entities.[224] Consistent with our discussion above, we believe that retail investors seeking services from dually licensed financial professionals should receive information about all of the services the financial professional offers, even if the services are through two affiliated SEC-registered firms. As a result, if two affiliated SEC-registered firms prepare separate relationship summaries, and they provide brokerage and investment advisory services through dually licensed financial professionals, the final instructions require the firms to deliver to each retail investor both firms' relationship summaries with equal prominence and at the same time, without regard to whether the particular retail investor qualifies for those retail services or accounts. To provide clarity, we have added a definition for dually licensed professionals in the final instructions that was not included in the proposal.[225] The final instructions also provide that each of the relationship summaries must cross-reference and link to the other.[226] If the affiliated firms are not providing brokerage and investment advisory services through dually licensed financial professionals, they may choose whether or not to reference each other's relationship summary and whether or not to deliver the affiliate's relationship summary with equal prominence and at the same time.[227]

[224] See Cambridge Letter.

[225] General Instruction 11.B. to Form CRS (defining “dually licensed financial professional” as “A natural person who is both an associated person of a broker or dealer registered under section 15 of the Exchange Act, as defined in section 3(a)(18) of the Exchange Act, and a supervised person of an investment adviser registered under section 203 of the Advisers Act, as defined in section 202(a)(25) of the Advisers Act.”).

[226] General Instruction 5.B. to Form CRS. As discussed above, as is the case for dual registrants, affiliates preparing separate relationship summaries must deliver them to each retail investor with equal prominence and at the same time, without regard to whether the particular retail investor qualifies for those retail services or accounts. Each of the relationship summaries must reference and provide a means of facilitating access to the other. General Instruction 5.B.(ii).a. to Form CRS.

[227] General Instruction 5.B.(ii).b. to Form CRS. Firms that are unaffiliated will be treated as standalone broker-dealers and standalone investment advisers, each with an independent responsibility to create and deliver its own relationship summary in accordance with the final instructions.

Finally, we modified the instructions to explicitly permit a firm to acknowledge other financial services the firm provides in addition to its services as a broker-dealer or investment adviser registered with the SEC, such as insurance, banking, or retirement services, or investment advice pursuant to state registration or licensing.[228]

Firms may include a means of facilitating access (e.g., cross-references or hyperlinks) to additional information about those services.[229] Some commenters encouraged the SEC to allow firms to disclose services of other affiliates, even if those services are not regulated by the SEC, such as investment advisory services offered by an affiliated thrift savings institution.[230] In response to our request for comment asking whether we should permit firms to include wording regarding other types of services and lines of businesses, several commenters submitting mock-ups of relationship summaries included language referencing banking and insurance services or products.[231] We found these comments persuasive and believe that permitting firms to reference financial services not necessarily regulated by the Commission so that retail investors can see the range of options available to them can benefit their decision-making, as discussed above.[232] This new instruction supports and expands upon the commenters' suggestions. Given that the focus of the relationship summary is on brokerage and/or advisory services, however, information pertaining to other services should not obscure or impede understanding of the information that must be disclosed in accordance with the Form CRS instructions.[233]

[228] General Instruction 5.C. to Form CRS. This would also permit a broker-dealer that is registered with one or more states as an investment adviser to refer to such advisory services.

[229] General Instruction 5.C. to Form CRS.

[230] See Northwestern Mutual Letter (seeking flexibility to disclose advisory services offered through an affiliated thrift because this would be in the clients' best interest); ACLI Letter (asserting that Form CRS is not flexible enough to describe in a meaningful and accurate way investment advisory services provided by insurance affiliates such as banks or thrifts).

[231] See ASA Letter; Primerica Letter; Comment Letter of Stifel Financial (Aug. 7, 2018) (“Stifel Letter”) (referencing bank sweep accounts and also providing: “Banks and insurance brokers and agents may also provide access to financial planning and advice services, but these services are beyond the scope of this document.”); Cetera Letter I (referencing bank sweep programs).

[232] See supra footnotes 215, 218-219, and accompanying text.

[233] See General Instruction 5.C. to Form CRS.

We believe that, together, these requirements for dually registered firms, financial professionals, and affiliates will enhance comparability while providing flexibility for them to present their services and relationships in the way the firm believes to be the clearest.

B. Items

The relationship summary is principally designed to provide succinct information about (i) relationships and services the firm offers to retail investors; (ii) fees and costs that retail investors will pay, conflicts of interest, and the applicable standard of conduct; and (iii) disciplinary history. The proposed relationship summary included this information as well as additional topics that we are eliminating, as explained further below. In determining the scope of the relationship summary, we balanced the need for robust disclosures with the risk of “information overload” and reader disengagement, a theme in comment letters, investor feedback at roundtables and in the Feedback Forms, and observations reported in the RAND 2018 report and other surveys and studies.

Some of the key changes from the proposal include:

We have modified the sections to place substantively related information generally together. We believe this will facilitate comprehension, leading to a better-informed decision-making process and selection of a firm, financial professional, account type, services, and investments.

The final instructions simplify the introduction; highlight disciplinary history in a separate section; and integrate key questions, now characterized as “conversation starters,” among the remaining sections of the relationship summary.

After reviewing the comments and observations reported in the RAND 2018 report and other surveys and studies, we have determined to remove prescribed generalized comparisons between brokerage and investment advisory services. 1. Introduction

The relationship summary will include a standardized introductory paragraph. The instructions will require a firm to: (i) State the name of the broker-dealer or investment adviser and whether the firm is registered with the Securities and Exchange Commission as a broker-dealer, investment adviser, or both; (ii) indicate that brokerage and investment advisory services and fees differ and that it is important for the retail investor to understand the differences; and (iii) state that free and simple tools are available to research firms and financial professionals at the Commission's investor education website, Investor.gov/CRS, which also provides educational materials about broker-dealers, investment advisers, and investing.[234]

[234] See Item 1 of Form CRS. Firms also must include the date prominently at the beginning of the relationship summary, for example, in the header or footer of the first page or in a similar location for a relationship summary provided electronically. See id.

The introduction's instructions as adopted differ from the proposal, which would have required prescribed wording in the introduction that differed for broker-dealers, investment advisers, and dual registrants. Specifically, the prescribed wording in the proposed introduction was intended to highlight in a generalized sense and make investors aware that broker-dealers and investment advisers are different, and that investors needed to carefully consider this choice. We received one comment specifically addressing the introduction. It stated that the prescribed wording would not capture the attention of retail investors and failed to adequately convey information regarding differences between investment advisers and broker-dealers.[235] In addition, several of the mock-ups commenters submitted included other suggestions for beginning the relationship summary, many of which had an introduction that was generally shorter and included less discussion about generalized business models than the proposed relationship summary.[236] In response to the comment and the mock-ups, a number of which we found conveyed useful information in a more concise manner than the proposed prescribed wording, we simplified and standardized the introductory paragraph, eliminating or replacing most of the prescribed wording we proposed, as discussed further below. In addition, we added a requirement to provide a link to Investor.gov/CRS in the Introduction to highlight the tools and educational resources available to retail investors. This dedicated page on Investor.gov will provide information specifically tailored to educate retail investors about financial professionals, including search tools in order to research firms and financial professionals and information about broker-dealers and investment advisers and their different services, fees, and conflicts. We believe the changes and the new page will better focus retail investors on how the relationship summary can be most helpful to them, while providing a link to resources to more general investor education information at the front of the relationship summary.

[235] See CFA Letter I. The commenter argued that the introduction would best be used to convey additional basic information about the differences between services offered by broker-dealers, investment advisers, and dual registrants. See id.

[236] See, e.g., Primerica Letter; Schwab Letter I; SIFMA Letter.

We made the following specific changes to the introduction: First, the final instructions require all firms to include certain information without prescribing the specific words that firms

must use.[237] The proposed relationship summary would have required prescribed wording that differed for standalone investment advisers, standalone broker-dealers, and dual registrants.[238] These changes correspond with the general approach throughout the final instructions of permitting more flexibility for firms to tailor the wording of their relationship summaries to enhance the relationship summary's accuracy, clarity, usability, and design.[239]

[237] See Item 1 of Form CRS.

[238] See Proposed Items 1.B. (standalone broker-dealers); 1.C. (standalone investment advisers); and 1.D. (dual registrants) of Form CRS.

[239] See supra footnote 83 and accompanying text.

Second, we eliminated the proposed requirement that standalone investment advisers state that they do not provide brokerage services, and vice versa.[240] We believe this information is more succinctly conveyed by including the firm's registration status.[241] Additionally, commenters pointed out that the choice of financial services providers is not binary—there are more than two types of services offered that could apply.[242] We agree that the proposed wording could be viewed as unduly constricting and potentially misleading.

[240] In bold font, a standalone broker-dealer would have been required to state: “We are a broker-dealer and provide brokerage accounts and services rather than advisory accounts and services.” Proposed Item 1.B. of Form CRS. Likewise, a standalone investment adviser would have been required to state in bold font: “We are an investment adviser and provide advisory accounts and services rather than brokerage accounts and services.” Proposed Item 1.C. of Form CRS. Dual registrants would have included a similar statement in bold font: “Depending on your needs and investment objectives, we can provide you with services in a brokerage account, investment advisory account, or both at the same time.” Proposed Item 1.D. of Form CRS.

[241] As noted and discussed further infra, the Introduction will also refer retail investors to Investor.gov/CRS for further information regarding broker-dealers and investment advisers.

[242] See, e.g., ACLI Letter (describing the “binary approach that the SEC has taken, which is not entirely accurate for the distribution of variable annuity and variable life products”).

Third, we excluded the statement for dual registrants that, depending on an investor's needs and investment objectives, the firm can provide services in a brokerage account, investment advisory account, or both at the same time. We believe that this information is conveyed more effectively by the statement of a firm's registration status and the information provided elsewhere in the relationship summary, such as in the description of services that the firm provides.[243] In addition, requiring a statement of a firm's registration status at the beginning of the relationship summary helps obviate a need for the Affirmative Disclosures under the Exchange Act and the Advisers Act proposed specifically to require a broker-dealer and an investment adviser to prominently disclose that it is registered as a broker-dealer or investment adviser, as applicable, with the Commission in print or electronic retail investor communications.[244] As discussed below, we are not adopting the Affirmative Disclosures.[245] In response to our request for comment relating to the Affirmative Disclosures,[246] several commenters stated that the proposed rules were duplicative of other disclosure obligations (e.g., Form ADV, Regulation Best Interest, Form CRS) [247] and that such rules were costly and difficult to implement and supervise.[248]

[243] See infra Section II.B.2.

[244] See Proposing Release, supra footnote 5, at Section III.D.

[245] See infra Section III.

[246] See Proposing Release, supra footnote 5, at Section III.D.

[247] See, e.g., LPL Financial Letter; SIFMA Letter; IRI Letter; Committee of Annuity Insurers Letter; Trailhead Consulting Letter; see also infra Section III.

[248] See, e.g., LPL Financial Letter; Bank of America Letter; IRI Letter; SIFMA Letter; Comment Letter of Altruist Financial Advisors LLC (Aug. 7, 2018) (“Altruist Letter”); see also infra Section III.

Fourth, we have included an instruction that allows (but does not require) reference to FINRA or Securities Investor Protection Corporation (“SIPC”) membership in a manner consistent with other rules and regulations (e.g., FINRA rule 2210).[249]

[249] See Item 1.A. of Form CRS.

We are not adopting the proposed requirements to include statements that: (i) There are different ways an investor can get help with investments; (ii) an investor should carefully consider which types of accounts and services are right for him or her; (iii) the relationship summary gives an investor a summary of the types of services the firm provides and how the investor pays; and (iv) an investor should ask for more information with a specific reference to the key questions.[250] We believe that this information is not necessary in the introduction and is better conveyed through the revised question-and-answer structure of the relationship summary and a more streamlined introduction highlighting that it is important for retail investors to understand the difference between brokerage and investment advisory services and fees and referencing Investor.gov/CRS.[251] The conversation starters more directly prompt discussion between retail investors and their investment professionals than a generalized statement to ask for more information, and the conversation starters relating to the Relationships and Services item convey that an investor should carefully consider which types of accounts and services are appropriate. In addition, several commenter mock-ups demonstrated that removing the prescribed wording from each of these changes results in a shorter introduction and promotes additional white space in the relationship summary. Our adopted instructions remove required text that might be unnecessary for investors, similar to introductions in mock-ups that were typically shorter with less discussion about generalized business models than the proposed relationship summary.[252] As a result, we believe these changes will enhance the relationship summary's clarity, usability, and design.

[250] See Proposed Items 1.B. (standalone broker-dealers); 1.C. (standalone investment advisers); and 1.D. (dual registrants) of Form CRS.

[251] Similarly, we eliminated the reference to suggested questions on a specified page because the key questions are now included throughout the relationship summary.

[252] See, e.g., Primerica Letter; Schwab Letter I; SIFMA Letter.

Finally, we added a requirement to provide a link to Investor.gov/ CRS and state that free and simple search tools are available at Investor.gov/CRS in order to research firms and financial professionals. Firms also will state that the page provides educational materials about broker-dealers, investment advisers, and investing. These materials include information about the different services and fees that broker-dealers and investment advisers offer. We believe a focus on Investor.gov and specifically the Investor.gov/CRS page at the beginning of the relationship summary will be more helpful to retail investors than the proposed relationship summary introduction. Investor.gov provides various resources that can assist with investor education relating to firms and their professionals. Among other components, Investor.gov currently provides resources prepared by Commission staff for retail investors to:

Review the background of their investment professional;

Educate themselves about investment products, including the risks and unique characteristics of many products;

Perform fee calculations;

Review Investor Alerts and Bulletins;

Find contact information for the Commission; and

Review educational information regarding broker-dealers and investment advisers.[253]

[253] See Investor Bulletin: Ten Ways to Use Investor.gov (Mar. 8, 2017), available at https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-bulletin-ten-ways-use-investorgov; see also Brokers, available at https://www.investor.gov/research-before-you-invest/methods-investing/working-investment-professional/brokers; Investment Advisers, available at https://www.investor.gov/research-before-you-invest/methods-investing/working-investment-professional/investment-advisers. _____________________________________-

The Investor.gov/CRS page will bring together these types of educational materials about investment professionals, along with broader tools and other content specifically tailored for retail investors on Investor.gov, which will help them to more easily learn about different types of firms and find information about specific firms and financial professionals.

As discussed further below, we are removing discussions in the proposed relationship summary that were more generalized or educational in nature, including the comparison sections for standalone broker-dealers and investment advisers and other statements comparing these two different types of financial services and fees. Many commenters indicated that the Commission is generally better-positioned to provide investor education materials as compared to firms.[254] As a result, the revised introduction provides the Investor.gov/CRS link at the beginning of the relationship summary to direct retail investors to the Commission staff's resources and highlights the importance of investor education.[255]

[254] See supra footnote 40 and accompanying text.

[255] Certain commenters provided mock-ups that did not include any introductory wording. E.g., Fidelity Letter; IAA Letter I. In our view, these mock-ups either did not include, or, at minimum, did not appropriately highlight, important information regarding the registration status of the firm or the availability of additional information for retail investors.

Investors and commenters also supported highlighting Investor.gov more generally. Investor feedback at roundtables generally indicated that Investor.gov was a useful website for retail investors and should be prominent in the relationship summary.[256] Comment letters were supportive of the Commission providing educational materials to retail investors generally and Investor.gov specifically.[257] Observations in surveys and studies also indicated that many retail investors would seek information at Investor.gov and would trust that information because it is a government site.[258] Some investor studies, however, indicated that retail investors did not understand what information was available at Investor.gov.[259] Moving the link to Investor.gov/CRS and the related explanation to the front of the relationship summary (from the “Additional Information” section at the end of the relationship summary, as proposed) will address this issue by making the website more prominent and by concentrating information helpful to retail investors on one dedicated page on Investor.gov.

[256] See Denver Roundtable (Investor Nine: “Yeah, I went there [to Investor.gov], that's good.” Ms. Siethoff: “Did you think that sort of thing should be highlighted more?” Investor Nine: “More, yes. More”); Philadelphia Roundtable (Investor Four: “I went to those websites [including Investor.gov] and I found them very useful.”). Some Feedback Form commenters also indicated that a link to Investor.gov or a similar educational website would be helpful. See, e.g., Baker Feedback Form (“I found the document overall extremely useful and learned, most importantly, to refer to the sec.gov website often”); Shepard Feedback Form (“An investing.gov [sic] website seems to be a useful source”); Smith2 Feedback Form (“would like to see a link included to a site or sites that contain general investment information”).

[257] See, e.g., MassMutual Letter (“The SEC provides a wealth of information at www.investor.gov for educational purposes . . . Providing general information about broker-dealers and investment advisers in a consistent and readily-accessible [sic] space on the SEC's website would allow each firm to use the space available in Form CRS to accurately describe its brokerage and advisory services, with tailored language to reflect its business model, products and services offered and conflicts of interest.”).

[258] See Kleimann II, supra footnote 19 (“Many participants said that they would use the investor.gov site . . . [and] that they would put a high level of trust in whatever information would be on the site because it was a government site.”); RAND 2018, supra footnote 13 (finding that two-thirds of investors would be “very likely” or “somewhat likely” to click on a hyperlink for investor education materials).

[259] See Kleimann I, supra footnote 19 (“None [of the study participants] had a clear idea of the information that would be provided at Investor.gov.”); see also Kleimann II, supra footnote 19 (“Many participants said that they would use the investor.gov site to research the firm, but few knew what specific information would be at that site . . .”).

Relationships and Services

As proposed, after the introduction firms will be required to summarize the relationships and services that they offer to retail investors. They will use a revised heading, “What investment services and advice can you provide me? ”, which follows the new question-and-answer format.[260] Several commenters used this question or a similar heading in mock-ups they provided.[261] Generally as proposed, we are requiring firms to provide information about specific aspects of their brokerage and investment advisory services, with modifications from the proposal to permit firms to use their own wording to cover these topics.

[260] Item 2.A. of Form CRS.

[261] See, e.g., IAA Letter I; LPL Financial Letter; Primerica Letter ; SIFMA Letter; Wells Fargo Letter; Fidelity Letter; Schwab Letter I (mock-up). We proposed requiring the heading, “[Types of] Relationships and Services.” As discussed above, many commenters recommended that the relationship summary use a question-and-answer format as a more engaging approach for retail investors.

We proposed separate instructions for firms to describe brokerage account services and investment advisory account services. Firms would have used a mix of prescribed wording and their own wording to provide a summary overview of fees and certain required topics, including the scope of advice services, investment discretion, monitoring, and significant limitations on investments available to retail investors.[262] We received feedback from the observations in the RAND 2018 report, other surveys and studies and on Feedback Forms that relationships and services is an important area to cover,[263] and that investors learned important information from the prescribed wording on relationships and services.[264] In addition, the IAC recommended that the Commission adopt a uniform, plain English disclosure for retail investors that would include basic information “about the nature of services offered,” among other

things.[265] However, some commenters expressed concern that, without more educational content, this approach would not sufficiently inform or would confuse retail investors.[266] One commenter pointed out that the proposed instructions dictated different ways for broker-dealers and investment advisers to describe similar services.[267] These commenters suggested including more explanatory wording or definitions to cover what services are typically associated with brokerage accounts and investment advisory accounts, to provide more background information to help retail investors understand the firm-specific disclosures.[268] At the same time, commenters noted that summary, prescribed wording for this section may not accurately describe the services of every broker-dealer or investment adviser.[269] Results of the RAND 2018 survey reflected these concerns and showed that almost a quarter of survey respondents (22.2%) described the relationships and services section as “difficult” or “very difficult” to understand.[270] Comments from participants in qualitative interviews reported in the RAND 2018 report, as well as comments from roundtable participants and on Feedback Forms, indicated that prescribed terms such as “transaction-based fee,” “asset-based fee,” “discretionary account,” and “non-discretionary account” contributed to this difficulty.[271]

[262] See, e.g., Proposed Item 2.B. of Form CRS (“If you are a broker-dealer that offers brokerage accounts to retail investors, summarize the principal brokerage services that you provide to retail investors.”); and Proposed Item 2.C. of Form CRS (“If you are an investment adviser that offers investment advisory accounts to retail investors, summarize the principal investment advisory services that you provide to retail investors.”).

[263] See RAND 2018, supra footnote 13 (next to fees and costs, survey participants responded the relationships and services section was one of the most informative; more than 56% of survey participants said to keep the section the same length); see also Cetera Letter II (Woelfel) supra footnote 17 (85% of survey participants responded that this section was very or somewhat important); Schwab Letter I (Koski) supra footnote 21 (54% of survey participants selected “a description of the investment advice services the firm will provide to me” from a menu of 11 subjects as one of the four most important things for firms to communicate). In addition, nearly 90% of Feedback Form commenters graded this section as “very useful” or “useful.” See Feedback Forms Comment Summary supra footnote 11 (summary of responses to Question 2(a)).

[264] See RAND 2018, supra footnote 13 (in qualitative interviews, participants appeared to have “a general understanding that this section describes two different services or accounts that a client would choose”); Kleimann I, supra footnote 19 (while study authors found that participants had difficulty with “sorting out the similarities and differences,” this study also reports that “[n]early all participants easily identified a key difference between the Brokerage Accounts and Advisory Accounts as the fee structure either being tied to transactions or to assets. Some further identified as a key difference who had the final approval on all transactions, seeing the Brokerage Account as giving them more control on making the final decision.”).

[265] See IAC Broker-Dealer Fiduciary Duty Recommendations, supra footnote 10; and IAC Form CRS Recommendation, supra footnote 10.

[266] See CFA Letter I (“We believe the Commission should . . . require firms to be crystal clear about the nature of the services they offer. Simply telling [investors] that the account is a brokerage account or an advisory account doesn't necessarily convey useful information.”); CFA Institute Letter I (“Given the similarities to what investment advisers offer, CRS disclosure of these additional services will likely confuse investors without language clarifying that they are outside of their usual broker-dealer duties and would typically require a separate contract.”).

[267] CFA Letter I.

[268] See CFA Letter I (suggesting prescribed wording for how typical broker-dealers and investment advisers might describe their services); CFA Institute Letter I (suggesting alternative wording for how broker-dealers might describe their services). Commenters on Feedback Forms also asked for explanatory wording and definitions. See Feedback Forms Comment Summary, supra footnote 11 (summary of responses to Question 4) (seven commenters asked for definitions of terms such as transaction-based fee, asset-based fee or wrap fee; 10 asked for a definition or better explanation of the term “fiduciary”); see also, Bhupalam Feedback Form (“The definition of a broker dealer [sic] and investment advisory [sic] is not very clear.”); Daunheimer Feedback Form (“For a novice investor, all terms that seasoned investors take for granted, are new to them. Consider making the language as simple as possible.”); Margolis Feedback Form (“wording is very confusing and not very accurate”); Anonymous27 Feedback Form (“define better”), but see Baker Feedback Form (“the discussion of differences among the relationships is very useful as it describe [sic] the differences in services provided . . . and most importantly, the difference between a commission-based fee and an `asset-value' fee”); Hawkins Feedback Form (“Summary does a good job of explaining the basis [sic] services for a brokerage vs advisory account. Some clearer examples could help.”); Rohr Feedback Form (“Makes clear how a discretionary account differs from a brokerage account”).

[269] See, e.g., MassMutual Letter (explaining that the prescribed wording that a customer will pay a commission each time a security is bought and sold is not universally true, e.g., for mutual funds and variable annuities with internal exchange programs, which allow a customer to switch from one investment to another without paying a commission); CFA Letter I (recognizing that a generalized description of portfolio management services, included for purposes of educating investors, does not apply to all business model among registered investment advisers).

[270] RAND 2018, supra footnote 13. In the RAND 2018 qualitative interviews, participants noted several phrases that raised concerns such as “additional services” and “might pay more” and identified terms that needed further definition. Id. Another interview-based investor study found that “[p]articipants were quite mixed in their understanding about the advice and monitoring that was offered in the two accounts” when presented with the proposed sample dual registrant relationship summary. Kleimann I, supra footnote 19.

[271] RAND 2018, supra footnote 13; see also Betterment Letter I (Hotspex) supra footnote 18 (finding that “respondents found certain terminology (e.g., fiduciary,' asset-based,' `ETF') to be unclear or lack sufficient detail”). Roundtable discussions found similar results. See, e.g., Philadelphia Roundtable (participant finding “transaction-based fee” to be complex); Miami Roundtable (participant stating that “most people don't really understand” what fiduciary duty means); see also Feedback Forms Comment Summary, supra footnote 11 (summary of responses to Question 4) (Seven Feedback Forms included narrative comments that asked for definitions of terms such as “transaction-based fee,” “asset-based fee” or “wrap fee;” 10 asked for explanation or definition of the term “fiduciary”); Anonymous06 Feedback Form (“Definitions might not be understood transaction based vs asset based fee”); Baker Feedback Form (“It may be more helpful to have detailed definitions (Ex. “transaction-based fee”) that, unfortunately, result in a longer document.”); Bhupalam Feedback Form (“definition of a broker dealer [sic] and investment advisory [sic] is not very clear”); Starmer2 Feedback Form (“Spell out . . . best interest”).

As discussed in Section II.A.1. above, we are sensitive to the potential inaccuracies and confusion that the prescribed wording can create. We also recognize that in some cases, providing instructions that require broker-dealers and investment advisers to describe similar services in different ways can create confusion. Accordingly, we have revised the instructions to allow firms to use more of their own wording. We also eliminated the separate instructions for brokerage account services and investment advisory account services, and instead are adopting one set of instructions that generally applies the same requirements to all firms.[272] To facilitate comparison of firms' relationships and services, however, we have retained the concept of specific sub-topics that each firm must cover in this section.[273]

[272] See, e.g., Item 2.B. of Form CRS (requiring all firms to summarize their principal services but requiring broker-dealers to state whether or not they offer recommendations and investment advisers to state the particular types of advisory services they offer).

[273] As discussed in Section II.A.2 above, we are not requiring that these sub-topics follow a prescribed order, so firms are able to tailor the presentation of their services, as well as include additional information about their brokerage or advisory services, so long as the description covers all applicable topics. See supra footnote 121 and accompanying text.

Another change from the proposed instructions relates to a concern regarding how accounts were delineated. The proposed instructions would have applied based on whether or not broker-dealers and investment advisers offered brokerage accounts or investment advisory accounts to retail investors and would have included some prescribed language referencing accounts.[274] Insurance and variable annuity providers commented that this focus on accounts would not allow them to accurately describe insurance offerings and would be confusing, particularly to investors whose insurance or annuity products are held directly with an issuing insurance company.[275] We agree and have replaced references to accounts in this section with references to “services, accounts, or investments you make available to retail investors.” [276]

[274] See, e.g., Proposed Items 2.B.2. (“If you offer accounts in which you offer recommendations to retail investors, state that the retail investor may select investments or you may recommend investments for the retail investor's account . . . .”) and 2.C.4. (“If you significantly limit the types of investments available to retail investors in any accounts, include the following . . . .”) of Form CRS. In addition, some of the prescribed wording included language specific to accounts. See, e.g., Proposed Item 2.B.1. of Form CRS. Broker-dealers would state, “If you open a brokerage account, you will pay us a transaction-based fee, generally referred to as a commission, every time you buy or sell an investment.”

[275] E.g., ACLI Letter; Committee of Annuity Insurers Letter; IRI Letter; MassMutual Letter; New York Life Letter; Northwestern Mutual Letter.

[276] Item 2.B. of Form CRS.

a. Description of Services

The final instructions have an overarching requirement to state that the firm offers brokerage services, investment advisory services, or both, to retail investors, and to summarize the principal services, accounts, or investments the firm makes available to retail investors.[277] A firm also must include any material limitations on those services.[278] The final instructions require firms to include certain

information in their descriptions. Similar to the proposal, broker-dealers must state the particular types of principal brokerage services the firm offers to retail investors, including buying and selling securities, and whether or not they offer recommendations to retail investors (i.e., to distinguish execution-only services).[279] Investment advisers must state the particular types of principal advisory services they offer to retail investors, including, for example, financial planning and wrap fee programs.[280] The final instructions do not, however, require prescribed wording to describe the particular characteristics of these services, as did the proposed instructions.[281] Commenters argued that the proposed prescribed wording may not accurately describe the services of every broker-dealer or investment adviser.[282] As discussed in Section II.A.1 above, given that investors may be confused by information that does not directly relate to the firm's offerings, we are allowing firms to use their own wording to describe their own services. Therefore, unlike the proposal, the final instructions do not prescribe specific wording for firms to describe the particular characteristics of these services.[283]

[277] Item 2.B. of Form CRS.

[278] Item 2.B. of Form CRS.

[279] Item 2.B. of Form CRS.

[280] Item 2.B. of Form CRS.

[281] See, e.g., Proposed Item 2.B.2. of Form CRS (requiring broker-dealers (i) that only offer accounts in which they offer recommendations to retail investors to state that the retail investor may select investments or the broker-dealer may recommend investments for the retail investor's account, but the retail investor “will make the ultimate investment decision regarding the investment strategy and the purchase or sale of investments” and (ii) that do not offer recommendations to state that the retail investor “will select the investments” and “will make the ultimate investment decision regarding the investment strategy and the purchase or sale of investments”).

[282] See, e.g., MassMutual Letter (explaining that the prescribed wording that a customer will pay a commission each time a security is bought and sold is not universally true, e.g., for mutual funds and variable annuities with internal exchange programs, which allow a customer to switch from one investment to another without paying a commission); CFA Letter I (recognizing that a generalized description of portfolio management services, included for purposes of educating investors, does not apply to all business models among registered investment advisers).

[283] See generally Items 2.B.(i) through 2.B.(v) of Form CRS.

Some commenters raised concerns about investor confusion if both broker-dealers and investment advisers discuss the advice they provide in the relationship summary. To mitigate that confusion, some commenters called for an explicit statement that broker-dealers are in sales relationships.[284] In response to these concerns, we added the explicit requirement that broker-dealers state that they buy and sell securities, in order to clarify their principal services.[285] We also have included a note in the final instructions that broker-dealers offering recommendations should consider the applicability of the Investment Advisers Act of 1940, consistent with SEC guidance.[286]

[284] See, e.g., CFA Institute Letter I; Consumers Union Letter; see also Kleimann II, supra footnote 19 (alternative wording for redesigned relationship summary described broker-dealer services as a “sales relationship”).

[285] See Item 2.B of Form CRS (“For broker-dealers, state the particular types of principal brokerage services you offer, including buying and selling securities, and whether or not you offer recommendations to retail investors.”).

[286] See Item 2.B.(ii) to Form CRS. See Solely Incidental Release, supra footnote 47.

The final instructions require all firms to address the following topics in the description of their services: (i) Monitoring; (ii) investment authority; (iii) limited investment offerings; and (iv) account minimums and other requirements.[287] As discussed further below, the final instructions require firms to include much of the same substantive information as proposed, but rely less on prescribed wording and assumptions regarding typical brokerage and investment advisory accounts.[288] In response to comments, we added a new requirement for firms to disclose whether or not they have account minimums.[289] Commenters recommended that we include information about account minimums in the relationship summary.[290] In addition, a number of commenters submitting mock-ups included disclosures on account minimums in their forms.[291] We agree this information is important to investors when they are deciding on account types and services, particularly as they consider the amount of funds they are planning to invest and whether they may incur any fees or become ineligible for certain services if their accounts fall under certain dollar thresholds. We also removed requirements to discuss fees at the beginning of this section [292] and are consolidating these requirements with other related ones in the fees, costs, conflicts, and standard of conduct section, as discussed below.[293] We also are not adopting a proposed requirement to describe any regular communications with retail investors.[294] Neither the RAND 2018 report nor other surveys and studies suggested that this information was important to investors, as compared to fees. Mock-ups submitted by commenters also did not include this disclosure, underscoring the relative importance of other topics. Given the goal of limiting the length of the relationship summary so that investors remain engaged and are not overwhelmed by the information, we decided to prioritize requiring other information in the relationship summary.

[287] Item 2.C. of Form CRS.

[288] In the proposed instructions, assistance with developing or executing the retail investor's strategy and monitoring the performance of the retail investor's account were characterized as additional services for broker-dealers. The final instructions do not make this distinction and instead permit firms more flexibility to describe their services accurately. See Proposed Item 2.B.3. of Form CRS.

[289] Item 2.B.(iv) to Form CRS (“Explain whether or not you have any requirements for retail investors to open or maintain an account or establish a relationship, such as minimum account size or investment amount.”).

[290] See, e.g., NASAA Letter (“Form CRS should specify minimum account size and include information on miscellaneous fees different categories of investors can expect to pay.”); Cetera Letter I (Form CRS should include “[w]hether or not the firm has established standards for the minimum or maximum dollar amount of various account types.”).

[291] See, e.g., Primerica Letter and Cetera Letter I.

[292] See Proposed Items 2.B.1. (broker-dealers) (“If you open a brokerage account, you will pay us a transaction-based fee, generally referred to as a commission, every time you buy or sell an investment.”); and 2.C.1. (investment advisers) (“State the type of fee you receive as compensation if the retail investor opens an investment advisory account. For example, state if you charge an on-going asset-based fee based on the value of cash and investments in the advisory account, a fixed fee, or some other fee arrangement. Emphasize the type of fee in bold and italicized font. If you are a standalone adviser, also state how frequently you assess the fee.”) of Form CRS.

[293] See infra footnotes 373-375 and accompanying text.

[294] See Proposed Items 2.B.3. (broker-dealers) and 2.C.2. (investment advisers) of Form CRS (“Briefly describe any regular communications you have with retail investors, including the frequency and method of the communications.”).

Monitoring. The final instructions require both broker-dealers and investment advisers to explain whether or not they monitor retail investors' investments, including the frequency and any material limitations of that monitoring, and if so, whether or not the monitoring services are part of the firm's standard services.[295] In the proposal, different instructions concerning monitoring applied to broker-dealers and investment advisers. Broker-dealers would have stated whether they monitored the performance of retail investors' accounts, and if so, how frequently they performed such monitoring, whether it constituted additional services or was part of the broker-dealer's standard services, and whether a retail investor would pay more for it.[296] Investment advisers

would have stated how frequently they monitor retail investors' accounts.[297]

[295] Item 2.B.(i) of Form CRS.

[296] Proposed Item 2.B.3. of Form CRS.

[297] Proposed Item 2.C.2. of Form CRS.

One commenter objected to the requirement for broker-dealers to describe additional services, including monitoring, on the basis that the information would add little value.[298] On the other hand, several commenters suggested that understanding the degree to which firms monitor the performance of their investments can be important to investors.[299] One of these commenters noted that broker-dealers and investment advisers have different legal obligations to monitor accounts, and that differences would remain even under Regulation Best Interest.[300] Observations from surveys and studies indicated that investors are interested in or may benefit from clarification of monitoring services.[301] For example, an overwhelming majority of participants in the OIAD/RAND study believed that a financial professional required to act in an investor's best interest would monitor the investor's account on an on-going basis.[302] In qualitative interviews in the RAND 2018 report, participants seemed to distinguish brokerage and investment advisory accounts and assess which type of relationship was a better fit for different investors based on assumptions concerning monitoring.[303] Other surveys and studies also showed that participants varied in their understanding of monitoring and whether they should expect firms to monitor their account.[304]

[298] See Wells Fargo Letter (recommending elimination of broker-dealer description of additional services because it could take up substantial space and adds little value for the investor).

[299] See, e.g., Comment Letter of the St. John's Law School Securities Arbitration Clinic (Aug. 7, 2018) (“St. John's Law Letter”); CFA Letter I (discussing investors' expectations of a fiduciary duty based on whether and to what degree a firm or financial professional provides monitoring services); Comment Letter of the Commonwealth of Massachusetts (Aug. 7, 2018) (“Massachusetts Letter”) (suggesting that the payment of ongoing compensation, such as a trail commission, indicates an ongoing relationship and should carry ongoing duties to monitor the investment); IAA Letter I (stating that, just as an adviser's duty to monitor extends to all personalized advice it provides a client, so should investors expect a similar duty from broker-dealers when providing monitoring services).

[300] See CFA Letter II.

[301] See, e.g., RAND 2018, supra footnote 13 (in qualitative interviews, “participants were sometimes unclear on how a financial professional would monitor an account” and “some participants were unclear on how frequently monitoring would occur”).

[302] See OIAD/RAND (finding that 69% of all participants in the survey, 75% of a specialized group defined as “investors,” and 86% of a specialized group defined as “investment advice consumers” believed that best interest required ongoing monitoring).

[303] See RAND 2018, supra footnote 13 (in qualitative interviews, “some felt that brokerage accounts are better for those with investment expertise and time to dedicate to investing, whereas advisory accounts are better for those who have less expertise and/ or less time to monitor investments”; one participant was confused by a statement that the firm could provide “additional services to assist you and monitor performance” and wanted to know up front which services would be included and which would cost extra.).

[304] See Kleimann I, supra footnote 19 (“Participants assumed that the level of advice and monitoring provided in the two accounts would be the same. They defined monitoring as constant looking at the market and their accounts and making sure their accounts were making money”); Betterment Letter I (Hotspex) supra footnote 18 (among survey participants reviewing a standalone adviser relationship summary designed to follow the proposal sample, only 37% correctly identified as “false” a statement that broker-dealers typically monitor client's portfolios and provide advice on an ongoing basis).

We disagree with the comment that requiring broker-dealers to describe monitoring services would add little value. As we also state in the Regulation Best Interest Release, we believe that it is important for retail customers to understand (1) the types of monitoring services (if any) a particular broker-dealer provides, and (2) whether the broker-dealer will be monitoring the particular retail customer's account.[305] We also agree with commenters that monitoring is an important distinguishing feature of different investment services and believe that retail investors should have accurate expectations of the types of monitoring firms offer. We are therefore requiring firms to explain whether or not they monitor retail investors' investments, and if so, the frequency, material limitations, and whether or not monitoring is offered as part of the firm's standard services.[306]

[305] See Regulation Best Interest Release, supra footnote 47; see also Solely Incidental Release, supra footnote 47.

[306] Item 2.B.(i) of Form CRS.

The proposal provided different instructions for broker-dealers and investment advisers concerning monitoring, requiring broker-dealers to discuss monitoring of account performance only if they offered it, and requiring investment advisers to disclose how frequently they monitor retail investors' accounts, as monitoring is generally part of ongoing advisory services.[307] Even with the different wording for broker-dealers and investment advisers as proposed, some participants in investor studies still assumed that the level of monitoring was the same between broker-dealers and investment advisers.[308] As discussed above, we believe it is important for firms to describe more accurately and precisely the monitoring that they actually do for retail investors. Therefore, we are retaining, with slight modifications, the obligation to disclose monitoring services, applying the same instruction to both broker-dealers and investment advisers, and eliminating the prescribed wording. The final instructions pertain to monitoring services generally and are not limited to monitoring for account performance only; to the extent firms describe monitoring services, they must include the frequency and any material limitations on these services and whether or not they are offered as part of the firm's standard services. We believe that subjecting firms to the same requirements to describe their own monitoring services, including a specific statement that they do not provide monitoring, if that is the case, will better facilitate investor understanding of whether any monitoring is provided and if so, the scope and type of such service. This approach also may result in more comparable information so that retail investors can understand the key differences among monitoring services by different firms based on firm-specific descriptions.

[307] See Fiduciary Release, supra footnote 47.

[308] See Kleimann I, supra footnote 19, at 10 (“Some participants assumed that the advice and level of monitoring was the same.”); Betterment Letter I (Hotspex) supra footnote 18 (among survey participants reviewing a standalone investment adviser's relationship summary designed to follow the proposal, only 37% correctly identified as “false” a statement that broker-dealers typically monitor client's portfolios and provide advice on an ongoing basis).

Investment Authority. The final instructions require investment adviser firms that accept discretionary authority to describe those services and any material limitations on that authority. Broker-dealers may, but are not required, to state whether they accept limited discretionary authority. Both investment advisers that offer non-discretionary services and broker-dealers must explain that the retail investor makes the ultimate decision regarding the purchase or sale of investments.[309]

[309] Item 2.B.(ii) of Form CRS.

Commenters and results from the RAND 2018 qualitative interviews suggested modifications to the proposed investment authority disclosures in the relationship summary but generally supported including this topic.[310] In

addition, various commenters submitting their own mock-ups included disclosures on investment authority in their relationship summaries.[311] One commenter also alluded to disputes that can arise when investors misunderstand the investment authority the financial professional exercises for different accounts.[312] One investor study indicated that only a few investors understood from the proposed sample dual-registrant relationship summary that non-discretionary advisory accounts offer investors the ability to approve recommendations.[313] Some RAND 2018 interview participants indicated that further definitions of “discretionary account” and “non-discretionary account” would be helpful.[314]

[310] See CFA Letter I (stating that it is necessary for firms to describe the various types of discretionary and/or non-discretionary accounts they offer with specificity for such information to be useful to investors in choosing among providers for financial services); CFA Institute (suggesting that investment advisers only be required to discuss the type of accounts they offer (i.e., discretionary and/or nondiscretionary accounts) because discussing both—when not both are offered—would be confusing to customers); Betterment Letter I (stating that some of the prescribed language concerning investment authority may lead to more confusion than it clarifies); RAND 2018 report, supra note 13 (participants in qualitative interviews stated that it would be helpful if the relationship summary provided clearer definitions of “discretionary account” and “non-discretionary account”); see also Kleimann I, supra note 19 (noting that some “identified a key difference as who had final approval on all transactions, seeing the Brokerage Account as giving them more control” and only a few “recognized that non-discretionary advisory accounts also offer this option.”). One Feedback Form commenter also noted that explanation of non-discretionary accounts was not clear. See Shaffer Feedback Form (broker-dealer recommendation and investment adviser “non-discretionary” account seem very similar. I was asking: “what's the difference.”), but see Asen Feedback Form (“The Relationship and Services section for BDs is clear in that the investment decision is the customer's . . .”); Rohr Feedback Form (“makes clear how a discretionary account differs from a brokerage account”).

[311] See, e.g., Stifel Letter; AALU Letter; Wells Fargo Letter; Cetera Letter I; LPL Financial Letter; IAA Letter I; Primerica Letter; ASA Letter.

[312] See St. John's Law Letter (describing an arbitration case in which investor was not informed of a change in investment authority when the account type changed).

[313] See Kleimann I, supra footnote 19 (noting that some “identified a key difference as who had final approval on all transactions, seeing the Brokerage Account as giving them more control” and only a few “recognized that non-discretionary advisory accounts also offer this option.”).

[314] See RAND 2018, supra footnote 13 (participants in qualitative interviews stated that it would be helpful if the relationship summary provided clearer definitions of “discretionary account” and “non-discretionary account”).

We continue to believe that it is important for investors to understand whether they or the firm or financial professional ultimately makes the investment decision in the relationship or service that they are considering. Accordingly, the final instructions generally require disclosure of the same substantive information on this topic as the proposed instructions, but in a less prescriptive way. As discussed in Section II.A.1, above, we believe that allowing firms to use their own wording to describe their discretionary and non-discretionary offerings and explaining what that means to retail investors in terms of who makes the ultimate investment decisions can lead to disclosures that are more meaningful and less confusing. We recognize that some investor feedback suggested that further definitions of “discretionary account” and “non-discretionary account” would be useful. While the final instructions do not require prescribed wording including these terms, as the proposed instructions would have required, the final instructions do require investment advisers that accept discretionary authority to use their own wording to explain similar information.[315]

[315] Item 2.B.(ii) to Form CRS.

The final instructions provide that investment advisers that accept discretionary authority will be required to describe these services and any material limitations on that authority.[316] Additionally, any such summary must include the specific circumstances that would trigger that discretionary authority and any material limitations.[317] Investment advisers may, for example, explain whether they seek the retail investor's approval before implementing or changing investment strategies or executing certain transactions. In comparison, the proposed instructions took a more prescriptive approach.[318] For example, the proposed instructions prescribed wording for investment advisers to include in their relationship summaries if they offer a discretionary account.[319] We believe that the more general final instruction provides investment advisers with the flexibility to describe their discretionary offerings more accurately.

[316] Item 2.B.(ii) of Form CRS.

[317] Item 2.B.(ii) of Form CRS.

[318] Compare Item 2.B.(ii) of Form CRS with Proposed Item 2.C.3 of Form CRS (“State if you offer advisory accounts for which you exercise discretion (i.e., discretionary accounts), accounts where you do not exercise discretion (i.e., non-discretionary accounts), or both. Emphasize the type of account (discretionary and non-discretionary) in bold and italicized font.”).

[319] See Proposed Item 2.C.3. of Form CRS (“If you offer a discretionary account, state that it allows you to buy and sell investments in the retail investor's account, without asking the retail investor in advance.”).

For broker-dealers, the final instructions provide that they may, but are not required to, state whether they accept limited discretionary authority.[320] We have made this disclosure optional for broker-dealers because of our understanding that these services may not be a significant part of broker-dealers' services.[321] Accordingly, describing them here may detract from disclosure of other items that better characterize the firm's business and would be more helpful to investors. If limited discretion services are a significant part of a broker-dealer's business, for example, if limited discretion services constitute material facts relating to the scope and terms of the relationship with the retail customer that need to be disclosed under Regulation Best Interest, that broker-dealer may wish to include in its relationship summary a statement that it offers limited discretion services.

[320] Compare Item 2.B.(ii) of Form CRS with Proposed Item 2.B.2, which instructed broker-dealers: “If you offer accounts in which you offer recommendations to retail investors, state that the retail investor may select investments or you may recommend investments for the retail investor's account, but the retail investor will make the ultimate investment decision regarding the investment strategy and the purchase or sale of investments. If you only offer accounts in which you do not offer recommendations to retail investors (e.g., execution-only brokerage services), state that the retail investor will select the investments and the retail investor will make the ultimate investment decision regarding the investment strategy and the purchase or sale of investments.”

[321] See discussion on discretionary authority in Solely Incidental Release, supra footnote 47; see also footnotes 284-286 and accompanying text.

Finally, both broker-dealers and investment advisers that offer non-discretionary services must explain that the retail investor makes the ultimate decision regarding the purchase or sale of investments.[322] Under the proposed instructions, firms would have been required to explain whether they offer non-discretionary services and what that means, but using prescribed wording. Investment advisers would have been required to state that they give advice and the retail investor decides what investments to buy and sell.[323] Broker-dealers would have been required to state that the retail investor will make the ultimate investment decision regarding the investment strategy and the purchase or sale of investments, in addition to other prescribed wording to distinguish execution-only accounts from those in which the broker-dealer would offer recommendations.[324] The final

instructions require firms to explain to retail investors that they make the ultimate investment decision in non-discretionary accounts, but do not include requirements to use prescribed wording or references to account types. This change is consistent with our general approach described above that such prescribed wording may be confusing or may not sufficiently cover the discretionary and non-discretionary services a firm may offer.[325]

[322] Item 2.B.(ii) of Form CRS.

[323] See Proposed Instruction to Item 2.C.3. of Form CRS (“If you offer a non-discretionary account, state that you give advice and the retail investor decides what investments to buy and sell.”).

[324] See Proposed Item 2.B.2. of Form CRS (“If you offer accounts in which you offer recommendations to retail investors, state that the retail investor may select investments or you may recommend investments for the retail investor's account, but the retail investor will make the ultimate investment decision regarding the investment strategy and the purchase or sale of investments. If you only offer accounts in which you do not offer recommendations to retail investors (e.g., execution-only brokerage services), state that the retail investor will select the investments and the retail investor will make the ultimate investment decision regarding the investment strategy and the purchase or sale of investments.”).

[325] See, e.g., CFA Letter I (suggesting that Form CRS should require advisers to discuss only what they offer in terms of discretionary or nondiscretionary accounts, because discussing both types when they offer only one would confuse investors); IAA Letter I (suggesting that the proposed prescribed wording would not cover sufficiently the variety of discretionary or non-discretionary advisory services a firm may offer and offering alternative language).

Limited Investment Offerings. The final instructions require firms to explain whether or not they make available or offer advice only with respect to proprietary products, or a limited menu of products or types of investments. If so, they must also describe the limitations.[326] In comparison, the proposed instructions included prescribed wording for firms to include if they significantly limit the types of investments in any accounts.[327] Specifically, broker-dealers would have stated, “We offer a limited selection of investments. Other firms could offer a wider range of choices, some of which might have lower costs.” [328] Investment advisers would have stated, “Our investment advice will cover a limited selection of investments. Other firms could provide advice on a wider range of choices, some of which may have lower costs.” [329] The proposed instructions gave examples of what might constitute a significant limitation on the types of investments, specifically, offering only one type of asset (e.g., mutual funds, exchange-traded funds, or variable annuities); mutual funds or other investments sponsored or managed by the firm or an affiliate, i.e., proprietary products; or only a small number of investments.[330] If these limits applied only to certain accounts the proposed instructions would have required firms to identify those accounts.[331]

[326] Item 2.C.(iii) of Form CRS.

[327] The Proposed Items stated, “If you significantly limit the types of investments available to retail investors in any accounts, include the following . . . .” Proposed Items 2.B.4. and 2.C.4. of Form CRS.

[328] Proposed Item B.4. of Form CRS.

[329] Proposed Item C.4. of Form CRS.

[330] Proposed Items B.4. and C.4. of Form CRS.

[331] Proposed Items B.4. and C.4. of Form CRS.

Comments were mixed on the proposed instruction concerning limited investment offerings. Several commenters acknowledged the importance of investors understanding limitations on investments.[332] Results of RAND 2018 qualitative interviews also indicated that investors would like to understand limits on investment offerings.[333] Some commenters expressed concerns that the proposed disclosure would not be of sufficient value to investors.[334] A number of commenters, whether or not they supported generally requiring firms to discuss limitations on investments, expressed concerns that the scope of “significantly limits” in the proposed instructions or “limited selection of investments” was not sufficiently clear.[335] Furthermore, a few commenters expressed concern that the prescribed wording (“Other firms could offer a wider range of choices, some of which might have lower costs.”) unduly prioritized cost over other investment product features or characteristics.[336]

[332] See CFA Letter I; CFA Institute Letter I; New York Life Letter; see also mock-ups submitted by commenters that included the “limited selection of investments” wording or substantially similar wording. See Fidelity Letter; IAA Letter I; IRI Letter. These mock-ups did not elaborate on what the limitations are.

[333] See RAND 2018, supra footnote 13 (from qualitative interviews, finding that “[p]articipants reacted strongly to the notion of being offered limited investment options”).

[334] See CFA Letter I (“[W]e fear the proposed disclosure provides too little information to be of value to the investor.”); CFA Institute Letter I (suggesting that the disclosure expressly state that performance may be lower due to higher costs).

[335] See CFA Letter I (“But simply stating they offer “limited” investments is not enough, as that will mean different things to different investors.”); Prudential Letter (“It is unclear what significantly limits' means for firms that offer predominantly, but not exclusively, proprietary products. It is also unclear what constitutes a small choice of investments.' Additional examples or more prescriptive instructions regarding when firms must disclose such limitations would be helpful.”); CFA Letter I (“[F]irms should have to describe how they limit the selection of investments.”); Wells Fargo Letter (“This requirement appears to be overly broad as no firm can offer all investments and we therefore recommend that this be limited to those broker-dealers that only offer one type of product.”).

[336] See, e.g., New York Life Letter (“[T]he Commission's exclusive emphasis on cost in this prescribed sentence does not provide consumers of insurance products with clear and complete information.”); Mutual of America Letter (“We believe that this focus on cost alone is not necessarily in the best interest of retail consumers, who may benefit from high-value products, such as variable annuities.”); Lincoln Financial Group Letter (suggesting that either the Form CRS or Regulation Best Interest disclosure obligation should allow for descriptions of product benefits to retail investors as well as costs). Another commenter noted that the prescribed wording about other firms' offerings could raise First Amendment concerns. See CFA Letter I (“[R]equiring firms to compare their own services unfavorably to those of their competitors may raise First Amendment concerns.”). See supra footnotes 77-85 and accompanying text.

We continue to believe that firms that limit product menus—such as offering only proprietary products or a specific asset class—should be required to describe those limitations in the relationship summary.[337] Other examples include limitations based on products that involve third-party arrangements, such as revenue sharing and mutual fund service fees. We agree with commenters who advocated for helping investors before entering into a relationship with a firm to understand whether a firm limits its product offerings, and to what extent.[338] In light of comments, we have determined, however, that the proposed prescribed wording may not allow all firms to describe limited investment offerings, if applicable, in a way that is accurate and helpful to investors, and are not requiring it in the final instructions.[339] Accordingly, we are revising the instructions to require firms to address whether or not they make available or offer advice only with respect to proprietary products or a limited menu of products or types of investments, and if so, to describe such limitations.[340] We believe that the final instructions address the same types of limitations on investments that the proposed instructions sought to address, but in a less prescriptive way, and allow firms to describe their investment offerings more accurately to reflect their scope of products and services.

[337] The proposed instructions stated, “If you significantly limit the types of investments available to retail investors in any accounts, include the following . . .” Proposed Items 2.B.4. and 2.C.4. of Form CRS. In order to give firms more flexibility to describe limitations on products or investment types in the context of their business models, and to avoid potential confusion with the materiality threshold of Regulation Best Interest (which requires disclosure of all material facts relating to the type and scope of services provided to the retail customer, including any material limitations on the securities or investment strategies involving securities that may be recommended to the retail customer), we have eliminated the word “significantly” from the final instructions. Regulation Best Interest Release, supra footnote 47.

[338] See CFA Letter I; CFA Institute Letter I.

[339] See supra footnotes 77-85 and accompanying text.

[340] Item 2.C.(iii) of Form CRS.

Account Minimums and Other Requirements. The final instructions also include a requirement to explain whether or not the firm has any requirements for retail investors to open or maintain an account or establish a relationship, such as minimum account

size or investment amount, which is a change from the proposal.[341] In response to our request for comments on such possible requirements, commenters recommended that we include this information in the relationship summary.[342] In addition, a number of commenters submitting mock-ups included disclosures on account minimums in their forms.[343]

[341] Item 2.C.(iv) of Form CRS.

[342] See, e.g., NASAA Letter (stating that Form CRS should include a disclosure, specifying the minimum account size and include information on miscellaneous fees different categories of investors can expect to pay); see also Cetera Letter I (stating that firms should disclose as material conflict of interest whether or not they have established standards for the minimum or maximum dollar amount of various account types).

[343] See, e.g., Primerica Letter; Cetera Letter I.

We agree that this is important for retail investors to understand because many firms offer a number of services that are only available to investors with higher account balances.[344] Furthermore, fee schedules may be tiered based on account balances.[345] Investors benefit from being aware of and seeing a range of options in the same context, as discussed above. We believe investors can use information about different account requirements for both current and future decision-making purposes. Thus, the final instructions require firms to address whether or not they have any requirements for retail investors to open or maintain an account or establish a relationship, such as a minimum account size or investment amount.

[344] See, e.g., SIFMA Letter (stating that investment advisory services typically require a minimum account balance); ACLI Letter; Comment Letter of the National Association of Insurance and Financial Advisors (Aug. 2, 2018) (“NAIFA Letter”).

[345] See, e.g., Cetera Letter II (mock-up) (explaining tiered fee schedule).

b. Additional Information

In a change from the proposal we are requiring firms to provide specific references to more detailed information about their services that, at a minimum, include the same or equivalent information to that required by the Form ADV, Part 2A brochure (Items 4 and 7 of Part 2A or Item 4.A and 5 of Part 2A Appendix 1) and Regulation Best Interest, as applicable.[346] Broker-dealers that do not provide recommendations subject to Regulation Best Interest (e.g., execution-only broker-dealers) are not required to prepare more detailed information about their services, but to the extent they do, must include references to such information in their relationship summaries.[347] The final instructions require firms to use text features to make this additional information more noticeable and prominent in relation to other discussion text.[348]

[346] Item 2.C. of Form CRS. See Regulation Best Interest Release, supra footnote 47, at Section II.C.1.

[347] Item 2.C. of Form CRS. See Regulation Best Interest Release, supra footnote 47, at Sections II.A., II.C.1.

[348] General Instruction 4.C. to Form CRS. For example, firms could use larger or different font; a text box around the heading or questions; bolded, italicized, or underlined text; or lines to offset the information from other sections.

As with other references to additional information, firms may include hyperlinks, mouse-over windows, or other means of facilitating access to this additional information and to any additional examples or explanations of such services.[349] This allows firms to summarize their services while making available more detailed and fulsome information for retail investors, in keeping with the design of the relationship summary as a short, succinct disclosure with links to additional information, as commenters and investors asked. We believe that requiring firms to make retail investors aware of the services they offer, at a high level, and where retail investors can obtain more detailed information through layered disclosure, will best engage retail investors and help them make more informed decisions when choosing from among firms, services, or accounts.

[349] Item 2.C. of Form CRS.

c. Conversation Starters

Firms will include in this section of the relationship summary three prescribed conversation starters for retail investors to ask their financial professional.[350] As discussed in Section II.A.4, these questions are taken from the Key Questions to Ask section in the proposed relationship summary, which a considerable majority of investors indicated were helpful.[351] Broker-dealers and investment advisers that are not dual registrants will include, respectively, “Given my financial situation, should I choose a brokerage service? Why or why not?” or “Given my financial situation, should I choose an investment advisory service? Why or why not?” [352] Dual registrants will include “Given my financial situation, should I choose an investment advisory service? Should I choose a brokerage service? Should I choose both types of services? Why or why not?” [353] These questions are largely the same as the first proposed Key Question but replace the terms “brokerage account” and “advisory account” with “brokerage service” and “investment advisory service,” respectively.[354] This revision addresses comments that the concept of “accounts” may not align with all firms' business models and may cause investor confusion.[355] In addition, some commenters stated that it was inappropriate for the Commission to require firms to describe products and services that they do not offer and about which they may have limited or no expertise.[356] Although the proposed instructions permitted firms to modify the first Key Question to reflect the type of accounts they offer to retail investors, we are replacing it with three formulations that are explicitly tailored to firm type in order to clarify that firms are obligated to discuss only the services that they offer. Finally, we have rephrased the questions as “Should I choose [a/an brokerage/advisory] service? Why or why not?” rather than “Why should I choose [a/an brokerage/advisory] service?” to avoid a presumption that the relevant service will always be an appropriate service for the retail investor. The questions are designed to prompt a conversation relevant to the specific retail investor's circumstances.

[350] Item 2.D. of Form CRS. Firms should keep in mind the applicability of the antifraud provisions of the federal securities laws, including section 206 of the Advisers Act, section 17(a) of the Securities Act, and section 10(b) of the Exchange Act and rule 10b-5 thereunder, in preparing the relationship summary, including statements made in response to the relationship summary's “conversation starters.” See supra footnote 98 and accompanying text.

[351] See supra footnotes 174-178 and accompanying text.

[352] Items 2.D.(i) and 2.D.(ii) of Form CRS.

[353] Item 2.D.(iii) of Form CRS.

[354] Cf. Proposed Item 8.1 of Form CRS (“Given my financial situation, why should I choose an advisory account? Why should I choose a brokerage account?”). We did not receive specific comments on this question, though some commenters included it or a variation thereof in their mock-ups. See, e.g., Betterment Letter I; IRI Letter.

[355] See supra footnote 80 and accompanying text.

[356] E.g., ACLI Letter; IAA Letter I.

All firms also will include the questions “How will you choose investments to recommend to me?” and “What is your relevant experience, including your licenses, education and other qualifications? What do those qualifications mean?” [357] These questions are nearly identical to proposed Key Questions numbers six and nine except, again, for the removal of the account concept from proposed Key Question number six, and a minor revision to proposed Key Question number nine to encourage retail investors to ask a broader question regarding the financial professional's

qualifications.[358] We believe that answers to these questions will be helpful to retail investors as they make their choices. In addition, a significant majority of participants from the RAND 2018 survey indicated that they would feel comfortable asking any of the Key Questions.[359] Although fewer participants indicated that they would feel “very comfortable” asking about the financial professional's experience and qualifications, compared with the other two questions,[360] we believe that including this question serves as a useful reminder both to investors who would feel comfortable and as encouragement to those who are hesitant that asking such a question is acceptable.

[357] Items 2.D.(iv) and 2.D.(v) of Form CRS.

[358] Proposed Key Question number six asked “How will you choose investments to recommend for my account?” Proposed Key Question number nine asked “What is your relevant experience, including your licenses, education and other qualifications? Please explain what the abbreviations in your licenses are and what they mean.” Proposed Items 8.6 and 8.9 of Form CRS.

[359] RAND 2018, supra footnote 13 (finding that at least two-thirds and up to 85% of survey participants indicated that they would be “somewhat comfortable” or “very comfortable” asking any of the Key Questions, including which account to choose and why, how investments would be selected for them, and what the financial professional's experience and qualifications were); see also Betterment Letter I (Hotspex) supra footnote 18 (reporting that 93% of survey participants who viewed a version of the sample standalone adviser relationship summary in the proposal indicated that they were somewhat or very likely to ask the suggested questions.).

[360] RAND 2018, supra footnote 13.

Requirements Removed from the Proposed Instructions. The final instructions do not include several specific requirements that were proposed in this item. First, the proposal would have required firms to describe their transaction-based fees and asset-based fees in this section, in addition to the more specific fee information required in a separate fee section.[361] We learned from an investor study submitted by commenters that dispersing information on the same topic throughout several sections of the relationship summary or separating that information with an unrelated topic could confuse investors.[362] This illustrated the importance of establishing sufficient context and increasing the salience of related information by ensuring that it is kept together in the relationship summary. We agree that fee information should be provided together, and have eliminated fee disclosures from the Relationship and Services section to locate it with other fee information in an effort to reduce investor confusion.

[361] See Proposed Items 2.B.1. (“Include the following (emphasis required): “If you open a brokerage account, you will pay us a transaction-based fee, generally referred to as a commission, every time you buy or sell an investment.”) and 2.C.1. (“State the type of fee you receive as compensation if the retail investor opens an investment advisory account. For example, state if you charge an on-going asset-based fee based on the value of cash and investments in the advisory account, a fixed fee, or some other fee arrangement. Emphasize the type of fee in bold and italicized font. If you are a standalone adviser, also state how frequently you assess the fee.”) of Form CRS.

[362] See Kleimann I, supra footnote 19 (“[W]hile the Brokerage Account was defined as using transaction-based fees and the Investment Advisory Account as using asset-based fees in the first section, in the Costs and Fees section, the Investment Adviser Services column also discusses transaction fees. This `contradictory' repetition was confusing to participants.”).

In addition, the final instructions do not require firms to describe regular communications with retail investors, including frequency and method, as proposed. Comments were mixed on the proposed instruction. One commenter expressed the view that proposed Form CRS suggested that firms should contact advisory clients by phone or email every quarter and disagreed with this implication. The commenter recommended that instead of mandating the form or frequency of contact with clients, the Commission should continue to give advisory clients flexibility to communicate how and when they want, as long as investment advisers are meeting their obligations under the Advisers Act.[363] Another commenter noted that misunderstandings concerning broker-dealers' duty or intention to monitor accounts can be avoided by proper communications, most importantly at the time the relationship is formed.[364] Mock-ups submitted by commenters generally did not refer to or describe communications between the firm or financial adviser and the investor.[365] The proposal was not designed to mandate the form or frequency of contact with clients. Nonetheless, given these mixed responses, our goal of keeping the relationship summary focused on a limited amount of information, and to allow more flexibility for firms to describe their services more accurately and meaningfully, firms will not be required to describe the frequency and method of their regular communications with retail investors. Firms may include this information, however, to help investors better understand the services provided.

[363] See Edward Jones Letter.

[364] See Schnase Letter.

[365] But see Cetera Letter II (“Regardless of the program chosen, your IAR is responsible for ongoing review of your account(s), regular communication with you . . . .”).

Summary of Fees, Costs, Conflicts, and Standard of Conduct

In response to comments, feedback from investors at roundtables and on Feedback Forms, and observations reported by the RAND 2018 report and other surveys and studies, we are adopting changes to the relationship summary's required discussion of fees, costs, conflicts of interest, and standard of conduct. Commenters generally supported the Commission's goal of providing investors with reliable and straightforward information about the fees they pay, the standard of conduct applicable to financial professionals, and conflicts of interest relating to financial professional compensation.[366] Some suggested that the fee disclosure should be more prominent in the proposed relationship summary and located towards the front of the relationship summary and also suggested modifications to sections of the relationship summary addressing financial professional conflicts of interest and standards of conduct.[367]

[366] See, e.g., CFA Institute Letter I (noting that “we support efforts to help retail investors educate themselves on the differences between broker-dealers and investment advisers—in terms of services offered, fees they charge, conflicts of interest, and importantly, the standard of care under which each operates”); Fidelity Letter (“Form CRS should . . . inform investors of the types of fees they may incur and direct them, via a link, to more detailed disclosure.”); Comment Letter of the Investment Adviser Association (Dec. 4, 2018) (“IAA Letter II”) (describing “fees and expenses to be paid, legal obligations, conflicts of interest” as disclosure items that are “more critical than others”); Comment Letter of the University of Miami School of Law (Aug. 2, 2018) (“Investors should be provided with clear and concise information that fully and fairly discloses the specific charges he or she will incur as a result of the particular recommendation.”); NAIFA Letter (agrees that clients should receive “early in the client-advisor relationship—all of the information in the SEC's proposal” which would include: “fees and charges . . . material conflicts of interest associated with a recommendation (to the extent known at the time of disclosure); [and] standards of conduct applicable to the services offered”); see also AARP Letter (recommending reformatting of Form CRS to meet “critical core components” including that “standard of care should be clear, concise and defined” [and] “fee structure should be straightforward and avoid technical jargon”); CCMC Letter (in connection with investor polling, noting that investors identify explaining “fees and costs,” “own compensation,” and “conflicts of interest” as “issues that matter most” to investors).

[367] See, e.g., mock-ups in IAA Letter I; Robinson Letter; SIFMA Letter; Fidelity Letter; Schwab Letter I.

Results of the RAND 2018 report and other surveys and studies showed that investors view information about fees and costs as one of the most important of the proposed sections of the relationship summary.[368] Investor

feedback at roundtables and through Feedback Forms also showed the importance of fees and cost information to investors.[369] However, the RAND 2018 survey and other surveys and studies also indicated that the proposed relationship summary presentation of fee and cost information could be difficult for investors to understand.[370] The RAND 2018 survey and other surveys and studies also suggested that investors found sections in the proposed relationship summary covering the obligations of financial professionals and conflicts disclosure less informative,[371] and indicated that investors could have difficulty understanding and synthesizing information about the obligations of financial professionals and the impact of conflicts of interest.[372] As discussed more fully below, we considered all of this feedback, as well as comments received, in redesigning the disclosures related to the topics.

[368] RAND 2018, supra footnote 13 (more than 70% of survey respondents selected the fees and costs section as one of the most informative; this section was least likely to be selected as not informative); see also Cetera II Letter (Woelfel) supra footnote 17 (reporting that 88% of survey respondents agreed that it is very or somewhat important to cover “fees and costs associated with those services”); Schwab Letter I (Koski) supra footnote 21 (reporting that 63% of survey respondents ranked “costs I pay for investment advice” as one of the four most important things for firms to communicate); CCMC Letter (investor polling) supra footnote 21(describing “explaining fees and costs” as one of three issues that “matter most” to investors).

[369] See, e.g., Houston Roundtable; Atlanta Roundtable; Philadelphia Roundtable; Miami Roundtable; Washington, DC Roundtable; Denver Roundtable; Baltimore Roundtable; CFA Letter I; see also Feedback Forms Comment Summary, supra footnote 11 (responses to Question 2(c)) (over 80% of commenters graded the section on fees and costs as “very useful” or “useful”).

[370] RAND 2018, supra footnote 13 (40% of survey respondents rated fees and costs section difficulty as “just right” while 35% rated the fees and cost section as difficult or very difficult; in qualitative interviews, participants generally found the section to be important, but also overwhelming and had trouble with language); see also Kleimann I, supra footnote 19 (“Participants expected to pay for transactions in a Brokerage Account or the quarterly fee for an Advisory Account, but they were surprised by the proliferation of additional fees . . . commented on the introduction of many new terms and wanted definitions. . .”); Cetera Letter II (Woelfel) supra footnote 17 (78% of survey respondents agreed strongly or somewhat agreed that fees and costs were clearly described, well below ratings for clarity of information about services and obligations).

[371] See RAND 2018, supra footnote 13 (almost one quarter of survey respondents selected “our obligations to you” as one of the least informative sections, only one third selected the section as one of the two most informative; the conflicts of interest section was selected as one of the two most informative by only 15% of respondents and as one of the least informative by more than a third); see also Cetera Letter II (Woelfel), supra footnote 17 (largest percent of survey respondents (88%) strongly or somewhat agreed that the “our obligations to you” topic was important; smallest percent (81%) strongly or somewhat agreed that conflicts of interest was important); CCMC Letter (investor polling) supra footnote 21(describing “explaining fees and costs,” “explaining own compensation,” and “explaining conflicts of interest” as three issues that “matter most” to investors).

[372] See RAND 2018, supra footnote 13 (in qualitative interviews, some participants struggled with understanding differing obligations for different account types and reconciling information in the conflicts of interest section with the “our obligations to you” section); Kleimann I, supra footnote 19 (“Few participants could define “fiduciary standard”; participants explaining firms' financial relationships that could create potential conflicts “had difficulty explaining how firms earned money from these relationships . . . often absent from these explanations was a discussion of the negative impact that these practices would have on them.”); Betterment Letter I (Hotspex), supra footnote 18 (reporting survey results indicating that some investors viewing a version of the sample proposed standalone adviser relationship summary had difficulty answering correctly questions about financial professional obligations and conflicts of interest).

A new Item 3 will require the relationship summary to cover three areas: (i) Fees and costs; (ii) standard of conduct and conflicts of interest; and (iii) financial professional compensation and related conflicts of interest. Some of the key elements of these disclosures include:

Integrated sections covering fees, costs, conflicts of interest, and standard of conduct. We have modified the proposal by combining the fees and costs section and the sections discussing conflicts of interest and standard of conduct into one Item 3 that will require three consecutive sections. These sections will help illustrate the interconnectedness of fees, costs, conflicts, and standard of conduct, and will keep these related disclosures close in proximity to each other.

Distinct summaries of principal fees and costs other fees and costs, and other ways the firm makes money. We are also requiring separate sections discussing certain fees and costs, with one section discussing principal fees and costs, another section discussing other fees and costs related to the firm's services and investments, and another section discussing other ways the firm and its affiliates make money. We are not requiring firms to discuss all of the fees and costs together as proposed, to address comments and feedback that the section was complicated and overwhelming. We are also requiring a firm to include cross-references to more detailed information about the firm's fees.

A description of the standard of conduct with conflicts. We are placing the description of the standard of conduct under the same heading as a summary of conflicts in order to help retail investors better understand the relationship between the standard of conduct and conflicts.

Broadening the types of conflicts disclosure. We are requiring firms to disclose information on the topics that were required in the proposal—i.e., proprietary products, third-party payments (shelf space and revenue sharing arrangements), and principal trading. But we are requiring firms without these conflicts to disclose at least one material conflict. We are also requiring a firm to include cross-references to more detailed information about the firm's conflicts of interest.

Financial professional compensation. We are adding a separate section that will require a firm to highlight how its financial professionals are compensated and the conflicts of interest those payments create. This disclosure will distinguish firm-level from financial professional-level conflicts.

The proposal would have included one section summarizing fees and costs, one section summarizing conflicts of interest, and one section discussing the applicable standards of conduct. The principal fees were also discussed at the beginning of the services section, and for standalone investment advisers and broker-dealers, the section discussing fees and costs and the section discussing conflicts of interest were separated by a section discussing comparisons between investment advisers and broker-dealers. Commenters suggested locating fee and conflict disclosures more closely together, and several sample relationship summaries submitted by commenters placed the fees and conflicts sections in close proximity to each other.[373] As noted, we learned from an interview-based study submitted by a commenter that investors could have trouble connecting related information when those sections were not closely located.[374] Observations in the RAND 2018 qualitative interviews and comments submitted on Feedback Forms also suggested that investors' level of understanding varied significantly with regard to the relationship between the applicable standard of conduct and conflicts, and that investors might be more confused by this relationship when the relationship summary placed these sections far apart from one

another.[375] We agree that it is important to illustrate the relationship between fees, conflicts, and standards of conduct. We are therefore combining in Item 3 of the final instructions the discussions on fees and costs with discussions of firms' conflicts of interest, and combining the standard of conduct discussion with the discussion of certain other conflicts of interest.

[373] See, e.g., LPL Financial Letter; Betterment Letter I; Primerica Letter; SIFMA Letter; Wells Fargo Letter; Schwab Letter I.

[374] See supra footnote 362 and accompanying text.

[375] See RAND 2018, supra footnote 13 (in qualitative interviews, participants struggled to reconcile information in the conflicts of interest section with obligations section). Among commenters on Feedback Forms who indicated that the relationship summary was too technical or that topics could be improved, many commented that sections addressing fees and costs, obligations and conflicts of interest needed clarification or better explanation. See Feedback Forms Comment Summary, supra footnote 11 (summary of responses to Question 4). Some Feedback Form commenters suggested changes to the order of information about fees, conflicts and obligations or offered other comments suggesting that the order of the topics was confusing. See Anonymous28 Feedback Form (“Conflicts of Interest should come right after Obligations to You.”); Asen Feedback Form (“Somewhat I would prefer to see conflicts before fees”); Lee2 Feedback Form (comment responding to Question 3(b), whether order is appropriate, “[c]onflicts seems buried too deeply”); Smith1 Feedback Form (“The transactions comment in the fees section seems like it would also fall under the conflicts of interst [sic] section”).

a. Description of Principal Fees and Costs and Other Fees

Similar to the proposal, firms will be required to summarize the principal fees and costs that retail investors incur with respect to their brokerage and investment advisory accounts, and the conflicts of interest they create.

As noted above, commenters generally supported the Commission's goal of providing investors with reliable and straightforward information about the fees they pay and suggested making this information more prominent and located towards the front of the relationship summary.[376] Similarly, observations in the RAND 2018 report, and other surveys and studies, and comments from investors at roundtables and in Feedback Forms, overwhelmingly supported including fee disclosure in the relationship summary and showed that investors believe that information about fees and costs is important to understanding their relationship with a financial professional.[377] The RAND 2018 survey reported, however, that survey participants were more likely to rate the proposed relationship summary section on fees and costs as “difficult” or “very difficult” to understand and would add more detail.[378] In the RAND 2018 qualitative interviews, participants generally understood that this section would provide information on the types of fees they could possibly pay, but also found the section overwhelming with the number of various types of fees and had some difficulty with language, including certain terms.[379] Some participants also did not appear to synthesize information about fees and conflicts of interest to be able to apply it.[380] Other surveys and studies, and comments provided on Feedback Forms, also indicate that investors both want additional information about fees and costs and found this information difficult to understand.[381] Several commenters also said that information on fees and costs was not straightforward and used too much technical jargon.[382] In addition, the IAC recommended that the Commission adopt a uniform, plain English document that covers basic information about fees and compensation, among other topics.[383] The Feedback Form commenters and observations reported in the RAND 2018 report and other surveys and studies reaffirms our view that it is critical for retail investors to better understand the fees and costs incurred with their investments and related conflicts of interest. This section has been revised to further our policy objective of helping investors better understand such fees, costs, and conflicts of interest.

[376] See supra footnotes 366-367 and accompanying text.

[377] See supra footnotes 368-369 and accompanying text.

[378] See RAND 2018, supra footnote 13 (in the RAND 2018 survey about 40% rated the difficulty of the section on fees and costs as “just right” and 35% rated the section on fees and costs as “difficult” or “very difficult”; about 30% of survey respondents suggested adding more detail).

[379] See RAND 2018, supra footnote 13 (“Participants struggled with terms in this section. . . . Words that participants flagged include markup,' markdown,' load,' surrender charges,' wrap fee' and custody.' ”).

[380] See RAND 2018, supra footnote 13 (“[O]ne participant could clearly put differences in fees related to each type of account [but] when asked about which type of financial professional has an incentive to encourage investors to buy and sell securities frequently . . . incorrectly answered.”).

[381] See Kleimann I, supra footnote 19 (finding that “[p]articipants expected to pay for transactions in a Brokerage Account or the quarterly fee for an Advisory Account, but they were surprised by the proliferation of additional fees. . . . Participants also commented on the introduction of many new terms); Cetera Letter II (Woelfel) supra footnote 17 (78% of survey respondents strongly or somewhat agreed that information on fees and costs was clearly presented, rating below sections describing the firm's obligations and the services that the firm provides.); Feedback Forms Comment Summary, supra footnote 11 (summary of responses to Question 4) (41 commenters on Feedback Forms (44%) indicated that one or more topics on the relationship summary is too technical or could be improved; 23 included comments indicating that information about fees and costs is too technical or needed to be more clear).

[382] See e.g., IAA Letter I (stating that retail investors are unlikely to understand the use of “technical terms and industry jargon” with respect to fees in the relationship summary); see also AARP Letter; Fidelity Letter.

[383] See IAC Broker-Dealer Fiduciary Duty Recommendations, supra footnote 10.

Description of Principal Fees and Costs. First, using the heading “What fees will I pay?”,[384] firms will summarize their principal fees and costs that retail investors will incur for brokerage or investment advisory services, including how frequently such fees are assessed and the conflicts of interest they create.[385] Broker-dealers must describe their transaction-based fees [386] and investment advisers must describe their ongoing asset-based fees, fixed fees, wrap fee program fees, or other direct fee arrangements.[387] The fees described by investment advisers should align with the type of fee(s) disclosed in response to Form ADV Part 1A, Item 5.E, but they should be summarized in a way that provides retail investors a high-level overview.[388]

[384] Item 3.A. of Form CRS.

[385] Item 3.A.(i) of Form CRS.

[386] Item 3A.(i)(a) of Form CRS.

[387] Item 3.A.(i)(b) of Form CRS.

[388] Item 3.A.(i)(b) of Form CRS. In addition, investment advisers must include information about each type of fee they report in Form ADV that is responsive to Item 3.A. of Form CRS.

Although the proposal required firms to include information about their principal fees and costs, much of the wording was prescribed. For instance, the proposed instructions included prescribed wording to describe transaction-based fees and asset-based fees and the incentives that each of those fees create.[389] The proposed instructions also required firms to use technical terms and explain their definitions (e.g., “mark-up” or “mark-

down,” “load,” and “custody”).[390] Additionally, firms providing advice about investing in wrap fee programs were required to include several more prescribed sentences.[391] Finally, dual registrants were required to state when a retail investor may prefer a brokerage or investment advisory service from a cost perspective,[392] and wrap fee program providers had to explain when a retail investor may prefer a wrap fee program.[393] Commenters argued that in many cases the prescribed wording was confusing and not accurate.[394] For example, several commenters indicated the proposed fee discussion was unnecessarily technical and suggested the relationship summary avoid the use of jargon (e.g., terms like “asset-based fee” and “load”) in this section.[395] Several roundtable participants also said that they did not understand these terms,[396] as did some participants in investor studies and surveys.[397] Other commenters noted that the wording in the proposal was too binary.[398] Another commenter argued that certain prescribed wording was obvious to retail investors and did not add value to the retail investor.[399]

[389] Dual registrant broker-dealers, for example, were required to include the following wording on transaction based fees: “You will pay us a fee every time you buy or sell an investment. This fee, commonly referred to as a commission, is based on the specific transaction and not the value of your account.” Proposed Item 4.B.1. of Form CRS. Dual registrant investment advisers were required to include the following wording on asset-based fees: “You will pay an on-going fee [at the end of each quarter] based on the value of the cash and investments in your advisory account.” If the asset manager charged another type of fee instead of an asset-based fee, it was required to briefly describe that fee and how frequently it was assessed. Investment advisers that charged an ongoing asset-based fee would have been required to include the following: “The more assets you have in the advisory account, including cash, the more you will pay us. We therefore have an incentive to increase the assets in your account in order to increase our fees. You pay our fee [insert frequency of fee (e.g., quarterly)] even if you do not buy or sell.” Broker-dealers would have been required to include the following: “The more transactions in your account, the more fees we charge you. We therefore have an incentive to encourage you to engage in transactions.” Proposed Items 4.B.5. and 4.C.8. of Form CRS.

[390] Broker-dealers were required to state the following (emphasis required): “With stocks or exchange-traded funds, this fee is usually a separate commission. With other investments, such as bonds, this fee might be part of the price you pay for the investment (called a mark-up' or mark down'). With mutual funds, this fee (typically called a `load') reduces the value of your investment.” Proposed Item 4.B.2.(a) of Form CRS. Investment advisers were required to state, if applicable, that “a retail investor will pay fees to a broker-dealer or bank that will hold the retail assets and that this is called custody.” Proposed Item 4.C.6. of Form CRS.

[391] Investment advisers that provided advice to retail investors about investing in wrap fee programs were required to include the following (emphasis required): “We offer advisory accounts called wrap fee programs. In a wrap fee program, the asset-based fee will include most transaction costs and fees to a broker-dealer or bank that will hold your assets (called `custody'), and as a result wrap fees are typically higher than non-wrap advisory fees.” If the investment adviser offered a wrap fee program as well as another type of advisory account, it was required to include: “For some advisory accounts, called wrap fee programs, the asset-based fee will include most transaction costs and custody services, and as a result wrap fees are typically higher than non-wrap advisory fees.”

[392] Dual registrants were required to include the following: “An asset-based fee may cost more than a transaction-based fee, but you may prefer an asset-based fee if you want continuing advice or want someone to make investment decisions for you.” Proposed Item 4.C.10. of Form CRS.

[393] Investment advisers that provided advice to retail investors about investing in wrap fee programs were required to include the following (emphasis required): “You may prefer a wrap fee program if you prefer the certainty of a [insert frequency of the wrap fee (e.g., quarterly)] fee regardless of the number of transactions you have.” Proposed Item 4.C.10. of Form CRS.

[394] See, e.g., CFA Institute Letter I (suggesting that the Commission revise the proposed wording to reflect the effect on costs in a more even-handed manner); ACLI Letter (stating that the prescriptive nature of the disclosures does not sufficiently allow for diverse business models to be explained); IAA Letter I (stating that the prescribed language comparing investment advisers to broker-dealers does not include important information and may confuse retail investors, and that the prescribed language associated with fees based on assets under management, while technically correct, misses an important point—namely that an adviser earns more when the client's portfolio performs better and earns less when the portfolio performs less well aligns the adviser's interest with the client's interest, rather than the reverse); FSI Letter I (stating that prescribing language in the relationship summary may confuse retail investors); Comment Letter of Paul Hynes (Jul. 31, 2018) (“Paul Hynes Letter”) (stating that the prescribed wording is inaccurate by suggesting that investment advisers can sell variable annuities); ACLI Letter (stating that the Fees and Costs section is replete with required statements that may be unnecessary/misleading).

[395] CFA Letter I; AARP Letter; IAA Letter I.

[396] See, e.g., Miami Roundtable; Houston Roundtable; Philadelphia Roundtable.

[397] See RAND 2018, supra footnote 13 (in qualitative interviews participants asked for definitions of “transaction-based fee,” asset-based fee,” and struggled with terms such as “mark-up,” “mark-down,” “load,” surrender “charges” and “wrap fee”); see also Kleimann I, supra footnote 19.

[398] See, e.g., CFA Letter I; Margolis Feedback Form (stating that the wording assumed that a retail investor would pay either a transaction-based fee or an asset-based fee for a brokerage or advisory account, respectively, and did not capture other fee structures).

[399] See Wells Fargo Letter.

In an effort to balance the goal of educating retail investors with the need to provide firms with enough flexibility to tailor the disclosure to their services and investments, we have decided to remove from the Instructions the prescribed wording we proposed about fees and costs.[400] Specifically we are replacing the prescribed wording with a requirement to describe the firm's principal fees and the conflicts of interest they create. We have also included examples in the instructions of statements that would describe certain principal fees. We have concluded, based on consideration of the comments and investor feedback, that the proposed requirements did not reflect the fees for all firms and, depending on firms' business models, could be confusing. Instead the relationship summary will focus on a high level summary of fees. Having considered comments, we believe this more flexible approach will better facilitate meaningful disclosure in the relationship summary, as well as conversations between the retail investor and his or her financial professional, and help the retail investor decide on the types of services that are right for him or her. Additionally, we believe that certain definitions and concepts explained in the proposed relationship summary can be better explained in other ways, such as through layered disclosure that explain technical terms as appropriate for the specific firm (e.g., “hovers”).[401] Further, requiring firms to draft their own descriptions will allow them to tailor the description to their particular business models, including the fees their prospective customers and clients will most commonly incur, which will make the discussion more accurate and relevant and further help facilitate retail investors' comprehension.

[400] As discussed further below, we are not eliminating all prescribed wording for this section and are requiring firms to include the following statement: “You will pay fees and costs whether you make or lose money on your investments. Fees and costs will reduce any amount of money you make on your investments over time. Please make sure you understand what fees and costs you are paying.”.

[401] Firms are also encouraged to fully explain any technical terms that they use to describe their fees. We also believe that Investor.gov can be a resource for this information, and the relationship summary will highlight Investor.gov/CRS where educational material is available.

In addition, we are not including the proposed prescribed wording with respect to wrap fee programs.[402] Instead, investment advisers that offer these services to retail investors should include disclosure about the relevant fees and conflicts of interest, and explain the program. We are including instructions encouraging investment advisers with wrap fee programs to explain that asset-based fees associated with the wrap fee program will include most transaction costs and fees to a broker-dealer or bank that has custody of these assets, and therefore are higher than a typical asset-based advisory fee.[403]

[402] The proposal required certain prescribed wording describing wrap fee programs. See Proposed Item 4.C.3. of Form CRS.

[403] Item 3.A.(i)(b) of Form CRS.

We also removed the proposed disclosures about which type of service or account is better for a retail investor. Specifically, the proposal would have required firms to include prescribed wording about when a retail investor may prefer paying a transaction-based fee or an asset-based fee.[404] Although

some commenters did not object to the proposed prescribed wording and some included it in their mock-ups,[405] several commenters raised concerns.[406] For example, one commenter argued that the required wording could be false and misleading, noting that the required statements do not take into account that transaction-based fees are not necessarily more affordable for buy-and-hold investors who do not trade often, many broker-dealers offer higher-cost investment products (e.g., variable annuities, non-traded REITs, and private placements), and many investment advisers recommend investments with lower operating expenses than those sold by brokers.[407] We have concluded that the proposed required wording did not capture all of the information that, in certain circumstances, would be necessary to help retail investors reasonably assess whether a particular service and its associated fees will be better for them. Instead, the relationship summary provides information about what the firm offers and encourages discussion with conversation starters. Such a discussion—facilitated by Form CRS—is more appropriate between the financial professional and the retail investor about the firm's specific offerings and associated fees and conflicts, and the retail investor's specific circumstances.

[404] The proposal required standalone investment advisers and standalone broker-dealers to state that a retail investor may prefer paying “a transaction-based fee from a cost perspective, if you do not trade often or if you plan to buy and hold investments for longer periods of time.” or “an asset-based fee if you want continuing advice or want someone to make investment decisions for you, even though it may cost more than a transaction-based fee.” Proposed Items 5.A.4. and 5.B.6. of Form CRS. Dual registrant broker-dealers were required to include the following: “From a cost perspective, you may prefer a transaction-based fee if you do not trade often or if you plan to buy and hold investments for longer periods of time.” Proposed Item 4.B.6. of Form CRS. Dual registrant investment advisers that charged an ongoing asset-based fee were required to include the following: “An asset-based fee may cost more than a transaction-based fee, but you may prefer an asset-based fee if you want continuing advice or want someone to make investment decisions for you.” Proposed Item 4.C.10. of Form CRS.

[405] See, e.g., LPL Financial Letter; Betterment Letter I; IRI Letter.

[406] See supra footnote 394.

[407] See CFA Letter I.

The proposal also required firms to state whether their fees vary and are negotiable and to describe the key factors that would help a reasonable retail investor understand the fee that he or she is likely to pay for services.[408] In the RAND 2018 qualitative interviews, some participants were confused by the statement about fees being negotiable and most mock-ups commenters submitted did not include this disclosure.[409] We did not include this requirement in the final instruction. It is important to instead focus the relationship summary on information about fees that retail investors identified as important to their assessment of firms. Given the comments and investor testing results showing that the fee section was technical and difficult to understand, we believe that the final instructions will help investors focus on the information the final instructions do require. We believe that removing information about negotiability should help achieve this objective.

[408] Proposed Items 4.B.3. and 4.C.5 of Form CRS. The instructions included examples of such key factors (for a broker-dealer, this may be how much the retail investor buys or sells, what type of investment the retail investor buys or sells, and what kind of account the retail investor has with a firm; for an investment adviser, this may include the services the retail investor receives and the amount of assets in the retail investor's account). Investment advisers were also required to state that a retail investor could be required to pay fees when certain investments are sold (e.g., surrender charges for selling variable annuities).

[409] See RAND 2018, supra footnote 13 (noting that the phrase stating that fees are negotiable and may vary concerned participants, and many noted that it made them feel as if they pay too much). Similarly, see Anonymous28 Feedback Form (“If fees are negotiable, when is this done?”); see also mock-ups in IAA Letter I; Robinson Letter; Primerica Letter; LPL Financial Letter, SIFMA Letter; Schwab Letter I; Fidelity Letter.

In another modification from the proposal, we are requiring firms to discuss the conflicts of interest created by their principal fees and costs rather than prescribing specific wording about those conflicts. We are making this change in response to commenters, who pointed out that the conflicts of interest created by principal fees can vary in more ways than our prescribed wording contemplated.[410] Instead of prescribed wording, the final instructions include a requirement that firms explain the conflict of interest their principal fees create, as well as examples of how a firm may communicate certain conflicts of interest. These examples are the same conflicts the proposed instructions required. For instance, a broker-dealer could disclose its conflicts of interest related to transaction-based fees by stating that a retail investor would be charged more when there are more trades in his or her account and that the firm may therefore have an incentive to encourage a retail investor to trade often.[411] Investment advisers that charge an asset-based fee could disclose related conflicts of interest by stating that the more assets in a retail investor's advisory account, the more the retail investor will pay in fees, and the firm may therefore have an incentive to encourage the retail investor to increase the assets in his or her account.[412] Firms that offer variable annuity and variable life insurance products could disclose that they have a financial incentive to offer a contract that includes optional benefit features, which may entail additional fees on top of the base fee associated with the contract, that they may encourage contract owners to select investment options with relatively higher fees, or that they may offer the contract owner a new contract in place of the one that he or she already owns. Finally, we also have included a note in the final instructions that an investment adviser receiving compensation in connection with the purchase or sale of securities should consider the applicability of the broker-dealer registration requirements of the Exchange Act and any applicable state securities statutes.[413]

[410] See, e.g., Comment Letter of Invesco Advisers, Inc. (Aug. 7, 2018) (“Invesco Letter”); Committee of Annuity Insurers Letter; IAA Letter I; see also CFA Institute Letter I (noting that investors “will most likely focus on the fees and costs discussion and should be alerted to the fact that in addition to different fee arrangements and structures, different practices and conflicts may also result in higher costs.”).

[411] Item 3.A.(i).a. of Form CRS.

[412] Item 3.A.(i).b. of Form CRS.

[413] See Item 3.A.(i).b of Form CRS. This statement is consistent with Part 2A of Form ADV.

Description of Other Fees and Costs. Firms also will be required to describe other fees and costs related to their brokerage and investment advisory services and investments, in addition to the firm's principal fees and costs, that the retail investor will pay directly or indirectly. Firms must list examples of the categories of the most common fees and costs that their retail investors will pay directly or indirectly.[414] Those fees and costs may include, for example, custodian fees, account maintenance fees, fees related to mutual funds and variable annuities, and other transactional fees and product-level fees.[415] With regard to product-level fees, in particular, firms may wish to highlight certain fees such as distribution fees, platform fees, shareholder servicing fees and sub-transfer agency fees, in order to enhance the retail investor's understanding of these fees to the extent applicable to the customer's transactions, holdings, and accounts.

[414] Item 3.A.(ii) of Form CRS.

[415] Item 3.A.(ii) of Form CRS.

We recognize that the fees and costs that a firm determines to be the most common will vary and depend on particular products and services the firm offers and the fee arrangements associated with those products and services. Generally, in making this determination, firms should consider, for example, the amount of the fee (including whether the fee varies based on options the investor may select such as optional benefits and the investment options that a contract owner may select in the context of variable annuities and variable life insurance products), the likelihood that the fee will be applicable, whether the fee is ordinarily assessed on a significant number of the firm's clients, whether the fee is associated with a product or service that the firm frequently recommends or provides, whether the fee is contingent

upon certain events the investor should be made aware of, the effect on returns, and the magnitude of the conflict of interest it may create. For example, an investment adviser should consider discussing commissions that are charged when an investment is bought or sold. A firm that commonly offers an investment that includes a surrender fee-- for example, a variable annuity or variable life insurance contract is sold as a long-term investment that may entail relatively high surrender fees—should consider disclosing that a retail investor could be required to pay fees when certain investments are sold.

The proposal similarly required firms to state that retail investors will pay other fees in addition to the firm's principal fees. Like the final instructions, the proposal required disclosure of the other fees related to the services or account such as custodian fees, account maintenance fees, and account inactivity fees, and included these other fees in the same section discussing the firm's principal fees.[416] The proposal also required that all firms disclose that certain investments imposed additional fees, including fees that reduce the value of investments over time (e.g., mutual funds and variable annuities) and fees paid when an investment is sold (e.g., surrender charges for selling variable annuities).[417] Observations reported from RAND 2018 qualitative interviews and another study indicated that some investors could become overwhelmed with the number of various types of fees and many were surprised that so many different types of fees could apply in addition to a firm's principal fee.[418] At the same time, investors participating in surveys and studies and investors providing comments on Feedback Forms have indicated that more information would be helpful.[419] Industry commenters, commenters representing investors, and commenters on Feedback Forms, and roundtable participants supported some disclosure regarding product-level fees, though commenters differed in the level of suggested detail on such fees.[420] For instance, one commenter stated that the relationship summary should reveal all fees and commissions for all purchases.[421] Other commenters, however, believed that a link to the prospectus should sufficiently satisfy disclosure requirements regarding mutual fund fees and expenses.[422] Another urged the Commission to provide a list of examples of transaction-based fees.[423]

[416] Proposed Items 4.B.4. and 4.C.6. of Form CRS. Specifically, the proposal required broker-dealers to state, if applicable, that a retail investor will pay other fees in addition to the firm's principal fees, including, but not limited to, custodian fees, account maintenance fees and account inactivity fees. The proposal required investment advisers to state, if applicable, that a retail investor will pay transaction-based fees when it buys and sells an investment for the retail investor and that retail investors will pay, if applicable, custodian fees, and other fees such as those for account maintenance services.

[417] Proposed Items 4.B.2.(b) and 4.C.4. of Form CRS.

[418] RAND 2018, supra footnote 13 (qualitative interview results); Kleimann I, supra footnote 19. Similarly, see Anonymous02 Feedback Form (“Do companies charge all these fees? Maybe use words like `may charge' ”); Anonymous28 Feedback Form (“The section on fees might better be presented in a chart—no mention is made of front and backend loads.”).

[419] See RAND 2018, supra footnote 13 (qualitative interview results), Kleimann I, supra footnote 19; Kleimann II, supra footnote 19 (in study testing investor reaction to alternate design of relationship summary, participants continued to focus on additional fees and wanted additional information on fees); see also Feedback Forms Comment Summary, supra footnote 11 (summary of responses to Question 5) (of 48 Feedback Forms with narrative comments suggesting additional information to be required in the relationship summary, 29 suggested that additional information about fees and costs would be helpful).

[420] See Fidelity Letter; CFA Letter I; see also Anonymous11 Feedback Form (“. . . disclose specific fees for different types of securities”); Caddess Feedback Form (“description of brokers buying one loaded' fund and then selling it soon after to buy a more suitable loaded' fund is not vivid enough.”); Fontaine Feedback Form (“More on the mutual fund loads and class shares Load”); Malone Feedback Form (“Suggest fees monthly associated with each fund by type”); Mennella Feedback Form (“In addition to paying a management fee what is the cost of the underlying investments such as mutual funds, liquid alternatives, seperately [sic] managed accounts, transaction costs, etc.?”); Houston Roundtable; Philadelphia Roundtable.

[421] Comment Letter of Tony Greiner (Jul. 14, 2018).

[422] Comment Letter of Oppenheimer Funds (Aug. 7, 2018) (“Oppenheimer Letter”); TIAA Letter.

[423] Comment Letter of the Investment Company Institute (Aug. 7, 2018) (“ICI Letter”).

We agree that understanding these fees is important so that retail investors have the necessary information to evaluate between firms, firm types (i.e., investment adviser, brokerage, or dually registered), and firm services, accounts, and products so that they can select what is right for them. We continue to believe drawing retail investors' attention to these additional fees is important because they have an impact on investors' investment returns over time. Accordingly, we are requiring disclosure of these types of fees and listing examples of categories as proposed. The final instructions, however, make clear that firms can use their own wording, and only require examples of the most common fees and costs. As discussed below, firms will be required to include cross-references to more specific information, and will be permitted to use tools to help investors learn about these fees and costs in an interactive way without overwhelming retail investors with the additional information. We believe that this approach balances providing short, understandable disclosures about additional fees and costs with investors' interest in understanding more about fees and costs.

Additional Information. Finally, in a change from the proposal, firms will be required to state: “You will pay fees and costs whether you make or lose money on your investments. Fees and costs will reduce any amount of money you make on your investment over time. Please make sure you understand what fees and costs you are paying.” [424] The first sentence replaces a statement in the proposal that some investments impose additional fees that will reduce the value of the retail investor's investment over time. Given the importance of assisting investors to understand the impact of fees and costs, we are requiring prescribed wording in this instruction. The prescribed wording discloses to investors a key term under which a service will be offered, namely the fact that the service will not be free and that the cost of using the service will exist regardless of investment performance.[425]

[424] Item 3.A.(iii) of Form CRS.

[425] See Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626, 651 (1985) (upholding required disclosure of factual information about terms of service, including that clients would still be liable to litigation costs even if their lawsuits were unsuccessful).

Firms must also include specific cross-references to more detailed information about their fees and costs.[426] The cross-reference must, at a minimum, include the same information as, or contain information equivalent to that required by, the Form ADV Part 2A brochure (specifically Items 5.A., B., C., and D.) and Regulation Best Interest, as applicable.[427] If the firm is a broker-dealer that does not provide recommendations subject to Regulation Best Interest, to the extent it prepares more detailed information about its fees, it must include specific references to such information.[428] The final instructions require firms to use text features to make this additional information more noticeable and prominent in relation to other discussion text.[429] Firms may choose to

provide a hyperlink, or other means of facilitating access, that leads directly to the relevant Regulation Best Interest disclosure or section of Form ADV, or they may choose to create an additional page that contains the same or equivalent information.[430] For example, a firm may decide to include information on a different website.

[426] Item 3.A.(iii) of Form CRS.

[427] Item 3.A.(iii) of Form CRS.

[428] Item 3.A.(iii) of Form CRS.

[429] General Instruction 4.C to Form CRS. For example, firms could use larger or different font; a text box around the heading or questions; bolded, italicized, or underlined text; or lines to offset the information from other sections.

[430] While drafting these disclosures for Form CRS, investment advisers also are encouraged to consider whether they can describe the information about fees more clearly in the Form ADV brochure in a more reader-friendly format. See also General Instructions 3. and 4. of Form CRS (instructions applicable to electronic delivery). For further discussion of these provisions, see supra Section II.A.3. and footnotes 156 and 158 and accompanying text, and Section II.B.2.(b) and footnotes 348-349.

The proposed instructions did not include a specific cross-reference to additional fee disclosure, but the proposal required a cross-reference in the Additional Information section about where the retail investor could find information about the services offered, and we requested comment on whether to require firms to include a fee schedule.[431] In the RAND 2018 survey, a potential hyperlink to information on fees, however, generated the most interest among survey participants.[432] Some industry commenters suggested that the relationship summary should permit hyperlinks to fee schedules, arguing that additional information would be helpful for retail investors, but that including the fee schedule itself would be unwieldy.[433] Another commenter, however, suggested requiring a fee schedule that includes typical breakpoints and information on likely and/or maximum fees.[434]

[431] Proposed Item 7.E. of Form CRS.

[432] See RAND 2018, supra footnote 13 (58% of participants selecting “very likely” and another 32% selecting “somewhat likely” to click on a hyperlink relating to fees; no other potential hyperlink generated a majority with “very likely” usage among any investor or education subgroup). Other investor studies indicated that participants wanted descriptions of the hyperlinks to be more concrete in terms of what information they would find, and that, while some participants were interested in additional information, others admitted they would not follow the links because it was extra effort, they were uninterested, or the link did not itself suggest what would be there. See Kleimann II, supra footnote 19. In addition, numerous commenters supported layered disclosure. See supra footnote 31 and accompanying text.

[433] See CFA Letter I; IAA Letter I; LPL Financial Letter.

[434] See Morningstar Letter.

Given the feedback from investors that fee information is important, we believe that requiring specific references to more detailed information about fees balances the goals of the relationship summary, to highlight information covering several topics, with investors' interest in understanding more about fees. This approach will give retail investors information about the types of fees at a higher level and then offer more details, permitting the relationship summary to cover other important topics as well.[435] Including a fee schedule in the relationship summary could make it more difficult to also cover the other topics while maintaining short, digestible disclosures. Instead, we are not including a fee schedule in the relationship summary but are requiring cross references to balance providing a shorter document with giving retail investors easy access to more detailed information.

[435] See supra Section II.A.3.

Conversation Starter. We are also adopting a conversation starter that is designed to prompt a more personalized discussion regarding the fees and costs that will impact the particular retail investor's account. A firm must include the following question for the retail investor to ask his or her financial professional: “Help me understand how these fees and costs might affect my investments. If I give you $10,000 to invest, how much will go to fees and costs, and how much will be invested for me?” [436]

[436] Item 3.A.(iv) of Form CRS.

As discussed above, the proposal included the following “Key Question,” which was intended to serve as a conversation starter between the retail investor and the financial professional and to provide the investor an opportunity to receive a quantitative example of the impact of fees: “Do the math for me. How much would I expect to pay per year for an advisory account? How much for a typical brokerage account? What would make those fees more or less? What services will I receive for those fees?” [437] The Proposing Release discussed the option of including an example of the impact of fees in the relationship summary, and requested comment on whether we should require an example showing how sample fees and charges apply to a hypothetical advisory account and a hypothetical brokerage account, as applicable.[438] We also requested comment on what assumptions firms should make in preparing such an example and how the information should be presented.[439]

[437] Proposed Item 8 of Form CRS.

[438] Proposing Release, supra footnote 5.

[439] Proposing Release, supra footnote 5.

Feedback from the RAND 2018 report, other surveys and studies, roundtables, and the Feedback Forms showed that retail investors want more information about fees and the impact of those fees on their investments.[440] At some of the roundtables, for example, participants discussed the utility of adding a hypothetical example in the relationship summary to illustrate fees.[441] Commenters on Feedback Forms also asked for more specific information about the impact of fees on their investments, such as example fee calculations or ranges of fees.[442] Commenters supported including a question highlighting fees a retail investor pays.[443] Commenters, including commenters representing investors and individual investors, also overwhelmingly supported requiring

more information to help retail investors understand the fees and costs associated with their investments, particularly specific examples about how those fees could affect them.[444] Several commenters, however, objected to the inclusion of the key question addressed above because of the operational challenges present in answering such a question with respect to a particular retail investor.[445] Some argued that anticipated fees are unknown for broker-dealer customers, while others believed that it is too difficult for firms to build out systems for individualized fees.[446] Other commenters suggested eliminating this particular key question and instead requiring firms to include links to investor education materials prepared by the Commission.[447] Many commenters were concerned that this key question would impose new disclosure or recordkeeping requirements.[448]

[440] See e.g., RAND 2018, supra footnote 13 (noting survey results finding that the fees and costs section was “the section for which the largest share of respondents suggest adding more detail” and investors were more likely than non-investors to suggest adding more detail to the section on fees and costs (31 percent versus 25 percent), and in qualitative interviews, “participants expressed that this section is overwhelming . . . and at the same time felt more information would be helpful.”); Feedback Forms Comment Summary, supra footnote 11 (summary of responses to Question 5) (narrative answers on 29 Feedback Forms indicated that additional information about fees and costs would be helpful).

[441] See Washington, DC Roundtable (an investor stated that it would be useful for comparing understanding costs if hypothetical examples were given about how cost affects the investor's returns); Atlanta Roundtable (an investor stated that it would be helpful to know the cost of investing a hypothetical amount of money); and Philadelphia Roundtable (an investor stated that it would be helpful to see hypothetical broker and investment adviser fee arrangements for a given investment portfolio to aid in determining which arrangement may be more appropriate for the investor).

[442] See, e.g., Lee1 Feedback Form (“fees should tell me the fees I can expect to pay”); Anonymous03 Feedback Form (“Create a calculator . . . where the investor fills in the amount and the fees for both scenarios are calculated”); Anonymous06 Feedback Form (“Provide monetary examples. If you invest $100, then your fees are . . .”); Anonymous24 Feedback Form (requesting “more specific examples showing specific costs”); Baker Feedback Form (“Graphic and hypothetical examples could be helpful. Mary invests $50,000 with a broker-dealer and Jane invests $50,000 with an investment adviser and present some scenarios with each . . . As fees, commissions, etc. may vary and be negotiable, a range of typical, usual, main-stream commission charges and asset-based fees would be helpful to alert the client to possible overcharges.”); Bhupalam Feedback Form (“What would make it better is if it has samples of costs in particular with each firm a client is dealing with.”); Hawkins Feedback Form (“Including some ranges as to what to expect in fees could help. Also, including information as to the impact that increased fees have on investment returns, long term, would help the average investor.”); Mennella Feedback Form (“I want to know what an investment is going to cost me over my time horizon . . . .”).

[443] See IAA Letter I; LPL Financial Letter; New York Life Letter; Primerica Letter; RAND 2018, supra footnote 13 (91% of participants indicated they were “very likely” or “somewhat likely” to ask a supplemental question that addressed the amount of a $1,000 investment that would go to fees and costs rather than being invested for them).

[444] See, e.g., CFA Institute Letter I; CFA Letter I; Betterment Letter I; Morningstar Letter; John Hancock Letter; Comment Letter of Barbara Greenwald (Jul. 12, 2018). See, e.g., Anonymous25 Feedback Form (“give examples with numbers, showing examples of hypothetical accounts”); Baker Feedback Form (“Graphic and hypothetical examples would be helpful”); Coleman Feedback Form (“Need simple examples”); Manella Feedback Form (“I want to know what an investment is going to cost me over my time horizon”); Schreiner Feedback Form (“Provide a hypothetical example with industry standard fees . . .”); see also Atlanta Roundtable; Houston Roundtable; Washington, DC Roundtable.

[445] See supra footnote 189.

[446] See NSCP Letter; Edward Jones Letter (noting that given the range of services available, it would be very difficult for financial professionals to fully address this question at the outset of the relationship, particularly for investors selecting transaction-based services); TIAA Letter; LPL Financial Letter; Primerica Letter; ICI Letter; SIFMA Letter (noting most firms do not currently have systems in place to allow financial professionals to answer customer-specific questions).

[447] See Prudential Letter.

[448] See Edward Jones Letter; see also supra Section II.A.4.

Commenters that supported more fee disclosure had a range of suggestions as to how to include the additional information. For example, one commenter believed that if hypothetical or personal fee disclosures are included in the relationship summary, such disclosures should focus on helping investors understand the effect expenses have on an investment and should make clear that such an example is for educational purposes.[449] One individual advocated for more transparent fee information, suggesting the relationship summary provide individualized fees or a specific range of fees.[450] Another commenter noted that, in response to a previously commissioned report revealing participants' lack of knowledge about fees as well as their desire for a better understanding of fees, a general chart or graph that depicts the effects of fees on an account would be helpful for investors.[451] Another commenter included a sample mock relationship summary with a numerical example of how the fees might impact a hypothetical account.[452]

[449] See Invesco Letter (stating that this could be achieved by, for example, a side-by-side bar graph showing the growth of an investment gross of costs and net of costs).

[450] See Wahh Letter.

[451] See AARP Letter.

[452] See Betterment Letter I (Hotspex), supra footnote 18 (noting that investors who viewed a redesigned version of the standalone adviser relationship summary appeared to appreciate the example of how fees would impact a hypothetical account).

Given the importance of fees, we want to encourage retail investors and their financial professionals to have a conversation to further discuss the particular fees and costs that would apply to the retail investor, and the impact fees and costs could have on the retail investor's investment returns over time, in order to promote investor understanding. After consideration of the comments received, we are adopting a conversation starter that is designed to elicit a more personalized discussion regarding the fees and costs that will impact the particular retail investor's account, while mitigating the concerns regarding the proposed “Do the math for me” question posed.[453] We believe that this conversation starter will allow financial professionals to tailor the conversation to the particular retail investor even if the financial professional does not provide precise fee information for that individual during the conversation. For instance, if the financial professional intends to recommend mutual funds to the retail investor, he or she may choose to discuss firm- and product-level fees that may apply. The financial professional should be in a position to explain the fees and costs relevant to that particular retail investor if the investor chooses a certain type of account and certain investment, even if the financial professional provides examples and estimated ranges rather than a precise prediction of how much the investor will pay. In addition, the financial professional should explain how those fees and costs will work (for example, whether they are upfront charges, taken out of the initial investment amount, taken out over time, future charges, or charged in another manner) and how the fees and costs could impact the retail investor's investment returns over time. Firms may consider including calculators, charts, graphs, tables, or other graphics or text features to enhance an investor's understanding of these fees. Firms may also consider reviewing with their retail investors the impact of fees on the retail investor's account on a periodic basis.[454]

[453] See supra Section II.A.4.

[454] See Regulation Best Interest Release, supra footnote 47, at Section II.C.1.a.

While we agree that examples are important to illustrate the potential impact of fees, we decline to require firms to provide a hypothetical example in the relationship summary.[455] Our intent with the proposed “Do the math for me” question was that it serve as a conversation starter and a prompt to encourage the retail investor to ask about the amount she would typically pay per year for the account, what would make the fees more or less, and what was included in those fees.[456] We believe that the conversation starter that is being adopted here is consistent with the proposal's intent to prompt retail investors to have a conversation with their financial professional about fees that may impact their investments and account while also addressing the concerns raised by commenters. We encourage firms to consider ways to provide more personalized disclosures to retail investors, and we will continue to consider whether to require more personalized fee disclosure, particularly as operational and technological costs fall.

[455] See infra Section IV.D.4 (Alternatives to the Relationship Summary) for a discussion on the inclusion of a hypothetical fee example.

[456] Proposing Release, supra footnote 5.

b. Other Ways of Making Money, Standard of Conduct, and Conflicts of Interest

Firms will be required to include disclosure under a single heading describing their standard of conduct and a summary of certain firm-level conflicts, including the specific conflicts the proposal required.[457] The proposal required disclosure on both conflicts and the standard of conduct, but in separate sections. The final relationship summary requires discussion in one section of other firm-level revenues and conflicts of interest,

and the applicable standard of conduct.[458]

[457] Item 3.B. of Form CRS. For broker-dealers, the heading will state “What are your legal obligations to me when providing recommendations? How else does your firm make money and what conflicts of interest do you have?”; for investment advisers, the heading will state “What are your legal obligations to me when acting as my investment adviser? How else does your firm make money and what conflicts of interest do you have?”; and for dual registrants that prepare a single relationship summary, the heading will state “What are your legal obligations to me when providing recommendations as my broker-dealer or when acting as my investment adviser? How else does your firm make money and what conflicts of interest do you have?”.

[458] Id.

We are placing these disclosures together, including the related conversation starter, because we believe they will more effectively allow retail investors to understand the standards of conduct for broker-dealers and investment advisers.[459] We are also modifying the requirements for the standard of conduct and conflict of interest disclosures, as discussed in more detail below.

[459] In addition, retail investors may learn more about investment advisers, broker-dealers, and investing at Investor.gov/CRS, which will be referenced in a relationship summary's introduction. See Instruction to Item 1.B. of Form CRS.

We continue to believe it is important to highlight the presence of conflicts and their interconnectedness with how the firm makes money. We recognize that investment advisers, broker-dealers, and their financial professionals have conflicts that affect their retail investor clients and customers and believe it is important to underscore this for retail investors.[460] Similarly, we continue to believe that it is important to provide retail investors with disclosure regarding a broker-dealer or investment adviser's legal obligations regarding the required standard of conduct in a way that is understandable for retail investors.

[460] See infra footnote 495 and accompanying text.

Standard of Conduct. As proposed, we are adopting a requirement that firms describe their legal standard of conduct using prescribed wording (the “standard of conduct disclosure”).[461] In a change from the proposal, however, the final instructions modify both the content of the standard of conduct disclosure [462] and its placement in the relationship summary. As discussed in more detail below, the final instructions require broker-dealers, investment advisers, and dual registrants to include a brief statement of the applicable standard of conduct.[463] In addition, as discussed above, this disclosure is required to be included in the conflicts of interest section rather than a separate standard of conduct section.

[461] Under the proposal, broker-dealers that offer brokerage accounts to retail investors would have been required to include the following: “[We must act in your best interest and not place our interests ahead of yours when we recommend an investment or an investment strategy involving securities.] When we provide any service to you, we must treat you fairly and comply with a number of specific obligations. Unless we agree otherwise, we are not required to monitor your portfolio or investments on an ongoing basis.” The bracketed wording would have been included only if the broker-dealer offered recommendations subject to Exchange Act Rule 15l-1. See Proposed Item 3.B.(1) of Form CRS. In addition, such broker-dealers would have had to include the following: “Our interests can conflict with your interests. [When we provide recommendations, we must eliminate these conflicts or tell you about them and in some cases reduce them].” The bracketed wording would only have been included if the broker-dealer offered recommendations subject to Regulation Best Interest. See Proposed Item 3.B.(2) of Form CRS.

Under the proposal, investment advisers that offer investment advisory accounts to retail investors would have had to include the following: “We are held to a fiduciary standard that covers our entire investment advisory relationship with you. [For example, we are required to monitor your portfolio, investment strategy and investments on an ongoing basis.]” The bracketed wording would have been omitted if the investment adviser did not provide ongoing advice. See Proposed Item 3.C.(1) of Form CRS. In addition, such investment advisers would have had to include the following: “Our interests can conflict with your interests. We must eliminate these conflicts or tell you about them in a way you can understand, so that you can decide whether or not to agree to them.” See Proposed Item 3.C.(2) of Form CRS.

The section also required a statement that the firm's interests may conflict with a retail investor's interests and explain the firm's obligations with respect to those conflicts using prescribed wording. See Proposed Item 3 of Form CRS.

[462] Form CRS also includes a conversation starter regarding broker-dealers and investment advisers' standards of conduct. See infra footnote 495 and accompanying text.

[463] Item 3.B.(i) of Form CRS.

Most commenters did not object to the proposal's requirement that broker-dealers and investment advisers provide disclosure regarding their standards of conduct or that such disclosure be standardized.[464] Results of the RAND 2018 report and other investor studies and surveys indicate that retail investors view this information as helpful.[465] Similarly, commenters on Feedback Forms indicated that this information was useful.[466] In addition, the IAC recommended that investors would benefit from receiving uniform, plain- English disclosure documents with topics, such as, to the extent the Commission does not adopt a uniform fiduciary standard, “what is your legal obligation to me?” [467] Certain commenters, however, suggested that the Commission discuss generally applicable information, including standards of conduct, in investor educational materials instead of requiring firms to do so in their relationship summaries.[468] A number of these commenters argued that this wording might unintentionally create an implied contractual relationship subject to a customer's private right of action.[469] The prescribed language describing the standard of conduct broker-dealers and investment advisers owe to their customers and clients is not intended to create a private right of action.

[464] See, e.g., AARP Letter; CFA Institute Letter I; IAA Letter II.

[465] See RAND 2018, supra footnote 13 (almost one third of survey respondents selected this section as one of the two most useful; almost 60% would keep the length as is and over 15% would add detail); Cetera Letter II (Woelfel), supra footnote 17 (88% of survey respondents somewhat or strongly agreed “the firm's obligations to you” is a “very or somewhat important” topic); see also Schwab Letter I (Koski), supra footnote 21 (“obligations of the firm” ranked third where survey participants were asked to identify four topics as most important for a firm to communicate”).

[466] Feedback Forms Comment Summary, supra footnote 11 (summary of responses to Question 2(b)) (36 commenters (39%) graded the “Our Obligations to You” section of the relationship summary as “very useful” and 42 commenters (45%) graded this section as “useful”).

[467] IAC Broker-Dealer Fiduciary Duty Recommendations, supra footnote 10.

[468] See, e.g., Primerica Letter.

[469] See ASA Letter; Primerica Letter; Transamerica Letter (requesting a statement from the Commission that any such private right of action was not intended).

Many commenters, however, found that the specific wording we proposed [470] did not effectively address investor confusion concerning legal duties applicable to broker-dealers and investment advisers. Commenters indicated that the proposed wording in this section was confusing and did not clarify the applicable legal standards.[471] Some commenters argued that this section included legal jargon inaccessible to retail investors.[472] Others believed that retail investors are unlikely to understand the difference between “best interest” and “fiduciary,” with some suggesting that relationship summaries more clearly define the applicable legal standards or communicate the differences between “fiduciary” and “best interest.” [473] Investment advisers also expressed concern that retail investors may “wrongly” view “best interest” as a higher standard of conduct as compared to the fiduciary standard.[474]

[470] See supra footnote 461.

[471] See, e.g., AARP Letter; Betterment Letter I; CFA Letter I.

[472] See Comment Letter of Fisher Investments (Jul. 31, 2018) (“Fisher Letter”); see also Kleimann I, supra footnote 19; RAND 2018, supra footnote 13; Kleimann II, supra footnote 19.

[473] See, e.g., AARP Letter; CFA Letter I; Comment Letter of the Financial Planning Coalition (Aug. 7, 2018) (“Financial Planning Coalition Letter”).

[474] See, e.g., Betterment Letter I; Fisher Letter; IAA Letter I; IAA Letter II.

Investor feedback through surveys and studies and in comments at roundtables and on Feedback Forms also showed some confusion. For example, some participants in investor studies and at one of the roundtables did not understand why conflicts of interest existed if broker-dealers and investment advisers were held to the standards of conduct described.[475] Investor studies and surveys showed

that participants varied in their understanding of differing obligations for different account types, some viewing brokerage accounts and advisory accounts as subject to similar standards of conduct but others interpreting the section as conveying that the two account types are subject to different standards.[476] Observations reported by the RAND 2018 report, other surveys and studies and comments received on Feedback Forms demonstrated that many participants did not understand the meaning of the word “fiduciary” in particular.[477] Investor studies also further observed that, when presented with alternative mock-ups of a relationship summary designed to clarify this section, some investors still struggled with understanding the legal obligations of brokers and advisers.[478]

[475] See RAND 2018, supra footnote 13 (in qualitative interviews, participants felt that the conflicts of interest section contradicted the “Our Obligations to You” section); Miami Roundtable.

[476] See RAND 2018, supra footnote 13; see also Kleimann I, supra footnote 19 (“Most participants did not draw a parallel between the best interest standard' of the Broker-Dealers and the fiduciary standard' of Investment Advisers. Rather, they drew a parallel between specific obligations' with Broker-Dealers and fiduciary standards' with Investment Advisers . . . [and] saw these two as similar regulatory obligations.”); Betterment Letter I (Hotspex), supra footnote 18 (in a survey that tested participant's comprehension after viewing a version of the proposed sample standalone adviser relationship summary, only 26% correctly identified as false a statement that broker-dealers are held to a fiduciary standard; 71% correctly identified as true that an adviser (Betterment) would be held to a fiduciary standard).

[477] See, e.g., RAND 2018, supra footnote 13 (“Some participants had never heard of the word, whereas others had heard it but did not know what it meant in this context. Others thought the word “fiduciary implies acting in best interest . . .”); Kleimann I, supra footnote 19 (“Few participants could define `fiduciary standard' ”); see also Feedback Forms Comment Summary, supra footnote 11 (summary of responses to Question 4) (On 10 Feedback Forms, commenters specifically asked for a definition or better explanation of the term “fiduciary.”).

[478] See, e.g., Kleimann II, supra footnote 19 (explains that, after redesign of obligations section participants still struggled to understand the implications of the fiduciary standard for advisers compared to the best interest standard for broker-dealers); Betterment Letter I (Hotspex), supra footnote 20 (almost one half of survey participants reviewing a version of the standalone adviser relationship summary designed by Betterment did not correctly identify as false a statement that broker-dealers are held to a fiduciary standard).

We proposed this section to address investor confusion concerning legal duties applicable to broker-dealers and investment advisers and, in combination with the key questions about the financial professional's legal obligations, to encourage a conversation between the retail investor and the financial professional about applicable standards of conduct.[479] The prescribed wording was intended to promote consistency in communicating these standards to retail investors.[480]

[479] See Proposing Release, supra footnote 5, at n.114 and accompanying text.

[480] Proposing Release, supra footnote 5, at n.115 and accompanying text.

We continue to believe that it is appropriate for the final instructions to require broker-dealers and investment advisers to describe their standards of conduct to investors, because, as discussed above, we believe that it is important to promote retail investors' understanding of these obligations. We also agree with commenters that requiring these firms to include prescribed disclosure regarding these standards of conduct is important in achieving this goal.[481] While the final instructions generally do not require prescribed disclosure in other contexts,[482] we believe that investors should be provided with a consistent articulation of their firm's legal obligations regarding their standard of conduct and that the rationale for allowing firms flexibility to tailor their disclosure in other aspects of the relationship summary does not apply with respect to the standard of conduct. In this regard, some commenters stated that Form CRS should be an educational document, which would be a standardized document published and maintained by the Commission.[483] While the content of disclosure regarding a firm's standard of conduct should be uniform, this disclosure should appear in the relationship summary, which must be delivered to all retail investors, rather than a separate SEC-staff-created and maintained publication. In addition, prescribing language for this disclosure does not raise the same concerns that commenters raised about prescribed language generally. For example, we are permitting more flexibility in how firms describe their fees and services in response to comments that some of the prescribed wording, for example, was not necessarily applicable to their business and could make investors confused.[484]

[481] But see footnotes 468-469 and accompanying text.

[482] As discussed in more detail above, many commenters who believed that the final instructions should not require prescribed disclosure focused on other aspects of the relationship summary, such as disclosure regarding a description of a firm's services. See supra Section II.A.1.

[483] See, e.g., Primerica Letter.

[484] See supra Section II.A.1. One commenter noted that requiring prescribed disclosure in some circumstances may not be accurate for all business models and could mislead investors. See CFA Letter I.

By contrast, a legal standard of conduct, whether through an investment adviser's fiduciary duty, Regulation Best Interest, or both, will apply to all firms delivering the relationship summary that provide recommendations or investment advice, and prescribing language will avoid investor confusion when describing the applicable standard. Indeed, it may be confusing to investors comparing relationship summaries among prospective firms to see the same legal standard described differently among these firms. The required statements about the legal standard of conduct are disclosures of purely factual information about the terms under which the firms' services will be made available to investors.[485]

[485] See Zauderer, 471 U.S. at 651; Milavetz, 559 U.S. at 250.

We have determined, however, that the proposed standard of conduct disclosure may not have appropriately addressed investor confusion. While the proposal was intended to provide retail investors with simple, easily understood disclosure, we agree with commenters and results from investor studies and surveys,[486] that the relationship summary could be revised in a manner that would be more beneficial to retail investors,[487] especially in light of the similarity between broker-dealers' and investment advisers' legal obligations to retail investors with respect to their standards of conduct when providing recommendations or advice under the rules and interpretations we are adopting concurrently.[488] In this regard, we have modified the standard of conduct disclosure to include it within the conflicts of interest section of the relationship summary and to contain simplified wording that is short, plain language, and user-friendly but still describes the key components of a broker-dealer's or investment adviser's standard of conduct when providing recommendations or advice.[489]

[486] See supra Section II.A.

[487] See, e.g., AARP Letter.

[488] See Fiduciary Release, supra footnote 47; Regulation Best Interest Release, supra footnote 47.

[489] The final instructions provide that if a required disclosure or conversation starter is inapplicable or specific wording required by the instructions is inaccurate, firms may omit or modify that disclosure or conversation starter. See General Instruction 2.B. to Form CRS. We note that, like the proposal, the standard of conduct disclosure distinguishes between broker-dealers that provide recommendations subject to Regulation Best Interest and broker-dealers that do not provide recommendations subject to Regulation Best Interest. See infra footnote 507 and accompanying text.

First, we are modifying the standard of conduct disclosure so that it is required to be provided under a modified heading [490] in the conflicts of

interest section.[491] While broker-dealers' and investment advisers' legal obligations regarding their standard of conduct apply not just in the context of conflicts of interest,[492] we believe that requiring this disclosure to be included in the conflicts of interest section will provide a retail investor with a greater ability to discern how a particular legal obligation regarding a standard of conduct may affect him or her by describing the application of that obligation in the context of conflicts of interest, which was a primary concern for retail investors and commenters alike.[493] In addition, this placement is supported by observations reported in the RAND 2018 qualitative interviews and another study, which indicated that some participants struggled with how to reconcile the conflicts of interest section with the legal obligations section because they were discussed separately.[494]

[490] Item 3.B. of Form CRS; see also supra footnote 457.

[491] Item 3 of Form CRS.

[492] See Regulation Best Interest Release, supra footnote 47 and Fiduciary Release, supra footnote 47.

[493] See Proposing Release, supra footnote 5, at Section II.B.6; supra footnote 475 and accompanying text.

[494] See, e.g., RAND 2018, supra footnote 13 (noting that “[s]ome participants expressed appreciation that the firm was being transparent about its conflicts of interest, but many participants struggled with how to reconcile the information in this section with the previous `Our Obligations to You' section.”); Kleimann I, supra footnote 19; see also infra footnote 505 and accompanying text.

Second, in the conversation starter relating to this section, we are requiring firms to include the following question: “How might your conflicts of interest affect me, and how will you address them?” [495] As discussed above, we believe that including questions for investors to ask their financial professionals is an important component of the relationship summary. This question also underscores for retail investors that investment advisers and broker-dealers have conflicts that may create incentives to put their interests ahead of the interests of their retail clients and customers.[496] As a corollary, it also underscores for retail investors how investment advisers and broker-dealers address these conflicts of interest in discharging their legal obligations regarding their standards of conduct to these investors. We believe that this requirement will improve a retail investor's understanding of the standard of conduct owed by his or her financial professional by helping the investor to better understand its application to him or her.

[495] Item 3.B.(iii) of Form CRS.

[496] See supra Section II.A.4.

Unlike the proposal,[497] the final instructions do not require prescribed disclosure summarizing how a firm's standard of conduct would require it to address conflicts of interest. As discussed above, commenters found the proposal's standard of conduct disclosure confusing.[498] After considering comments and observations reported in surveys and studies, we recognize that the proposed disclosures were confusing, particularly the prescribed disclosure attempting to explain concepts of full and fair disclosure, mitigation, and informed consent.[499] Accordingly, we are removing this wording to shorten the disclosure and to provide more focus on the rest of the disclosure required in this section, as we believe this should improve investor comprehension. We believe that clearly disclosing to investors that firms have an obligation to act in the best interest of a client or customer and also simultaneously have conflicts of interest is more important than describing the particular aspects of firms' general duty to disclose, mitigate, or obtain informed consent to conflicts, as applicable. Instead of this disclosure, we are requiring a conversation starter to encourage firms to discuss with retail investors how their standards of conduct require them to address conflicts of interests. In addition, we believe that the discussion prompted by the conversation starter accompanied by examples of conflicts of interest [500] will provide retail investors with specific illustrations of how a firm's standard of conduct can apply, which could encourage investors to ask more detailed questions about how firms address their conflicts.

[497] See Proposed Items 3.B.2. and 3.C.2. of Form CRS.

[498] See supra footnote 471 and accompanying text. See also RAND 2018, supra footnote 13 (noting that one “participant pointed out that the obligations section had said that any conflicts of interest would be reduced and disclosed [but] the conflicts of interest section does not mention disclosing or reducing conflicts); Kleimann II, supra footnote 19 (“Most participants did not understand how conflicts would be resolved . . . they read the disclosure as indicating that Brokerage Accounts were under no obligation to notify clients of a conflict . . .”).

[499] See Fiduciary Release, supra footnote 47 (discussing the concepts of full and fair disclosure, mitigation, and informed consent).

[500] Item 3.B.(ii) of Form CRS.

Finally, we have modified the standard of conduct disclosure for broker-dealers and investment advisers to reduce the amount of required disclosure,[501] to focus the disclosure on the standard of conduct that applies to the provision of recommendations and advice,[502] and to require that portions of the disclosure be presented in bold and italicized font.[503] We believe that streamlining the standard of conduct disclosure and tailoring the disclosure to the type of firm providing such disclosure will clarify for retail investors the applicable legal standard of conduct to which their particular firm is subject when providing recommendations or advice or when providing broker-dealer services without recommendations.

[501] Items 3.B.(i).a. and 3.B.(i).b. of Form CRS.

[502] Item 3.B. of Form CRS (heading).

[503] Items 3.B.(i).a., 3.B.(i).b., and 3.B.(i).c. of Form CRS.

Most commenters found the proposal's standard of conduct disclosure confusing because it included legal or technical words. For example, some commenters, and results from investor studies and surveys, indicated that many did not understand the meaning of “fiduciary” or had never heard of the word.[504] Accordingly, the modified standard of conduct disclosure both eliminates technical words, such as “fiduciary,” and describes the standards of conduct of broker-dealers, investment advisers, or dual registrants using similar terminology in a plain-English manner. In particular, the final instructions use the term “best interest” to describe how broker-dealers, investment advisers, and dual registrants must act regarding their retail customers or clients when providing recommendations as a broker-dealer or acting as an investment adviser.[505] We believe that requiring firms—whether broker-dealers, investment advisers, or dual registrants—to use the term “best interest” to describe their applicable standard of conduct will clarify for retail investors their firm's legal obligation in this respect, regardless of whether that obligation arises from Regulation Best Interest or an investment adviser's fiduciary duty under the Investment Advisers Act.[506] The modified language, however, highlights a key difference in when a firm must exercise its obligation—specifically, when providing a recommendation (in the case of a broker-dealer),[507] or when acting as an

investment adviser,[508] or either providing a recommendation or acting as an investment adviser (in the case of a dual registrant).[509] Portions of the modified standard of conduct disclosure also are required to be presented in bold and italicized font.[510] The final instructions are designed to provide retail investors with a clear understanding of when a firm's legal obligations regarding its standard of conduct is required to be discharged. In addition, with respect to broker-dealers, the modified standard of conduct disclosure, like the proposal,[511] distinguishes between broker-dealers that provide recommendations subject to Regulation Best Interest and broker-dealers that do not provide recommendations subject to Regulation Best Interest (e.g., execution-only brokers). The modified standard of conduct disclosure also requires that broker-dealers, investment advisers, and dual registrants to state that conflicts of interest will remain despite the existence of these legal obligations, and to provide examples of these conflicts.[512] This change is designed to address commenters' concerns that we clarify for retail investors the interaction between broker-dealers' or investment advisers' legal obligations regarding their standards of conduct and their conflicts of interest.

[504] See supra footnote 477 and accompanying text; see also CFA Letter I (citing to “man on the street” interviews suggesting that average investors do not understand the term “fiduciary”); Consumer Reports Letter (commenting on the RAND 2018 report).

[505] Item 3.B.(i) of Form CRS.

[506] See Fiduciary Release, supra footnote 47; Regulation Best Interest Release, supra footnote 47.

[507] Item 3.B.(i).a. of Form CRS (requiring broker-dealers that provide recommendations subject to Regulation Best Interest to include (emphasis required): “When we provide you with a recommendation, we have to act in your best interest and not put our interest ahead of yours. At the same time, the way we make money creates some conflicts with your interests. You should understand and ask us about these conflicts because they can affect the recommendations we provide you. Here are some examples to help you understand what this means,” and broker-dealers that do not provide recommendations subject to Regulation Best Interest to include (emphasis required): “We do not provide recommendations. The way we make money creates some conflicts with your interests. You should understand and ask us about these conflicts because they can affect the services we provide you. Here are some examples to help you understand what this means.”).

[508] Item 3.B.(i).b. of Form CRS (requiring investment advisers to include (emphasis required): “When we act as your investment adviser, we have to act in your best interest and not put our interest ahead of yours. At the same time, the way we make money creates some conflicts with your interests. You should understand and ask us about these conflicts because they can affect the investment advice we provide you. Here are some examples to help you understand what this means.”).

[509] Item 3.B.(i).c. of Form CRS (requiring dual registrants that prepare a single relationship summary and provide recommendations subject to Regulation Best Interest to include (emphasis required): “When we provide you with a recommendation as your broker-dealer or act as your investment adviser, we have to act in your best interest and not put our interest ahead of yours. At the same time, the way we make money creates some conflicts with your interests. You should understand and ask us about these conflicts because they can affect the recommendations and investment advice we provide you. Here are some examples to help you understand what this means,” and dual registrants that prepare a single relationship summary and do not provide recommendations subject to Regulation Best Interest to include (emphasis required): “We do not provide recommendations as your broker-dealer. When we act as your investment adviser, we have to act in your best interest and not put our interests ahead of yours. At the same time, the way we make money creates some conflicts with your interest. You should understand and ask us about these conflicts because they can affect the services and investment advice we provide you. Here are some examples to help you understand what this means.” Also requiring that dual registrants that prepare two separate relationship summaries follow the instructions for broker-dealers and investment advisers in Items 3.B., 3.B.(i).a. and 3.B.(i).b.).

[510] Items 3.B.(i).a. (“When we provide you with a recommendation” and “do not”), 3.B.(i).b. (“When we act as your investment adviser”), and 3.B.(i).c. (“When we provide you with a recommendation as your broker-dealer or act as your investment adviser,” “do not,” and “When we act as your investment adviser”) of Form CRS.

[511] See Proposed Item 3.B. of Form CRS.

[512] Broker-dealers that do not provide recommendations subject to Regulation Best Interest will be required to include substantially the same conflict disclosure, except that it will reflect that conflicts of interest can affect the services provided, rather than referring to recommendations. See Items 3.B.(i).a. and 3.B.i.(c) of Form CRS.

Examples of Ways the Firm Makes Money and Conflicts of Interest. Following the standard of conduct prescribed wording, a firm must summarize the following ways in which it and its affiliates make money from brokerage or investment advisory services and investments it provides to retail investors, to the extent they are applicable to the firm.[513] The specific wording is not prescribed, but firms must include specific information to describe each of the applicable conflicts.

[513] Item 3.B.(iv) of Form CRS.

Proprietary Products: Investments that are issued, sponsored, or managed by you or your affiliates;

Third-Party Payments: Compensation received from third parties when a firm recommends or sells certain investments;

Revenue Sharing: Investments where the manager or sponsor of those investments or another third party (such as an intermediary) shares with the firm revenue it earns on those investments; and

Principal Trading: Investments the firm buys from a retail investor, and/or investments the firm sells to a retail investor, for or from the firm's own accounts, respectively.[514]

[514] Items 3.B.(iv)(a) through 3.B.(iv)(d) of Form CRS.

If none of those conflicts apply to the firm, it must summarize at least one of its material conflicts of interest that affect retail investors. Firms will be required to explain the incentives created by each of these examples.[515]

[515] Item 3.B.(iv) of Form CRS.

The proposal would have required a firm to discuss these same enumerated topics, to the extent they were relevant. If none of the four specified conflicts applied to a firm, the firm was not required to discuss any other conflicts that applied to its business. The proposal did not require a firm to summarize other ways its affiliates made money from the services and products the firm provides to retail investors.

We are adopting a heading that specifically asks how else the firm makes money in an effort to further highlight the firm's financial incentives and emphasize that they are intertwined with conflicts. In a departure from the proposal, the relationship summary will not include an introductory sentence explaining that the firm benefits from the services it provides to the retail investor because we believe that the new heading and required content of this item make this sentence unnecessary. We are also expanding the required conflicts disclosures to ensure that firms without any of the enumerated conflicts will still summarize at least one other material conflict of interest. Firms will include the four enumerated conflicts (if applicable) that were in the proposal, or otherwise at least one material conflict of interest, and a specific cross-reference to more detailed information about conflicts. Firms with none of the enumerated conflicts should carefully consider their operations in their entirety when selecting a material conflict to disclose to retail investors. While we think it is unlikely that a firm will not have any material conflicts to disclose, if this item is inapplicable, firms may omit or modify this disclosure.[516]

[516] General Instruction 2.B. of Form CRS.

Commenters generally believed that at least some conflicts disclosure was important to include in the relationship summary, but many suggested changes to the approach, including fewer conflicts disclosures and increased use of layered disclosure.[517] Commenters generally supported requiring firms to disclose the types of conflicts of interest related to these financial incentives identified in the proposal, specifically disclosure regarding proprietary products,[518] compensation received

from third parties,[519] revenue sharing,[520] and principal trading.[521]

[517] See, e.g., IAA Letter I (suggesting leveraging disclosures made elsewhere on Part 2 of Form ADV); SIFMA Letter (suggesting leveraging disclosures that would be required by Regulation Best Interest); Fidelity Letter and Schwab Letter I (suggesting using examples of conflicts, with links to additional disclosure).

[518] See Fidelity Letter; Schwab Letter I; SIFMA Letter.

[519] See, e.g., IFS Letter; IAA Letter I; Wells Fargo Letter; Primerica Letter (suggesting including in additional layered disclosure).

[520] See Fidelity Letter (third-party revenue sharing agreements in mock-up).

[521] See mock-ups in IAA Letter I; Primerica Letter; Wells Fargo Letter.

Investor feedback, however, was mixed. Results from the RAND 2018 survey and another survey indicated that many survey participants did not find this section to be as informative as other sections,[522] and some participants in surveys and studies indicated that this section was “difficult” or “very difficult” to understand.[523] About 75% of Feedback Form commenters rated the conflicts of interest section as either “very useful” or “useful,” while narrative comments on the Feedback Forms suggested that the conflicts of interest disclosure could be clarified or otherwise improved.[524]

[522] See RAND 2018, supra footnote 13 (conflicts of interest was selected as one of the two most informative sections by only 15% of survey respondents and selected as one of the two least informative by 36%); Cetera Letter II (Woelfel), supra footnote 17 (81% of survey respondents strongly or somewhat agreed that conflicts of interest is an important topic in the relationship summary, fewer than for any other topic); see also Margolis Feedback Form (stating that the conflicts of interest section is very confusing, particularly with respect to fee-sharing arrangements and referral fees).

[523] See RAND 2018, supra footnote 13 (about one third of survey respondents found this section to be difficult or very difficult to understand; in qualitative interviews, participants demonstrated misunderstanding of how this section reconciled with the “obligations to you” section and how conflicts would be resolved); Kleimann I, supra footnote 19 (interview participants had difficulty explaining how firms earned money from financial relationships that could cause conflicts and were unclear how conflicts would be resolved); Betterment Letter I (Hotspex), supra footnote 18 (noting that further improvements could be made to improve respondents understanding of differences in conflicts).

[524] Feedback Forms Comment Summary, supra footnote 11 (summary of responses to Question 2(e) and Question 4). Among the 41 Feedback Forms with narrative comments suggesting that one or more topics were too technical or could be improved, 14 included a narrative comment suggesting clarification or more information about conflicts of interest. See, e.g., Baker Feedback Form (“A sampling of possible conflict-of-interest situations is most desirable”); Bhupalam Feedback Form (“It doesn't clearly tell me whether the company will do this or not. In fact, it tells me that the company may do this and I should be fine with it.”); Lee2 Feedback Form (“What can I expect and not expect about the independence and conflict-free nature of the advice”); Margolis Feedback Form (“While I agree that fee-sharing arrangements and referral fees need to be disclosed, your wording is confusing”); Schreiner Feedback Form (“highlight implications of conflicts of interest”).

Several commenters suggested that we broaden the disclosures to require a firm to inform its retail investors of all of the conflicts related to its business.[525] Commenters also supported highlighting conflicts of interest stemming from affiliates,[526] and several commenters included disclosure about affiliates in their mock-ups.[527] One industry commenter expressed concern that including solely the proposed conflicts in isolation and on a standalone basis may lead investors to think these are the only meaningful conflicts.[528] Other commenters pointed out that if only the proposed conflicts were required to be included, then some firms would not include any conflicts disclosures because their conflicts do not fall within the requisite categories.[529] Furthermore, one commenter proposed to allow firms to affirmatively state that they did not have any of these conflicts without further disclosure of the firm's other conflicts of interest.[530]

[525] See CFA Institute Letter I; Trailhead Consulting Letter.

[526] See Comment Letter of Jackson, Grant Investment Advisers, Inc. (Aug. 7, 2018) (“Jackson Grant Letter”) (stating that other compensation (such as recommending proprietary products and products of affiliates) needs to be addressed for the investor to fully understand the potential for conflicts in any relationship).

[527] See SIFMA Letter; Wells Fargo Letter; Schwab Letter I; Comment Letter of Ron A. Rhoades, Western Kentucky University (Dec. 6, 2018) (“Rhoades Letter”); Stifel Letter (mock-up); Cetera Letter I; Betterment Letter I; ASA Letter (mock-up).

[528] IAA Letter I.

[529] See Paul Hynes Letter; Betterment Letter I (stating that their business model avoids the proposed conflicts of interest, and proposing an alternate “alignment of interest” section for the section on conflicts of interest).

[530] Betterment Letter I (indicating that the firm had none of the proposed enumerated conflicts).

We continue to believe that the conflicts we identified in the proposal should be highlighted to retail investors in the relationship summary. Accordingly, we are including in the final instructions a requirement that firms describe these four conflicts to the extent that any of these conflicts apply to them. Like other sections in the relationship summary, this section will provide firms with more flexibility in the way in which they describe their particular conflicts so that they can tailor the summary to more accurately reflect their specific business. While we are maintaining the proposal's approach of requiring firms to provide information about certain types of conflicts applicable to them, we are not requiring firms to state as many specific details with respect to such conflicts.[531] For example, the proposed instructions would have required firms to provide specific examples of advising on proprietary or affiliated investments or investments paying the firm a share of revenue, and we have removed such requirements from the final instructions. Instead, the relationship summary will focus on four specific ways a firm could make money from retail investors' investments to highlight that firms have conflicts of interest and encourage retail investors to ask and learn more about them.

[531] In addition, the IAC recommended that the Commission adopt a uniform, plain English document that covers basic information about conflicts of interest, among other topics. See IAC Broker- Dealer Fiduciary Duty Recommendations, supra footnote 10.

Additionally, as some commenters pointed out, we agree that not mentioning any conflicts, or permitting the firm to affirmatively state that it has none of the enumerated conflicts, could lead retail investors to conclude that the particular firm does not have any material conflicts. Accordingly, the instructions require a firm that does not have any of the four required categories of conflicts to provide at least one example of the firm's conflicts of interest. Specially, the instructions require a firm to summarize at least one material conflict of interest that affects retail investors.[532] Firms are not expected to disclose every material conflict of interest, and should instead consider what would be most relevant for retail investors to know in deciding whether to select or retain the particular firm.

[532] As discussed in Section II.A.1. above, if a required disclosure is inapplicable to a firm's business, a firm would be permitted to omit or modify that disclosure. General Instruction 2.B. We believe, however, that most firms will have at least one material conflict of interest that they would need to disclose.

We determined to require an example of a conflict, rather than broadening the instruction to include all conflicts, as some commenters suggested. The language disclosing firms' standard of conduct and existence of conflicts includes wording to make explicit that the conflicts described in the relationship summary are examples. Firms will disclose at least one of their material conflicts of interest that impact their retail investors, and such a conflict is not limited expressly to financial conflicts. In addition, with respect to broker-dealers, this conflict disclosure (unlike the conflict disclosure obligation in Regulation Best Interest) [533] is not limited to conflicts associated with a recommendation.[534] To determine whether a conflict of interest should be disclosed, a firm could consider, for example, the benefit to the firm or its affiliate or the cost to the retail investor.

[533] See Regulation Best Interest Release, supra footnote 47, at Section II.C.1 (Disclosure Obligation).

[534] For instance, broker-dealers may include conflicts that affect product offerings to customers who do not obtain recommendations from the firm.

We believe that an exhaustive list of conflicts in the relationship summary would not as effectively enhance investor understanding of conflicts. More details could inundate investors with information that makes it difficult for them to focus on the fact that conflicts exist and will impact them, and they may not focus on or may not realize the importance of the specific conflicts firms are required to summarize. We also agree with comments that disclosure of all conflicts would be too cumbersome [535] and lengthy for the relationship summary's intended purpose—that is, highlighting certain aspects of a firm and its services to help retail investors to make an informed choice and to find additional information about a topic. The approach we are adopting of requiring firms to provide examples will make retail investors aware that these types of conflicts exist, but will avoid providing a laundry list of conflicts. Taking into account all of these considerations, we believe that these examples of conflicts of interest should be highlighted for the investor. We recognize that this will be a high-level summary of conflicts and generally will not be a complete description. As discussed further below, we are requiring firms to include a link to additional information on their conflicts of interest.[536] This layered disclosure will facilitate investors' ability to review additional information on conflicts while balancing the high-level nature of the relationship summary.

[535] See, e.g., CFA Letter I; SIFMA Letter; Prudential Letter.

[536] Item 3.B.(iv) of Form CRS (Firms must include specific references to more detailed information about their conflicts of interest that, at a minimum, include the same or equivalent information to that required by the Form ADV, Part 2A brochure and Regulation Best Interest, as applicable, and broker-dealers that do not provide recommendations subject to Regulation Best Interest, to the extent they prepare more detailed information about their conflicts, must include specific references to such information.).

Conversation Starter and Additional Information. To promote access to information about other firm conflicts, as well as to clarify for retail investors the application of their firms' standard of conduct as discussed above, firms will include a conversation starter prompting investors to ask about conflicts and a hyperlink to additional information. Specifically, firms must include the following question as a conversation starter: “How might your conflicts of interest affect me, and how will you address them?” [537]

[537] Item 3.B.(iii) of Form CRS.

The proposal included a longer key question asking about the most common conflicts of interest in the firm's advisory and brokerage accounts and how the firm will address those conflicts when providing services to the retail investor.[538] One commenter noted that this key question elicited the same information as provided elsewhere in the relationship summary.[539] We shortened the question to avoid this duplication. In addition, the firm's other conflicts will be disclosed as part of the summary of material conflicts or in the additional conflicts disclosure that firms will cross-reference. The new conversation starter is meant to complement these other disclosures and elicit more information about how specifically the firm's conflicts of interest could affect the retail investor.

[538] Proposed Item 8 of Form CRS. The proposal included the following question: “What are the most common conflicts of interest in your advisory and brokerage accounts? Explain how you will address those conflicts when providing services to my account.”

[539] See LPL Financial Letter.

Firms will also include specific cross-references to more detailed information about conflicts of interest that, at a minimum, includes the same or equivalent information to that required about a firm by the Form ADV, Part 2A brochure and/or Regulation Best Interest.[540] If a firm is a broker-dealer that does not provide recommendations subject to Regulation Best Interest, to the extent it prepares more detailed information about its conflicts, it must include specific references to such information.[541] Firms may include hyperlinks, mouse-over windows, or other means of facilitating access to this additional information and to any additional examples or explanations of such conflicts of interest.[542]

[540] Item 3.B.(iv) of Form CRS.

[541] Item 3.B.(iv) of Form CRS.

[542] Item 3.B.(iv) of Form CRS. See also General Instructions 3. and 4. of Form CRS (instructions applicable to electronic delivery). For further discussion of these provisions, see supra Section II.A.3. and footnotes 156 and 158 and accompanying text, and Section II.B.2.(b) and footnotes 348-349.

Over 60% of RAND 2018 survey respondents indicated that they would be “very likely” or “somewhat likely” to click on hyperlinks related to conflicts of interest.[543] While the proposal did not require firms to link to additional information with respect to their conflicts, several commenters suggested that the relationship summary include a link to all conflicts.[544] We believe that using layered disclosure through cross-references to a more detailed discussion of conflicts balances the Commission's objective of concise disclosure while providing interested investors with tools to easily access additional, useful information.

[543] RAND 2018, supra footnote 13. But see Kleimann II, supra footnote 19 (only one interview participant said he would use the link in the conflicts of interest section).

[544] See, e.g., Fidelity Letter (mock-up); IAA Letter I (mock-up); see also Kleimann II, supra footnote 19 (redesigned relationship summary suggests a link to more information about conflicts).

Many industry commenters also suggested that Regulation Best Interest's and Form CRS's conflicts disclosures be coordinated, and that any conflict disclosure obligations under Regulation Best Interest should be satisfied upon delivery of the relationship summary.[545] We recognize that broker-dealers may need to disclose additional conflicts or disclose additional conflicts at a point in time other than at the beginning of the relationship with an investor or other times the relationship summary is required to be delivered.[546] The relationship summary will provide a high-level summary for investors so that they can engage in a conversation with their financial professional about investment advisory or brokerage services, and so that the investors can choose the type of service that best meets their needs. Furthermore, as discussed above in Section II.A (Presentation and Format),[547] we believe it is essential to limit the length of the relationship summary and keep the disclosures focused, highlighting these topic areas while encouraging questions and providing access to additional information. As a result, we believe many firms may not be able to capture all of the necessary disclosures about their conflicts in this short summary disclosure.[548] The layered disclosure approach should strike a balance between alerting investors of these conflicts while keeping with the intended purpose of the relationship summary.

[545] See, e.g., ACLI Letter; Cambridge Letter; Massachusetts Letter; FSI Letter I; MassMutual Letter; Schwab Letter I; SIFMA Letter; Transamerica Letter; see also Regulation Best Interest Release, supra footnote 47, at n.438 and accompanying text.

[546] See Regulation Best Interest Release, supra footnote 47.

[547] See supra Section II.A (Presentation and Format).

[548] For example, investment advisers must make full and fair disclosure to all clients of all material facts relating to the advisory relationship, including conflicts of interest. See Fiduciary Release, supra footnote 47; General Instruction 3 to Form ADV Part 2. Broker-dealers subject to Regulation Best Interest must also provide full and fair disclosure of material facts, including all material facts relating to conflicts of interest that are associated with the recommendation. See Regulation Best Interest Release, supra footnote 47.

Finally, some commenters argued that the relationship summary should require firms to explain how conflicts will be mitigated or minimized, or that firms should be permitted to state that

a particular firm has fewer conflicts than other firms.[549] While we agree that firms should have increased flexibility to describe conflicts, as discussed above, we are not permitting this additional disclosure. The purpose of this section is to highlight for investors that conflicts of interest exist.

[549] See AARP Letter; Betterment Letter I.

c. Payments to Financial Professionals

Finally, in a change from the proposal, we are adding an additional section to Item 3 that requires a firm to include in its relationship summary the heading “How do your financial professionals make money?” [550] A firm will summarize how its financial professionals are compensated (including cash and non-cash compensation) and the conflicts of interest those payments create.[551] For example, the firm must, to the extent applicable, disclose whether financial professionals are compensated based on factors such as: The amount of client assets they service; the time and complexity required to meet a client's needs; the product sold (i.e., differential compensation); product sales commissions; or revenue the firm earns from the financial professional's advisory services or recommendations.[552]

[550] Item 3.C. of Form CRS.

[551] Item 3.C.(i) of Form CRS.

[552] Item 3.C.(ii) of Form CRS.

In the Proposing Release, we asked if the relationship summary should include disclosure of compensation received by financial professionals and the related conflicts of interest such compensation might pose. Several commenters supported including disclosures related to the conflicts of interest that financial professionals' compensation arrangements create.[553] Several commenters suggested featuring financial professionals' compensation in the relationship summary, including in a separate section.[554] A number of commenters illustrated the importance of these disclosures by including sections discussing financial professionals' compensation in their mock-ups.[555] These disclosures generally included more detailed information about how broker-dealers and investment advisers earn money from various sources, in addition to what the retail investor may pay directly.

[553] See Proposing Release, supra footnote 5 (requesting comments on whether there are other considerations related to fees and compensation that we should require firms to highlight for retail investors that were not captured in the proposal); see also Jackson Grant Letter; Schwab Letter I; SIFMA Letter; Stifel Letter.

[554] See, e.g., Schwab Letter I; SIFMA Letter; Stifel Letter; Jackson Grant Letter. One industry commenter also stated that we should focus on conflicts that result from a financial professional's financial compensation. SIFMA Letter (also stating this view is consistent with FINRA's 2013 Conflicts of Interest Report, which specifically identified financial compensation as the major source of conflicts of interest for associated persons); see also CCMC Letter (investor polling) supra footnote 21 (in connection with investor polling, noting that investors identify explaining “own compensation” as one of three “issues that matter most” to them).

[555] See Primerica Letter and ASA Letter (including disclosure stating that financial professional compensation is typically affected by the amount of client assets the financial professional is responsible for and the fees and commissions those assets generate); see also SIFMA Letter and Schwab Letter I (including disclosure on how the firm pays professionals who provide investment advice).

We have concluded that disclosure of conflicts of interest related to a financial professional's compensation is useful to highlight for retail investors in the relationship summary.[556] In particular, the commenters' mock-up disclosures highlighted the benefit of separately summarizing financial professionals' compensation to help retail investors identify and assess these conflicts of interest that may affect the services they receive.[557] We believe that requiring specific information on financial professional compensation and conflicts related to that compensation will provide improved clarity from the proposal and better help retail investors understand these conflicts and how they might impact a financial professional's motivation. We also believe it is useful to specifically highlight this conflict for retail investors, as it is a different type of payment and a different type of conflict than a conflict at the firm level. We further believe that by placing this discussion directly after the discussion on fees, costs and conflicts, it will mitigate potential investor confusion. This approach is also consistent with Regulation Best Interest, which treats compensation to financial professionals and the conflicts of interest that such compensation creates as material facts that must be disclosed.[558]

[556] See Regulation Best Interest Release, supra footnote 47, at Section II.C.1.b.

[557] See, e.g., Primerica Letter; SIFMA Letter; Schwab Letter I.

[558] See Regulation Best Interest Release, supra footnote 47.

Disciplinary History

The relationship summary will include a separate section about whether a firm or its financial professionals have reportable disciplinary history and where investors can conduct further research on these events.[559] Inclusion of a separate disciplinary history section is a change from the proposed relationship summary, where this information was included in the Additional Information section.[560] Certain commenters suggested that we remove the requirement that firms disclose whether or not they have disciplinary history.[561] Similarly, some commenters suggested that any disciplinary information should simply direct retail investors to resources where they could review a firm's or a representative's disciplinary history, without any firm-specific information in the relationship summary.[562]

[559] As proposed, we used the terms “legal or disciplinary events.” However, we are adopting the terms “legal or disciplinary history” for greater precision.

[560] See Proposing Release, supra footnote 5, at nn.270-71 and accompanying text.

[561] See, e.g., Wells Fargo Letter (arguing that any firm-based aspect of disciplinary disclosure is not fair to representatives of the firm without any history of wrongdoing); see also ACLI Letter; New York Life Letter (arguing that any firm-specific disciplinary history disclosure would prejudice large firms).

[562] See, e.g., LPL Financial Letter (mock-up suggested that “[f]or free tools to research our firm, our financial advisors and other firms, including our disciplinary events . . .” investors should visit BrokerCheck or IAPD).

We have concluded, however, based on consideration of commenters and investor feedback received through surveys and studies, at roundtables and in Feedback Forms, to include the disciplinary history as a separate section of the relationship summary.[563] These comments emphasized the importance of disciplinary history information and advocated that it should be placed in a more prominent position than as part of the Additional Information section.[564] Commenters also generally supported firm-specific disclosure as to whether the firm has disciplinary history.[565] About 70% of commenters on Feedback Forms responded that they would seek

out additional information about a firm's disciplinary history.[566] Similarly, more than 70% of investors surveyed in the RAND 2018 report reported that they were “very likely” or “somewhat likely” to look up the disciplinary history of a financial professional.[567]

[563] The IAC also recommended including disciplinary history in the relationship summary. See IAC Broker-Dealer Fiduciary Duty Recommendations, supra footnote 10 (“[W]e encourage the Commission to develop an approach to disclosure of disciplinary record that makes it easier for investors to assess the significance of disclosed events, particularly for firms that may have a large number of relatively insignificant technical violations.”).

[564] See, e.g., CFA Letter I (“The required disclosure regarding disciplinary events does not give adequate prominence to this issue.”); NASAA Letter (“The descriptor Additional Information' is too vague to describe the important information in this section [and] should be recast as Disciplinary History and Customer Rights and Remedies . . . .”); Trailhead Consulting Letter (“Legal and Disciplinary Actions are very important for an investor to consider and should not be `hidden' in an Additional Information section. This information deserves its own separate section.”); IAA Letter.

[565] See, e.g., CFA Letter I (“We believe this information is important enough to be highlighted under its own separate heading, `Do you have a disciplinary record?' ”).

[566] See Feedback Forms Comment Summary, supra footnote 11 (summary of responses to Question 3(e)). Some commented that, before viewing the relationship summary, they had not known that they could ask or how to check. See, e.g., Anonymous02 Feedback Form (“did not know how to do that”); Anonymous03 Feedback Form (“I looked up my advisor while reading through the summary”); Anonymous26 Feedback Form (“Now I know where to go”); Anonymous29 Feedback Form (“I didn't know if asked—they had to answer”); see also Philadelphia Roundtable (investor participant noting that “checking your broker's disciplinary record” is “something that people should do”).

[567] See RAND 2018, supra footnote 13 (“More than 40 percent of respondents reported being very likely to look up the disciplinary history based on the information provided in the Relationship Summary, and another 35 percent reported being somewhat likely to look it up. Only 5 percent reported being not at all likely to do so.”); see also Kleimann II, supra footnote 19 (study participants who viewed a redesigned form reported that they would research the company they are doing business with”); but see Schwab Letter I (Koski), supra footnote 21 (only 20% of survey participants selected “How to find disciplinary information about a firm or its representatives” when asked to select the four most important topics for a firm to communicate, from a list of 11 topics).

However, results from investor studies and surveys and investor comments on Feedback Forms supported the concern that the Additional Information section may not provide enough salience. For example, in the RAND 2018 survey, the Additional Information section was most often selected as one of the two least useful sections of the proposed relationship summary.[568] On Feedback Forms, commenters rated the Additional Information section as “very useful” or “useful” less often than any other section of the relationship summary.[569] One investor study suggested a reason for these mixed results, finding that participants would skip the Additional Information section, in part because they did not understand that the websites in the section would allow them to review the disciplinary history of the investment adviser or broker-dealer that they were considering.[570] Comments on Feedback Forms similarly suggest that information about how to research a firm's disciplinary information should be presented more prominently and more simply in the relationship summary.[571] After taking comments into consideration, we believe that a separate disciplinary history section is appropriate, with a requirement that firms explicitly state whether or not they have legal or disciplinary history so that investors can find the information in the summary with ease.

[568] See RAND 2018, supra footnote 14 (Additional Information section rated as one of the two “least informative” sections by 66% of respondents; only 3% selected it as one of the two “most informative”); see also Cetera Letter II (Woelfel), supra footnote 17 (84% of survey respondents strongly or somewhat agreed that the “how to find additional information about a broker/adviser” and “how to find additional information about the firm,” fewer than for most other topics out of a series of nine topic options).

[569] Feedback Forms Comment Summary, supra footnote 11 (summary of responses to Question 2(f)) (Additional Information section rated as “not useful” or “unsure” by more commenters (20%) and “very useful” by fewer commenters (32%) relative to other sections of the relationship summary).

[570] See Kleimann I, supra footnote 19; see also Kleimann II, supra footnote 19 (noting that interview responses to links in the relationship summary “suggest that use is dependent on perceived relevance . . . Some of that relevance can be built in with more specific descriptions of what can be found at the link.”).

[571] Some commenters on Feedback Forms suggested moving the Additional Information section forward in the relationship summary. See Anonymous14 Feedback Form (“Recommend add this to beginning of the pamphlet”); Durgin Feedback Form (“Additional info needs to be moved up”); Salkowitz Feedback Form (“Move this section to near the beginning”); Starmer2 Feedback Form (“put Key Questions and Additional Info up front to stimulate a conversation.”). Others commented that the presentation should be clearer. See, e.g., Anonymous28 Feedback Form (“Would be better titled How to find out about us' or Other information you need to know”'); Anonymous29 Feedback Form (“plain language”); Calderon Feedback Form (“say expressly where that information is found, with linked URL's”); Shepard Feedback Form (“the easier it is to access, the better”); Baker Feedback Form (“Please explain IAPD”).

The section will begin with the heading: “Do you or your financial professionals have legal or disciplinary history?” Firms will answer “yes” or “no,” depending upon whether they or one of their financial professionals have a triggering event enumerated in the instructions, as discussed below. The proposed relationship summary required a statement that the firm has legal and disciplinary events but did not require an affirmative statement that a firm or its financial professionals did not have disclosable events. We are requiring a “No” answer in the final instructions where applicable, given the importance of disciplinary history and to provide a complete answer to the question in the heading.

Regardless of whether firms report a “Yes” or “No” answer as to whether they or their financial professionals have legal or disciplinary history, the relationship summary will direct the retail investor to visit Investor.gov/CRS to research the firm and its financial professionals, as proposed.[572] This is responsive to RAND 2018 survey results, which indicated that 37% of investors did not know where to research disciplinary history.[573] Directing retail investors to the search tool is also consistent with the Commission's Office of Investor Education and Advocacy initiative to encourage retail investors to do background checks on financial professionals and is intended to increase awareness of available search tools.[574] In addition to disciplinary history, the search tools also can provide useful information regarding registration and licensing and financial professional employment history.

[572] Item 4.D.(i) of Form CRS. Investor.gov includes a search function that searches the databases Web CRD[supreg] and IARD, and this search will direct an investor to BrokerCheck and/or IAPD, as appropriate, where the investor can research disciplinary history.

[573] See RAND 2018, supra footnote 13. By contrast, 19% of surveyed investors cited the time and effort required and 10% of surveyed investors indicated that they would not look up a firm or financial professional's disciplinary history because the information was not very important to the investor. Id. We believe this is also consistent with the IAC's recommendation to “look at whether it might be beneficial to adopt a layered approach to [disciplinary history] disclosures, with the goal of developing a more abbreviated, user-friendly document for distribution to investors.” IAC Broker-Dealer Fiduciary Duty Recommendations, supra footnote 10.

[574] See https://www.investor.gov/research-before-you-invest.

The triggering events for a statement that a firm does have legal or disciplinary history are the same as proposed.[575] Following the heading, firms will be required to state “Yes” in response to the heading questions if they currently disclose or are required to disclose (i) disciplinary information per Item 11 of Part 1A or Item 9 of Part 2A of Form ADV,[576] or (ii) legal or disciplinary history per Items 11A-K of Form BD (“Uniform Application for

Broker-Dealer Registration”) [577] except to the extent such information is not released to BrokerCheck pursuant to FINRA Rule 8312.[578] Regarding their financial professionals, firms will determine whether they need to include an affirmative statement based on legal and disciplinary information on Form U4,[579] Form U5,[580] or Form U6.[581] In particular, firms will be required to state “Yes” if they have financial professionals for whom disciplinary history is reported per Items 14 A through M on Form U4, Items 7A or 7C through F on Form U5,[582] or Form U6 except to the extent such information is not released to BrokerCheck pursuant to FINRA Rule 8312.[583] Firms that do not have disclosable events for themselves or their financial professionals in connection with these provisions will state “No” in answer to the heading.[584]

[575] See Proposed Item 7.B. of Form CRS. In the proposal, firms with such events would have been required to state the following: “We have legal and disciplinary events.” Id. For reasons discussed supra, we believe the question-and-answer formatting will make the relationship summary more useful to investors.

[576] Item 4.B. of Form CRS. Generally, investment advisers are required to disclose on Form ADV Part 2A any legal or disciplinary event, including pending or resolved criminal, civil and regulatory actions, if it occurred in the previous 10 years, that is material to a client's (or prospective client's) evaluation of the integrity of the adviser or its management personnel, and include events of the firm and its personnel. See Amendments to Form ADV, Investment Advisers Act Release No. 3060 (Jul. 28, 2010) [75 FR 49233 (Aug. 12, 2010)], at 22-27 (“Brochure Adopting Release”). Items 9.A., 9.B., and 9.C. provide a list of disciplinary events that are presumptively material if they occurred in the previous 10 years. However, Item 9 requires that a disciplinary event more than 10 years old be disclosed if the event is so serious that it remains material to a client's or prospective client's evaluation of the adviser and the integrity of its management.

[577] Item 11 of Form BD requires disclosure on the relevant Disclosure Reporting Page (“DRP”) with respect to: (A) Felony convictions, guilty pleas, “no contest” pleas or charges in the past ten years; (B) investment-related misdemeanor convictions, guilty pleas, “no contest” pleas or charges in the past ten years; (C) certain SEC or the Commodity Futures Trading Commission (“CFTC”) findings, orders or other regulatory actions; (D) other federal regulatory agency, state regulatory agency, or foreign financial regulatory authority findings, orders or other regulatory actions; (E) self-regulatory organization or commodity exchange findings or disciplinary actions; (F) revocation or suspension of certain authorizations; (G) current regulatory proceedings that could result in “yes” answers to items (C), (D) and (E) above; (H) domestic or foreign court investment-related injunctions, findings, settlements or related civil proceedings; (I) bankruptcy petitions or SIPC trustee appointment; (J) denial, pay out or revocation of a bond; and (K) unsatisfied judgments or liens. Some of these disclosures are only required if the relevant action occurred within the past ten years, while others must be disclosed if they occurred at any time.

[578] Under FINRA Rule 8312, FINRA limits the information that is released to BrokerCheck in certain respects. For example, pursuant to FINRA Rule 8312(d)(2), FINRA shall not release “information reported on Registration Forms relating to regulatory investigations or proceedings if the reported regulatory investigation or proceeding was vacated or withdrawn by the instituting authority.” We believe it is appropriate to limit disclosure in the relationship summary to disciplinary information or history that would be released to BrokerCheck.

[579] Form U4 (Uniform Application for Securities Industry Registration or Transfer) requires disclosure of registered representatives' criminal, regulatory, and civil actions similar to those reported on Form BD as well as certain customer-initiated complaints, arbitration, and civil litigation cases.

[580] Form U5 (Uniform Termination Notice for Securities Industry Registration) requires information about representatives' termination from their employers.

[581] Form U6 (Uniform Disciplinary Action Reporting Form) is used by SROs, regulators, and jurisdictions to report disciplinary actions against broker-dealers and associated persons. This form is also used by FINRA to report final arbitration awards against broker-dealers and associated persons.

[582] Item 7(b) of Form BD (Internal Review Disclosure) is not released to BrokerCheck by FINRA, pursuant to FINRA Rule 8312(d)(3).

[583] Item 4.B.(iii) of Form CRS.

[584] Item 4.C. of Form CRS.

As noted above, several commenters opposed the approach of requiring firms to indicate in their relationship summaries whether they or their financial professionals have disciplinary history, questioning the value of the disclosure to retail investors,[585] or citing to prejudicial or competitive concerns.[586] These firms recommended that the relationship summary include only a prompt for investors to research the disciplinary history of the firm or financial professional, directing them to Investor.gov/CRS.[587]

[585] See NSCP Letter (“NSCP members believe that extending the disclosure of disciplinary history to be included in Form CRS would add additional administrative burden and costs outweighing any true benefit to the customer.”); Wells Fargo Letter (“such a broad statement will add no value”).

[586] See Wells Fargo Letter (arguing that the statement will lead clients to draw unfair conclusions about both the firm and its financial professionals); New York Life Letter (arguing that the statement prejudices larger, established firms that will usually have a small number of disclosure events to report for current or former registered representatives); ACLI Letter (same).

[587] See Wells Fargo Letter; New York Life Letter; ACLI Letter.

We recognize that the disciplinary history of firms and their financial professionals is already publicly available, as commenters have noted. From studies and investor feedback, however, we also understand that investors view disciplinary history as significant to their decision of whether or not to engage with a firm or a financial professional, but in many cases are unaware of the need for researching or the tools available to research whether disciplinary history exists.[588] Highlighting disciplinary history in this way provides information to retail investors before they enter into a relationship with a particular firm and financial professional and a “yes” response will alert retail investors that there is disciplinary history they may want to research, review, or discuss with their financial professional.[589] As there is no required waiting period between the delivery of the relationship summary to the retail investor and the time that the retail investor may enter into a relationship with or an order placed by a firm, highlighting the disciplinary information allows the retail investor time to consider any disciplinary history before moving forward or to monitor the relationship or financial professional more closely if the retail investor decides to move forward at that time. By basing this disclosure on information that is already reported elsewhere and also requiring the relationship summary to include details about where to find more information, we give retail investors the tools to learn more about firms and financial professionals.

[588] See, e.g., Staff of the Securities and Exchange Commission, Study Regarding Financial Literacy Among Investors as Required by Section 917 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Aug. 2012), at iv, v, xiv, 37, 73, 121-23 and 131-32, at nn.317-19 and accompanying text, available at https://www.sec.gov/news/studies/2012/917-financial-literacy-study-part1.pdf (“917 Financial Literacy Study”) ([A]bout 76.5% of the online survey respondents reported that, in selecting their current adviser, they did not use an SEC-sponsored website to find information about the adviser. 73% of respondents stated that they would check IAPD if they were made aware of its existence. Of that subset—those who reported not using an SEC-sponsored website-- approximately 85.2% indicated that they did not know that such a website was available for that purpose. Of that majority (i.e., a further subset)—those who were unaware of such a website-- approximately 73.5% reported that they would review information about their adviser on an SEC-sponsored website if they knew it were available); see also RAND 2018, supra footnote 13 (when investors were asked why they would not look up disciplinary history, 37 percent of all respondents indicated that they did not know where to get the information, whereas 19 percent of all respondents indicated that it would take too much time or effort).

[589] See Miami Roundtable (investor noting that she had gone on Investor.gov to learn about the disciplinary history of her financial professional and noting that she was “happy when [she] checked” the website).

We are not persuaded by commenters who believed that these disclosures are unduly prejudicial or would have sufficient competitive concerns and argued that we should not require this information. Firms or financial professionals would have the opportunity to provide more information about and encourage retail investors to ask follow-up questions regarding the nature, scope, or severity of any disciplinary history, so that retail investors have the information they need to decide on a relationship. In particular, financial professionals who themselves have no disciplinary history can make clear that a “Yes” disclosure in response to the heading question relates to the firm and other personnel (if applicable) and not to them. While we recognize that larger firms might be more likely to respond affirmatively to this question than smaller firms, we have determined to require this disclosure because we believe that, on balance, the potential benefit to the retail investor of seeing at a glance whether a firm or its financial professionals have disciplinary history (which may encourage the investor to conduct further research or monitor the relationship or financial professional more closely) justifies requiring the disclosures notwithstanding the concerns raised by commenters,

particularly given the importance that commenters placed on disciplinary history.

A few commenters suggested revisions to the specific events that would trigger a disciplinary event disclosure in the proposed relationship summary.[590] We have considered these comments but have determined to adopt the triggers as proposed. As noted in the Proposing Release, those disclosable events are those that we believe may generally assist retail investors in evaluating the integrity of a firm and its financial professionals.[591] Additionally, these triggering events are already disclosed on existing systems for other regulatory purposes. As such, there will not be additional regulatory burdens for a determination of disciplinary history for the purposes of the relationship summary.

[590] See CFA Institute Letter I (“For parity and comparability, we suggest requiring that the specific events that would trigger disclosure under these requirements be the same for both investment advisers and broker-dealers”); Comment Letter of the Business Law Section of the State Bar of Texas, Investment Funds Committee (Aug. 7, 2018) (advocating that an investment adviser disclose that it has a disciplinary event only based on Item 9 of Part 2A of Form ADV, rather than both Items 9 and 11).

[591] See Proposing Release, supra footnote 5, at nn.271-73 and accompanying text.

Different requirements between other aspects of Form ADV or Form BD and the relationship summary also could cause confusion and compliance uncertainty. One commenter suggested basing the relationship summary disciplinary disclosure around a standardized set of events that would trigger disclosures specific to the relationship summary.[592] This approach may have led to advisers or broker-dealers having publicly listed disclosure events on BrokerCheck or IAPD yet answering “No” to a question of whether they or their financial professionals have legal or disciplinary history. We believe that result could have been confusing or misleading to retail investors. By contrast, the approach we adopt allows for consistency across public information as to whether or not a firm or financial professional has a disciplinary event and leverages existing disclosure reporting systems. We believe that this consistency justifies not adopting a standardized set of events triggering disclosure on the relationship summary. Furthermore, the statement encouraging retail investors to visit Investor.gov/CRS for more information will help retail investors to more easily learn and compare additional details from the firms themselves and from their existing disclosures.[593]

[592] See CFA Institute Letter I.

[593] Item 4.D. of Form CRS.

Firms also will include the following conversation starter: “As a financial professional, do you have any disciplinary history? For what type of conduct?” [594] This conversation starter is intended to take the place of a similarly worded key question.[595] However, because this item's heading asks a similar question about disciplinary history with respect to the firm, we believe that the conversation starter would be most useful specifically with respect to the financial professional. This question will allow retail investors to assess that financial professional's disciplinary history as well as engage in further discussion about those events or any events applicable to the firm. In addition, this conversation starter is designed to encourage a discussion about any differences between the firm's disciplinary history and that financial professional's history, if applicable (e.g., if the financial professional has no disciplinary history while his or her firm has reportable discipline necessitating a “Yes” response to the heading question).

[594] Item 4.D.(ii) of Form CRS.

[595] See Proposed Item 8.8 of Form CRS (“Do you or your firm have a disciplinary history? For what type of conduct?”); see also supra Section II.A.4 (discussing removal of the “Key Questions to Ask” section).

Additional Information

At the end of the relationship summary, firms will state where the retail investor can find additional information about their brokerage or investment advisory services, as proposed.[596] This information should be disclosed prominently at the end of the relationship summary. However, unlike the proposed relationship summary, the adopted instructions do not prescribe the different references that a broker-dealer and investment adviser must include for such direction and do not require a heading for the section.[597] This approach is consistent with our intent to provide firms additional flexibility to provide information most useful to retail investors.[598] In addition, removing the prescribed wording from this section avoids potentially duplicative disclosure, as the Introduction now includes a statement that free and simple tools are available to research firms and financial professionals at Investor.gov/CRS. Investor.gov provides investors access to search for firms on BrokerCheck and IAPD, references to both of which would have been required in prescribed wording in the proposed relationship summary.[599] The flexibility is also responsive to observations reported in surveys and studies and comments from investors at roundtables and on the Feedback Forms indicating that investors found the proposed “Additional Information” section less helpful compared to other sections in the relationship summary.[600] Consistent with our layered disclosure approach, we encourage hyperlinks, QR codes, or other means of facilitating access for retail investors to obtain additional information.[601]

[596] See Proposed Item 7.E. of Form CRS. We are also requiring a statement of where retail investors can request a copy of the relationship summary.

[597] As proposed, broker-dealers would have had to state that, to find additional information, retail investors should visit BrokerCheck, the firm's website, and the retail investor's account agreement. In addition, broker-dealers would link to a portion of their website with up-to-date information and a link to BrokerCheck. If the firm did not have a public website, the broker-dealer would have been required to include a toll-free telephone number where retail investors could request up-to-date information. See Proposed Item 7.E.1. of Form CRS.

Investment advisers would have had to state that, to find additional information, retail investors should see the firm's Form ADV brochure on IAPD on Investor.gov and any brochure supplement the firm provides. If the adviser maintains its current Form ADV on a public website, it would have had to state the website address. If the adviser had no such website, a link to adviserinfo.sec.gov would have had to be provided as well as a toll-free telephone number where retail investors could request up-to-date information. See Proposed Item 7.E.2. of Form CRS.

[598] See supra footnotes 76-83 and accompanying text.

[599] See Item 1.A. of Form CRS. As discussed above, we are requiring firms to include the reference to Investor.gov/CRS in the Introduction in part to highlight to retail investors the ability to research firms and financial professionals as well as the ability to review educational materials at the website. See supra Section II.B.1.

[600] See supra footnote 568-569 and accompanying text; see also Philadelphia Roundtable (confusion regarding the difference between FINRA and the Commission as well as a statement that there are “too many websites” in the Additional Information section).

[601] See supra Section II.A.3.

We also are not adopting the proposed requirement that firms include information on how retail investors should report complaints about their investments, investment accounts, or financial professionals in the relationship summary.[602] While some

commenters supported including information on how retail investors could report complaints,[603] others disagreed with this approach[604] or suggested that it may not be information that is as critical at the beginning of a relationship.[605] Commenters submitting their own mock-ups of the relationship summary likewise took different approaches as to whether or not to include this information.[606]

[602] The proposal included the following instruction in the Additional Information section: “To report a problem to the SEC, visit Investor.gov or call the SEC's toll-free investor assistance line at (800) 732-0330. [To report a problem to FINRA, [ ].] If you have a problem with your investments, investment account or a financial professional, contact us in writing at [insert your primary business address].” If you are a broker-dealer or dual registrant, include the bracketed language. It is your responsibility to review the current telephone numbers for the SEC and FINRA no less often than annually and update as necessary.” Proposed Item 7.D. of Form CRS.

[603] See, e.g., NASAA Letter (suggesting that the Additional Information section be recast as “Disciplinary History and Customer Rights and Remedies” and include, among other things, a discussion of the legal rights and the remedies available to customers in the event of breach (including whether the customer will be subject to mandatory arbitration) and contact information for regulators where investors may file complaints or ask questions about disciplinary history); see also Philadelphia Roundtable (investor expressing that she would like to know where to file a complaint, but not realizing that the desired information was on the proposed relationship summary).

[604] See Wells Fargo Letter (“We also don't agree that Form CRS needs to get into details on how an investor can report a problem. Such a disclosure is outside of the overall purpose of the summary and will detract from both the readability and length of the document.”).

[605] See Trailhead Consulting Letter (“[T]his document is encouraged or required to be delivered prior to entering into a relationship or transaction, so hopefully problems have yet to occur. The account statements or investment adviser reports should include statements informing investors how to report a problem.”). But see Cetera Letter II (Woelfel) (86% of survey respondents strongly or somewhat agreed that “how to report a problem with your investments” was an important topic to be discussed in the relationship summary and 84% of survey respondents strongly or somewhat agreed that “how to report a problem with a financial professional” was an important topic; within a range of 88% to 81% of ratings for 9 different topics).

[606] Compare, e.g., LPL Financial Letter (including hyperlinks to BrokerCheck and IAPD in part “to report a problem” in mock-up) and IAA Letter I (no reference to problems or reporting complaints in mock-up).

We are requiring a conversation starter in this part of the relationship summary, which incorporates and adapts a key question from the proposal: “Who is my primary contact person? Is he or she a representative of an investment adviser or a broker-dealer? Who can I talk to if I have concerns about how this person is treating me?” [607] With required text features to highlight this conversation starter, as well as information from the Introduction to direct retail investors to Investor.gov/CRS, we believe that retail investors will be able to find information on who to contact and how to report a complaint to the firm at the appropriate time, and Investor.gov includes links to submit questions and complaints to the Commission. In light of the mixed feedback from commenters and the changes to the form designed to enhance flexibility and usability, we are not requiring firms to include more detailed information about submitting complaints, as proposed, to enable the disclosures in the relationship summary to focus on other information about the firm and its services.

[607] Item 5.C. of Form CRS. In comparison, the analogous proposed key question was “Who is the primary contact person for my account, and is he or she a representative of an investment adviser or a broker-dealer? What can you tell me about his or her legal obligations to me? If I have concerns about how this person is treating me, who can I talk to?” Proposed Item 8.10 of Form CRS.

We are also requiring firms to include a telephone number where retail investors can request up-to-date information and request a copy of the relationship summary.[608] This differs from the proposal, which required only those firms that do not have a public website to include a toll-free number that retail investors may call to request documents.[609] Some of the commenter mock-ups included a telephone number even though the firms maintained a public website.[610] A commenter who recommended including a contact telephone number in the relationship summary did not specify that it must be toll-free and we received a mock-up with a placeholder for a telephone number that was not specifically toll-free.[611]

[608] Item 5.B. of Form CRS.

[609] See Proposed General Instruction 8.(a) to Form CRS.

[610] See, e.g., Fidelity Letter (mock-up) and Primerica Letter (mock-up).

[611] See IAA Letter I and Primerica Letter (mock-up).

After consideration of these comments and mock-ups, we determined that all firms should include a telephone number in the relationship summary. We continue to believe it is important for retail investors to have firm contact information in the event that they would like to request disclosures and there is no public website for that firm that the investor may easily access. In addition, we anticipate that requiring all firms to include a telephone number will more readily accommodate retail investors who prefer communicating with firms over the phone and will facilitate their requests for up-to-date information and a copy of the relationship summary. If firms do not already have a toll-free telephone number, they will not be required to obtain one to comply with the requirements of the relationship summary. Firms will have the flexibility to decide whether or not the telephone number they provide in their relationship summary will be toll-free. 6. Proposed Items Omitted in Final Instructions

The proposal included two sections that we are not adopting as separate sections in the relationship summary.[612] As discussed above, the relationship summary will not include a separate section for “Key Questions to Ask;” instead, the topics covered by the proposed key questions will be integrated throughout the relationship summary as headings to items or as “conversation starters.” [613]

[612] In addition to the reasons discussed below, removing these sections also may help alleviate concerns from commenters that the proposed relationship summary was trying to “do too much.” E.g., Schwab Letter I; SIFMA Letter; Comment Letter of UBS Global Wealth Management (Aug. 7, 2018) (“UBS Letter”); see also AARP Letter (suggesting that the relationship summary be shortened to avoid “information overload”); CFA Institute Letter I (the proposed relationship summary is “too wordy, lacks design elements that engage the reader, and, in many respects, is too nuanced for the average retail investor who is trying to understand the differences between broker-dealers and investment advisers”).

[613] See supra Section II.A.4.

The relationship summary will also not include the Comparisons section for investment advisers and broker-dealers, as proposed. Standalone broker-dealers would have been required to include the following information, using prescribed wording, about a generalized retail investment adviser: (i) The principal type of fees; (ii) services investment advisers generally provide; (iii) the applicable legal standard of conduct; and (iv) certain incentives based on an investment adviser's asset-based fee structure. For standalone investment advisers, this section would have required them to include parallel categories of information regarding broker-dealers.[614]

[614] See Proposed Item 5 of Form CRS.

Many commenters opposed including discussions comparing investment advisers and broker-dealers. Some commenters stated that it was inappropriate for the Commission to require firms to describe products and services that they do not offer and about which they may have limited or no expertise.[615] Other commenters had concerns with the prescribed wording, which they said may increase investor confusion or be misleading with prescribed wording that would not reflect the likely relationship that an investor would have with a specific firm.[616] Some commenters believed that the wording in the comparison section

favored broker-dealers over investment advisers.[617] Others indicated that the comparisons should allow for discussions regarding insurance products.[618] As an alternative, some commenters suggested that the Commission include the information intended for the proposed Comparison section on the Commission's website as educational material,[619] and that firms could link to the educational material from their relationship summaries.[620] Given such concerns and suggestions, a number of mock-ups did not include a comparison section.[621]

[615] See, e.g., ACLI Letter.

[616] See IAA Letter I (arguing that the wording of the section was “too boilerplate” and would prohibit firms from providing useful information about what the specific investor's relationship would be with a firm).

[617] See CFA Letter I (arguing that “there are a number of statements . . . that many, if not most, advisers would likely object to” in the prescribed wording); IAA Letter I.

[618] See New York Life Letter; Northwestern Mutual Letter.

[619] See IAA Letter I; Schnase Letter; Pickard Djinis and Pisarri Letter.

[620] See, e.g., SIFMA Letter; Schwab Letter I.

[621] See, e.g., IAA Letter I; SIFMA Letter; Schwab Letter I. Other mock-ups included a “first level” disclosure that involved generalized comparisons between investment advisers and broker-dealers, with the relationship summary including firm-specific information. See LPL Financial Letter; Primerica Letter.

Comments on Feedback Forms indicated that this section was less useful than other sections of the relationship summary; fewer commenters rated this section as either “very useful” or “useful” compared to the other sections of the relationship summary.[622] Many narrative comments on Feedback Forms relating to this section (even from those who graded the section as “useful”) indicated that these commenters did not find this section informative and wanted more information to help them compare firms.[623] Feedback on this section from the RAND 2018 report and other surveys and studies was limited because the RAND 2018 report, and other surveys and studies, generally focused on the sample proposed dual registrant relationship summary. However, in a survey that focused on the standalone investment adviser relationship summary, most survey respondents indicated that this section was not useful in helping them to understand differences between firms.[624]

[622] Twenty-nine commenters (about 30%) on Feedback Forms rated the comparison section as “Very Useful”; 39 (about 40%) rated it as “Useful”; 17 (almost 20%) responded that they did not find this section useful or were unsure. See Feedback Forms Comment Summary (responses to Question 2(d), supra footnote 11).

[623] See, e.g., Anonymous07 Feedback Form (“Any example of how you use either or both for achieving goals”); Anonymous13 Feedback Form (“. . . list what is the same for both, as much is, then only list differences in separate columns. What I really want is what's the differences”); Brantley Feedback Form (“when is it best to use each type of account—maybe some examples”); Coleman Feedback Form (“. . . a word that suggests when one type of relationship would be more beneficial”); Hawkins Feedback Form (“There are so many different account types and investment options. More information needed”); Murphy Feedback Form (“Too complicated to follow”); Schreiner Feedback Form (“highlight differences”).

[624] See Betterment Letter I (Hotspex), supra footnote 18 (only 23% of survey respondents indicated that the disclosure on a version of the sample proposed standalone adviser relationship summary helped them to understand how other investment firms differed from Betterment).

We have determined not to require a separate Comparisons section in the relationship summary for broker-dealers and investment advisers that are not dual registrants. In lieu of the separate section with prescribed wording, the final instructions include several requirements that will help facilitate comparisons among firms. First, each relationship summary will be required to provide answers to the same questions in a standard order.[625] Second, dual registrants will be required to provide either a combined relationship summary describing both brokerage and advisory services, presenting the information with equal prominence and in a manner that facilitates comparison of the two types of services or, alternatively, will be required to provide separate relationship summaries that clearly distinguish and facilitate comparison of the firm's brokerage and investment advisory services.[626] Similarly, a firm that has an affiliate providing brokerage or advisory services may choose to prepare a single relationship summary, or two separate relationship summaries, discussing the services provided by both firms, but only if the relationship summary or summaries are designed in a manner that facilitates comparison of the brokerage and investment advisory services.[627]

[625] See supra Section II.A.2.

[626] See supra Section II.A.5. Additionally, and as noted above, firms that prepare two separate relationship summaries must deliver both relationship summaries to each retail investor with equal prominence and at the same time, without regard to whether the particular retail investor qualifies for those retail services or accounts. See id.; see also General Instruction 5.A. to Form CRS.

[627] See General Instruction 5.B.(i) to Form CRS.

These changes enhance the relationship summary's usability and design and, we believe, will improve comparisons among firms by retail investors using the relationship summaries. The relationship summaries will have differentiated, firm-specific information in a comparable format as compared to the proposed approach of requiring prescribed and more generalized information. We believe this comparability and differentiation among firm relationship summaries will enhance usability for retail investors. In addition, removing the prescribed wording allows firms to describe their services and fees more accurately while simultaneously mitigating concerns commenters raised regarding potentially misleading or inappropriate prescribed wording. Investors seeking more general information about investment advisers and broker-dealers will know they can refer to educational materials that are available on the Commission's website, Investor.gov, and elsewhere for investor research and education, including Investor.gov/CRS, which the relationship summary's Introduction must reference.[628]

[628] See Item 1.B. of Form CRS.

C. Filing, Delivery, and Updating Requirements

We are adopting the filing, delivery, and updating requirements with several modifications from the proposal. Firms will file copies of their relationship summaries with the Commission, will update the disclosures when the information becomes materially inaccurate, and will communicate any changes to retail investors who are existing clients or customers. The delivery requirements are designed to ensure a relationship summary is provided before or at the time a retail investor enters into a relationship with the firm and when changes are made to the services the firm provides.

We made several modifications to the proposed requirements in response to comments, in order to make it easier for retail investors to discern changes in updated relationship summaries, streamline the filing requirements, and provide greater clarity regarding several of the delivery requirements. As described further below, some of the key revisions include:

Broker-Dealer Initial Delivery Obligations. Broker-dealers will be required to deliver the relationship summary before or at the earliest of: (i) A recommendation of an account type, a securities transaction, or an investment strategy involving securities; (ii) placing an order for the retail investor; or (iii) the opening of a brokerage account for the retail investor, instead of before or at the time the retail investor first engages the broker-dealer's services, as proposed. We encourage delivery of the relationship summary to new or prospective clients or customers at the first possible opportunity, including the initial point of contact.

Other Delivery Obligations. Firms will deliver the relationship summary to existing retail investor clients and customers before or at the time firms open a new account that is different

from the retail investor's existing account, as was proposed. In addition, firms will deliver the relationship summary when they recommend that the retail investor roll over assets from a retirement account, or when they recommend or provide a new service or investment outside of a formal account (e.g., variable annuities or a first-time purchase of a direct-sold mutual fund through a “check and application” process). In response to commenters' concerns, these changes are intended to replace the proposed instruction that firms deliver the relationship summary when making changes to an existing account that would “materially change the nature and scope” of the firm's relationship with the retail investor with more concrete delivery triggers.

Highlighting Changes. In a change from the proposal, we are adding a requirement that firms delivering updated relationship summaries to existing clients or customers also highlight the most recent changes by, for example, marking the revised text or including a summary of material changes. This additional disclosure must be filed as an exhibit to the unmarked amended relationship summary (but would not be counted toward the two-page or four-page limit, as applicable).

New Filing Requirements. As proposed, we are requiring that firms file the relationship summary using a text-searchable format. However, in response to comments received, we are also requiring that the filings contain machine-readable headings to enhance the ability to compare information submitted by different firms. Also in response to comments, which we solicited on this topic, we are changing the system that broker-dealers will use to file Form CRS from EDGAR, as proposed, to Web CRD[supreg]. Dual registrants will be required to file their relationship summaries using both IARD and Web CRD[supreg].

Finally, we are revising the definition of retail investor to align more closely with the definition of “retail customer” in Regulation Best Interest. As discussed, below, we do not believe that this results in substantive changes in the definition as proposed. 1. Definition of Retail Investor

For purposes of Form CRS, “retail investor” is defined as “a natural person, or the legal representative of such natural person, who seeks to receive or receives services primarily for personal, family or household purposes.” [629] The proposal defined the term retail investor as “a prospective or existing client or customer who is a natural person (an individual), including trusts or other similar entities that represent natural persons, even if another person is a trustee or managing agent.” This definition was different from the definition of “retail customer” in proposed Regulation Best Interest [630] because the relationship summary was intended for an earlier stage of the relationship between an investor and a financial professional, and we thought it would be beneficial for all natural persons to receive information to facilitate their account choices.[631]

[629] General Instruction 11.E. to Form CRS.

[630] Compare Proposed Exchange Act rule 15l-1(b)(1) (defining retail customer to mean “a person, or the legal representative of such person, who: (A) Receives a recommendation of any securities transaction or investment strategy involving securities from a broker, dealer, or a natural person who is an associated person of a broker or dealer; and (B) Uses the recommendation primarily for personal, family, or household purposes.”).

[631] Proposing Release, supra footnote 5, at Section II, at n.29.

Many commenters recommended that we use a single definition for both “retail investor” and “retail customer” because consistent definitions would facilitate compliance and administrative efficiency.[632] Commenters were concerned that differences between the definitions could result in a requirement to deliver the relationship summary to broker-dealer customers who may not be “retail customers” for purposes of Regulation Best Interest.[633] Many commenters further recommended that the definitions of “retail investor” and “retail customer” should both be conformed to rules issued by FINRA, which use a net worth test to distinguish institutional and “retail” customers.[634] Commenters also asked us to clarify that the relationship summary need not be delivered to certain professionals retained to represent a natural person [635] and address whether participants in workplace retirement plans will be retail investors who should receive the relationship summary.[636]

[632] See Committee of Annuity Insurers Letter (“a standardized definition . . . would be more efficient and enable firms to more easily comply”); ICI Letter (“a single definition . . . would provide important administrative efficiencies, facilitate compliance, and avoid confusion”); see also Bank of America Letter; CFA Letter I; Cetera Letter I; Fidelity Letter; Comment Letter of Franklin Resources, Inc. (Aug. 6, 2018); Invesco Letter; Comment Letter of Morgan Stanley Smith Barney, LLC (Aug. 7, 2018) (“Morgan Stanley Letter”); Oppenheimer Letter; Comment Letter of Raymond James Financial (Aug. 7, 2018) (“Raymond James Letter”); SIFMA Letter; TIAA Letter; Transamerica Letter.

[633] See, e.g., SIFMA Letter; TIAA Letter.

[634] See, e.g., SIFMA Letter (referring to FINRA Rule 2210); Cetera Letter I; Investacorp Letter; Morgan Stanley Letter; TIAA Letter; UBS Letter; Wells Fargo Letter.

[635] E.g., Comment Letter of the American Bankers Association (Aug. 7, 2018) (“American Bankers Association Letter”); IAA Letter I; ICI Letter; Oppenheimer Letter; Prudential Letter; T. Rowe Letter; Wells Fargo Letter.

[636] E.g., Comment Letter of Empower Retirement (Aug. 2, 2018) (“Empower Retirement Letter”); Fidelity Letter; Comment Letter of Groom Law Group (Aug. 7, 2018) (“Groom Law Letter”); IAA Letter I; ICI Letter; IRI Letter; Invesco Letter; Comment Letter of the National Association of Government Defined Contribution Plans (Aug. 7, 2018) (“NAGDA Letter”); Oppenheimer Letter; Comment Letter of SPARK Institute, Inc. (Aug. 7, 2018) (“SPARK Letter”); T. Rowe Letter.

In response to comments, the final instructions adopt a definition of retail investor that is consistent with the definition of retail customer in Regulation Best Interest, but differs to reflect differences between the relationship summary delivery requirement and the obligations of broker-dealers under Regulation Best Interest, including that the relationship summary is required whether or not there is a recommendation and covers any prospective and existing clients and customers (i.e., a person who “seeks to receive or receives services”) of investment advisers as well as broker-dealers.[637] Specifically, under Regulation Best Interest, retail customer will be defined as “a natural person, or the legal representative of such natural person, who: (A) Receives a recommendation of any securities transaction or investment strategy involving securities from a broker, dealer, or a natural person who is an associated person of a broker or dealer; and (B) uses the recommendation primarily for personal, family, or household purposes.” [638] Like the definition of retail customer in Regulation Best Interest, the definition of retail investor in the final instructions includes natural persons [639] who seek to receive or receive services “primarily for personal, family or household purposes” and the “legal representatives of such natural persons.” In addition, we provide an interpretation on who would be considered to be a “legal representative” for purposes of this definition.

[637] See Regulation Best Interest Release, supra footnote 47, at Section II.B.3.c.

[638] Exchange Act Rule 15l-1(b)(1).

[639] The proposed definition used the language “a natural person (an individual).” While the final definition excludes the parenthetical reference to “an individual,” we do not intend any substantive change because a reference to a natural person typically includes any individual.

The proposed definition of retail investor did not include the phrase “personal, family or household purposes.” No commenters addressed whether or not to include this phrase in the Form CRS definition of retail investor, other than commenting

generally that they supported conforming both definitions. Commenters did comment and request clarification of this aspect of the definition of “retail customer” in Regulation Best Interest.[640]

[640] See Regulation Best Interest Release, supra footnote 47, at Section II.B.3a (describing comments).

We believe the final definition of retail investor remains consistent with our objective to provide all natural persons with information to facilitate their understanding of their choices among firms and types of accounts. Firms will be required to deliver the relationship summary to individuals seeking brokerage and investment advisory services in connection with any of the many different reasons that an individual may seek these services, including, for example, retirement, education and other personal, family or household saving and investing objectives. The final definition of retail investor will exclude natural persons seeking these services for commercial or business purposes, such as, for example, where an employee seeks services for an employer or an individual seeks services for a small business or on behalf of another non-natural person entity such as a charitable trust. However, firms must deliver the relationship summary to natural persons who might be seeking services for a mix of personal and commercial or other non-personal purposes, such as a sole proprietor or small business owner who may engage a firm or financial professional for multiple accounts and for personal as well as business purposes. Where firms do not know whether a natural person is seeking services for something other than personal, family, or household purposes at the beginning of a relationship, they may treat that natural person as a retail investor for purposes of delivery of the relationship summary.[641]

[641] As explained in Regulation Best Interest Release, supra footnote 47, at Section II.B.3a, we interpret “personal, family or household purposes” as used in the definition of retail customer to mean any recommendation to a natural person for his or her account, and we believe that, pursuant to the Care Obligation of Regulation Best Interest, broker-dealers are able to obtain sufficient facts to determine the purpose for which a recommendation will be used.

As in the proposal, the final retail investor definition will capture natural persons without any distinction based on net worth. While a number of commenters argued that firms should not be required to deliver a relationship summary to investors that meet certain asset or net worth thresholds,[642] others opposed narrowing the definition based on a net worth test or other test.[643] We continue to believe that the retail investor definition should not distinguish based on a net worth or other asset threshold test and that all individual investors would benefit from clear and succinct disclosure regarding key aspects of available brokerage and advisory relationships. As noted in the proposal, section 913 of the Dodd-Frank Act defines “retail customer” to include natural persons and legal representatives of natural persons without distinction based on assets or net worth.[644] Further, we believe that it also may be impractical to include a net worth or other test based on asset thresholds in the definition because it could be difficult for firms to determine a retail investor's net worth at the outset of the relationship when the relationship summary must be provided.

[642] For example, SIFMA's comments refer to FINRA Rule 2210, which treats accounts of natural persons with $50 million or more in assets as institutional investors; SIFMA explains that these investors are “among the wealthiest and most sophisticated customers and often have multiple professional fiduciaries and advisers, apart from their broker-dealer relationships” and “do not function as `retail customers' ”; see also Cetera Letter I; Investacorp Letter; Morgan Stanley Letter; TIAA Letter; UBS Letter; Wells Fargo Letter. Other commenters suggested different tests of financial sophistication, e.g., Advisers Act Rule 205-3 definition of “qualified clients” (a $2 million net worth test), see Comment Letter of American Investment Council (Aug. 7, 2018) (“American Investment Council Letter”); Comment Letter of Loan Syndications and Trading Association (Aug. 7, 2018); Comment Letter of the Managed Funds Association Alternative Investment Management Association (Aug. 7, 2018); or the section 2(a)(51) of the Investment Company Act definition of “qualified purchaser” ($5 million net worth test). See Fidelity Letter; Pickard Djinis and Pisarri Letter.

[643] See, e.g., Morningstar Letter (“any unequal distribution of this information would be arbitrary”); see also AARP Letter; CFA Letter I; Trailhead Consulting Letter.

[644] Proposing Release, supra footnote 5, at Section II, at text accompanying nn.31-32.

To conform definitions, the final definition of retail investor substitutes the language “the legal representative of such natural person” for language in the proposal referring to “a trust or other similar entity that represents natural persons, even if another person is a trustee or managing agent of the trust.” [645] We believe this is a clarification and not a substantive change from the proposal because it retains coverage of trusts and other similar legal entities that represent natural persons, and the proposal contemplated that certain legal representatives, e.g., a trustee or managing agent, would receive a relationship summary on behalf of a trust or other similar legal entity. Further, we clarify that we interpret a “legal representative” of a natural person to cover only non-professional legal representatives (e.g., a non-professional trustee that represents the assets of a natural person and similar representatives such as executors, conservators, and persons holding a power of attorney for a natural person).[646] In referring to non-professional legal representatives, we intend to capture persons who are acting on behalf of natural persons and are not regulated financial services professionals retained by natural persons to exercise independent professional judgment. This responds to those commenters who argued that it should not be necessary to provide a relationship summary to regulated professionals in the financial services industry, such as registered investment advisers and broker-dealers, corporate fiduciaries (e.g., banks, trust companies and similar financial institutions) and insurance companies, and the employees or other representatives of such advisers, broker-dealers, corporate fiduciaries and insurance companies.[647] Accordingly, non-professional legal representatives would not include such regulated financial services professionals. We agree with these commenters that delivery of the relationship summary to such regulated financial services professionals retained by natural persons to exercise independent judgment will not further our objective of facilitating retail investors' understanding of their account choices.[648] Importantly, however, this will not relieve firms or financial professionals retained to represent the assets of natural persons from their own obligations to deliver the relationship summary to clients or customers who are retail investors.

[645] General Instruction 11.E. to Form CRS.

[646] See ICI Letter (recommending that the Commission “make explicit in the definition of retail investor' that a legal representative' of a natural person “means an executor, conservator, or a person holding a durable power of attorney for a natural person”).

[647] See, e.g., American Bankers Association Letter; Bank of America Letter; IAA Letter I; Invesco Letter; ICI Letter; Oppenheimer Letter; Prudential Letter; T. Rowe Letter.

[648] See, e.g., American Bankers Association Letter; Bank of America Letter; IAA Letter I; Invesco Letter; ICI Letter; Oppenheimer Letter; Prudential Letter; T. Rowe Letter.

Commenters offered varying points of view about whether participants of workplace retirement plans should be treated as retail investors who receive the relationship summary. Some recommended that the definition of retail investor should include plan participants.[649] Others argued against

delivering a relationship summary to plan participants, explaining that a relationship summary would confuse participants and would duplicate other required disclosures.[650] Several commenters suggested that only plan participants that choose to retain a firm or financial professional in connection with assets in his or her plan account should receive a relationship summary.[651] Commenters also asked us to clarify whether the definition of retail investor would include participants in plans not subject to ERISA, such as governmental or other non-ERISA workplace retirement plans meeting requirements under section 403(b) or 457 of the Internal Revenue Code of 1986, as amended (“Internal Revenue Code” or “Code”), and individual retirement accounts (“IRAs”) (including SEPs and SIMPLE IRAs).[652]

[649] See ICI Letter; Invesco Letter; Oppenheimer Letter; Trailhead Consulting Letter; see also IRI Letter (permit delivery of Form CRS using media approved by the plan sponsor).

[650] See Empower Retirement Letter (noting that plans covered by ERISA “have named fiduciaries responsible for ensuring each plan is operated in the best interest of plan participants . . . [and who] are already obligated pursuant to ERISA Sec. 404a-5 to provide participants with detailed disclosures related to those investment choices.”); Groom Law Letter (noting that “the decision to engage a broker-dealer for purposes of providing services to the plan is made at the plan sponsor level and not at the participant level); Comment Letter of Principal Financial Group (Aug. 7, 2018) (“Principal Letter”).

[651] See T. Rowe Letter (noting that Form CRS should apply “if an individual chooses to retain a broker-dealer or advisor to provide recommendations or management regarding his or her retirement plan accounts . . . [but] “if a plan fiduciary selects a broker-dealer or adviser to provide such services to its plan participants . . . we do not think Form CRS should apply); Prudential Letter; SPARK Letter.

[652] See ICI Letter; Invesco Letter; Oppenheimer Letter; T. Rowe Letter.

In response to comments, we are clarifying that the relationship summary applies when retail investors seek services for their retirement accounts as well as non-retirement accounts because retirement savings is a personal, household or family purpose. Accordingly, the definition of retail investor will include a natural person seeking to select and retain a firm to provide brokerage or advisory services for his or her own retirement account, including but not limited to IRAs and individual accounts in workplace retirement plans, such as 401(k) plans and other tax-favored retirement plans.[653] For example, firms will be required to deliver a relationship summary to plan participants seeking advice about whether to take a distribution from a 401(k) plan or other workplace retirement plan and how to invest that distribution. Similarly, a firm will be required to deliver a relationship summary to a plan participant seeking to retain the firm to provide brokerage or advisory services for the participant's individual account held in a 401(k) plan or other workplace retirement plan.[654]

[653] Such IRAs include, for example, individual retirement accounts and individual retirement annuities described by section 408(a) and (b) of the Internal Revenue Code, “simplified employee pensions” (or (SEPs) described by section 408(k) of the Code, and simple retirement accounts described by section 408(p) of the Code (SIMPLE IRAs). In response to commenters, we also clarify that workplace retirement plans include any arrangement available at a workplace that provides retirement benefits or allows saving for retirement, including, for example, any 401(k) plan or other plan that meets requirements for qualification under Code section 401(a), deferred compensation plans of state and local governments and tax-exempt organizations described by Code section 457, and annuity contracts and custodial accounts described by Code section 403(b). Likewise, the definition of retail investor includes natural persons seeking brokerage or advisory services for other tax-favored savings arrangements such as an Archer Medical Savings Account described by Code section 220(d), a Health Savings Accounts described by Internal Revenue Code section 223(d) and any similar tax-favored health plan saving arrangement, a Coverdell education savings account described by Code section 530 and a qualified tuition program or “529 plan” established pursuant to Code section 529.

[654] For example, we understand that, although not common, some 401(k) plans and other individual account plans provide participants total discretion to choose an investment adviser or broker-dealer to provide services for their individual plan account. See, e.g., 29 CFR 2550.404c-1(f), Example 9.

However, participants in 401(k) plans and other workplace retirement plans will not be retail investors for purposes of the Form CRS delivery obligation when making certain ordinary plan elections that do not involve selecting or retaining a firm to provide brokerage or advisory services. We understand, for example, that participants in workplace retirement plans generally do not choose the firm that provides brokerage or advisory services in connection with certain ordinary plan elections, such as whether to enroll in the plan, make or increase plan contributions, or how to allocate contributions and plan account balances among a designated menu of plan investment options. We designed the relationship summary to assist investors in understanding their choices when they seek to engage a firm to provide brokerage and advisory services. Even if a financial professional or other firm representative assists a participant directly, e.g., at an enrollment meeting or through a call center interaction, the participant generally would not be making the type of account or firm choice contemplated by a relationship summary because the plan's sponsor or another representative designated by the terms of the plan (e.g., a trustee or other fiduciary or other responsible party) (a “plan representative”) already has selected the firm, has negotiated the terms of service, and remains responsible for supervising the firm.[655] We agree with commenters that delivering a relationship summary under these circumstances could be confusing to participants and duplicative of already required disclosures. Accordingly, plan participants should not be viewed as “seeking or receiving services” for purposes of the Form CRS definition of retail investor when they are merely electing among plan features offered by firms and financial professionals retained and supervised by a plan representative. This includes a participant's decision to invest his or her account balance through an in-plan self-directed brokerage account option or to select an in-plan managed account service option, where a plan representative retains and supervises the broker-dealer or investment advisory firm providing such services to the plan.

[655] This approach differs from our approach to defining retail customer for purposes of Regulation Best Interest to recognize differences between the relationship summary requirement and the obligations of broker-dealers under Regulation Best Interest. As discussed in the Regulation Best Interest Release, supra footnote 47, at Section II.B.3.a, a participant receiving recommendations for the participant's individual account held in a 401(k) or other workplace retirement plan would be a retail customer for purposes of Regulation Best Interest.

Finally, commenters asked us to address whether workplace retirement plans and their representatives (e.g., plan sponsors, trustees, and other fiduciaries) and service providers will be retail investors entitled to receive Form CRS. In the proposal, we excluded workplace retirement plans and their representatives from the definition of retail investor.[656] Most commenters agreed with this approach; some noting that workplace retirement plans and their representatives would not benefit from receiving a Form CRS.[657] Two

commenters argued that workplace retirement plans and their representatives should receive Form CRS.[658]

[656] Proposing Release, supra footnote 5, at Section II.

[657] See IAA Letter I (“Institutional trusts such as employee benefit or pension plans . . . would not benefit from a Form CRS”); T. Rowe Letter (“. . . where a plan fiduciary selects a broker-dealer or adviser to provide such services to its plan participants . . . we do not think Form CRS should apply. ERISA and governmental plans are already subject to extensive disclosures to participants and rules related to conflicts. Consequently, a Form CRS in this context would be duplicative of existing disclosures and cause potential confusion, without providing any additional benefits”); see also Comment Letter of the American Retirement Association (Aug. 3, 2018) (professional investment experts retained by a plan to perform investment advisory services in a fiduciary capacity should not be included); Fidelity Letter (“establish a uniform definition . . . [that] excludes ERISA and non-ERISA employer sponsored retirement plans regardless of size, as well as their sponsors, trustees and advisers . . .”); ICI Letter (a retail investor should not include retirement plans, their sponsors or trustees or plan fiduciaries); NAGDA Letter (requesting clarification); Prudential Letter (“`retail investor' for purposes of Form CRS should not include retirement plan representatives”); Transamerica Letter (same).

[658] See Comment Letter of Fisher Investments (Dec. 13, 2018) (“many individuals overseeing retirement plans . . . would benefit from a better understanding of concepts in proposed Form CRS”); Trailhead Consulting Letter.

We understand that plan representatives of workplace retirement plans typically are not seeking or receiving services primarily for personal, family or household purposes when they consider whether to engage a broker-dealer or investment adviser to provide services to a retirement plan established, maintained and operated by an employer to provide pension or retirement savings benefits to employees. Further, the relationship summary—designed to provide succinct information relevant to individual retail investors—is not designed to facilitate account and firm choices by the representatives of these workplace retirement plans. In this regard, we understand that plan representatives typically seek brokerage and advisory services bundled together with, or that will be complimentary with, other services supporting the plan's establishment, maintenance and operation, such as plan design, recordkeeping and other administrative services, and compliance services to meet applicable requirements under the Internal Revenue Code and ERISA (or applicable state law for non-ERISA governmental plans).[659]

[659] See, e.g., Groom Law Letter (describing business models of firms offering brokerage and advice services to plans together with other services); SPARK Letter (same).

Accordingly, the final definition of retail investor does not include most workplace retirement plans or their plan representatives seeking services for a plan established, maintained and operated by an employer to provide pension or retirement savings benefits to employees, because such plans and their representatives are not seeking services primarily for personal, family or household purposes. We note, however, that some plan representatives may participate under their employer's workplace plan, e.g., in the case of a workplace IRA or other workplace retirement plan is established and maintained by a sole proprietor or other self-employed individual that includes one or more employees in addition to the plan representative. If a plan representative who decides the services arrangements for a workplace retirement plan is a sole proprietor or other self-employed individual who will participate in the plan, the plan representative also would be a retail investor seeking services for personal, family or household purposes and must receive a copy of the firm's relationship summary.[660]

[660] This is consistent with the final definition of retail customer for purposes of Regulation Best Interest, which to the extent that the plan representative who decides services arrangements is a sole proprietor or other self-employed individual who will participate in the plan, the plan representative will be a retail customer for purposes of Regulation Best Interest to the extent that the plan representative receives recommendations directly from a broker-dealer primarily for personal, family or household purposes. See Regulation Best Interest Release, supra footnote 47, at Section II.B.3a.

Filing Requirements

As proposed, all broker-dealers and investment advisers will file their relationship summaries with the Commission, and the relationship summaries will be accessible via the Commission's public website, Investor.gov,[661] in addition to each firm's website. There are several reasons we are requiring the relationship summaries to be filed with the Commission. First, the public will benefit by being able to access any firm's relationship summary by using one website, Investor.gov. This should make it easier to make comparisons across firms. Second, some firms may not maintain a website, and therefore their relationship summaries will not otherwise be accessible to the public. Third, by having firms file their relationship summaries with the Commission, Commission staff can more easily monitor the filings for compliance. Commenters generally supported requiring broker-dealers and investment advisers to file their relationship summaries with the Commission.[662]

[661] For broker-dealers, relationship summaries will be filed through Web CRD[supreg], and for investment advisers, relationship summaries will be filed through IARD. Investors will be able to access relationship summaries using BrokerCheck and IAPD, the public interfaces of Web CRD[supreg] and IARD, respectively, and through the Commission's Investor.gov website, which has a search tool that links to both BrokerCheck and IAPD.

[662] See, e.g., CFA Letter I; Schnase Letter; Trailhead Consulting Letter; Institute for Portfolio Alternatives Letter.

We are requiring that the filing be in a text-searchable format, as proposed, and in addition, the final instructions will require that the filing be structured with machine-readable headings. Two commenters advocated that the relationship summary should be filed not only in a text-searchable, but also machine-readable, format,[663] in response to our solicitation for comment on filing formats. Both commenters stated that this would allow third parties to develop online comparison tools, making it easier for retail investors to compare firms with one another, including across key categories, such as fees.[664] We agree that requiring this formatting will enable investors and other data users, industry participants, and the Commission and Commission staff to better collect and analyze reported information and facilitate the development of tools to aggregate and compare the information. We are requiring that only the headings be machine-readable, given that firms will use their own wording in the narrative responses for each of the relationship summary items, and the responses will not be uniform. The machine-readable, structured headings could, for example, be implemented in PDF by creating a bookmark for each of the headings of the relationship summary that matches the text of the heading and that has the heading as its destination. We believe this promotes aggregation and comparison of responses to specific items across different relationship summaries but also limits the costs of preparing the relationship summary. This is consistent with the Commission's ongoing efforts to modernize our forms by taking advantage of technological advances both in the manner in which information is reported to the Commission and how it is provided to investors and other users.[665] These

instructions are not intended to require firms to prepare a relationship summary in paper format. A firm that prepares and delivers a relationship summary only in an electronic format could, for example, file a rendering of the electronic disclosures with the Commission.

[663] See CFA Letter I (“[P]ast experience regarding investors' limited use of existing databases, such as IARD and BrokerCheck, cautions against placing too much reliance on investors' accessing the documents directly. We therefore urge the Commission to require that the documents be filed, not just in a text-searchable format, but in a machine-readable format.”); Schnase Letter (“[T]he data contained in the Relationship Summary should be required to be filed in a structured data format, so the document can be utilized as a stand-alone human-readable document and serve as the source for a machine-readable data set.”).

[664] CFA Letter I (“We can envision a time when third parties could develop online tools to help investors search for a firm or account that meets their preferred parameters, much like the tools Kelly Blue Book or Edmunds provide to help car buyers narrow their selections.”); Schnase Letter (“Retail investors may not be able or inclined to build their own algorithms and spreadsheets to manipulate machine-readable data themselves, but third-party providers will likely step in when demand exists to provide investors publicly accessible comparison tools fueled by the machine-readable data made available by the SEC.”).

[665] See, e.g., Inline XBRL Filing of Tagged Data, Advisers Act Release No. 10514 (Jun. 28, 2018) [83 FR 40846] (Aug. 16, 2018); Optional internet Availability of Investment Company Shareholder Reports, Investment Company Act Release No. 33115 (Jun. 5, 2018) [83 FR 29158] (Jun. 22, 2018) (“Shareholder Reports Release”); Investment Company Reporting Modernization, Investment Company Act Release No. 32314 (Dec. 8, 2017) [82 FR 58731 (Dec. 14, 2017)].

In a change from the proposal, broker-dealers will file through Web CRD[supreg] instead of EDGAR. Investment advisers will file their relationship summaries through IARD in the same manner as they currently file Form ADV Parts 1A and 2A, as proposed.[666] Whether dual registrants prepare a single relationship summary or two, they will file their relationship summaries using both IARD and Web CRD[supreg].[667] We are requiring filing of the relationship summary through Web CRD[supreg] and IARD because they are currently used by and familiar to broker-dealers and investment advisers, respectively. This should minimize the systems changes firms would need to make, because they would not need to establish new systems in order to file their relationship summaries with the Commission. One commenter supported using EDGAR for analyzing and comparing fee information.[668] Several commenters, however, generally preferred Web CRD[supreg], arguing that Web CRD[supreg] is more accessible for broker-dealers, which already make filings through Web CRD[supreg], and that Web CRD[supreg] data provided on BrokerCheck is more familiar to retail investors.[669] In light of comments, we have determined that requiring broker-dealers to file their relationship summaries through Web CRD[supreg] should streamline broker-dealer filing requirements relative to requiring broker-dealers to file on EDGAR. Broker-dealers already use Web CRD[supreg] for filing their own registration records and those of their associated persons, and retail investors already can find broker-dealers' disciplinary history and other information on BrokerCheck. In addition, Investor.gov already has a prominent search tool on its main landing page that links to BrokerCheck and IAPD, which investors can use to search for information about firms and financial professionals. This minimizes the implementation changes needed to make relationship summaries easily accessible through Investor.gov because new search tools would not need to be created and existing search tools could be linked to the Investor.gov/CRS web page referenced in the relationship summary.

[666] General Instruction 7.A.(i) to Form CRS. Several commenters supported using IARD as the filing system for investment advisers. See, e.g., Trailhead Consulting Letter; Schnase Letter. Investment advisers may instead file a paper copy of the Form ADV with the Commission if they apply for a hardship exemption by filing Form ADV-H.

[667] General Instruction 7.A.(i) to Form CRS. Information for investment advisers on how to file with IARD is available on the SEC's website at www.sec.gov/iard. Information for broker-dealers on how to file through Web CRD[supreg] is available on FINRA's website at http://www.finra.org/industry/web-crd/web-crd-system-links. See General Instruction 7.A.(ii) to Form CRS.

[668] See Morningstar Letter (advocating for fee information to be filed in a standard table with brief examples “in the EDGAR system in a standardized data format facilitating analysis and comparison”).

[669] See Schnase Letter (“[I]t is not clear why BDs should be filing their Relationship Summary through a different filing system than IAs (IARD, which is operated by FINRA) and through a different filing system than BDs already use for Form BD (CRD, also operated by FINRA).”); NASAA Letter (“[B]roker-dealers should file Form CRS on the WebCRD platform maintained by FINRA for its BrokerCheck reports (and which is related to IARD).”); Institute for Portfolio Alternatives Letter (“CRD and its public-facing BrokerCheck is a system familiar to both the brokerage industry as well as investors. We believe that CRD/BrokerCheck will address potential investor confusion and streamline broker requirements.”).

We also received comment that dual registrants should file only on one system, instead of on both EDGAR and IARD as proposed.[670] One commenter, however, implicitly supported the requirement that dual registrants file on two systems.[671] The final instructions require dual registrants to file their relationship summaries using both systems—Web CRD[supreg] and IARD.[672] This approach ensures a complete and consistent filing record for each firm and facilitates the Commission's data analysis, examinations, and other regulatory efforts. Firms offering brokerage or investment advisory services through affiliates will follow the same filing requirements as standalone firms.

[670] See, e.g., Prudential Letter (“The Commission should clarify that a single filing [for dual registrants], in either IARD or EDGAR, would constitute compliance with the filing requirement.”).

[671] See Schwab Letter III (providing sample Form CRS instructions for dual registrants to file on IARD and EDGAR).

[672] General Instruction 7.A.(i) to Form CRS.

For investment advisers, we are also adopting clarifications in the General Instructions to Form ADV that relate to the amending and filing of the relationship summary.[673] First, investment advisers may file an amended relationship summary as an other-than-annual amendment or by including the relationship summary as part of an annual updating amendment, within the 30 days in which they are required to file the amendment.[674] Second, the instructions provide that advisers may, but are not required to, submit amended versions of their relationship summary as part of their annual updating amendment and include additional technical references to implement this instruction.[675] Third, we added provisions to mirror the requirements of the General Instructions to Form CRS as to when amendments and exhibits showing changes to Part 3 must be made and filed.[676] We believe that investment advisers will benefit from these clarifications. Finally, we are adopting certain amendments to the General Instructions to Form ADV to add conforming technical changes and references to the Form ADV, Part 3.[677]

[673] See infra Section II.C.4 generally for a discussion of amendments to the relationship summary.

[674] See amended General Instruction 4 to Form ADV (revised to add the following language: “If you are registered with the SEC, you must amend Part 3 of your Form ADV within 30 days whenever any information in your relationship summary becomes materially inaccurate by filing with the SEC an additional other-than-annual amendment or by including the relationship summary as part of an annual updating amendment.”). Compare Proposed General Instruction 4 to Form ADV (“You must amend your relationship summary and file your relationship summary amendments in accordance with the Form ADV, Part 3 (Form CRS), General Instructions, 6.”).

[675] See amended General Instruction 4 to Form ADV (revised with language that investment advisers must update responses to all items “in Part 1A, 1B, 2A and 2B (as applicable),” and “You may, but are not required, to submit amended versions of the relationship summary required by Part 3 as part of your annual updating amendment.”).

[676] See infra footnotes 769-774, 781-783, and accompanying text.

[677] See amended General Instruction 3 to Form ADV (indicating that Form ADV, as amended to add Part 3, now contains five instead of four parts); amended General Instruction 4 to Form ADV (“Part 3 requires advisers to create a relationship summary (Form CRS) containing information for retail investors. The requirements in Part 3 apply to all investment advisers registered or applying for registration with the SEC, but do not apply to exempt reporting advisers. Every adviser that has retail investors to whom it must deliver a relationship summary must include in the application for registration a relationship summary prepared in accordance with the requirements of Part 3 of Form ADV. See Advisers Act Rule 203-1.”); amended General Instruction SEC's Collection of Information section (removing “promptly” to reflect filing requirements for relationship summary changes).

Delivery Requirements a. Form of Delivery

The final instructions provide, as proposed, that firms will be able to deliver the relationship summary (including updates) within the framework of the Commission's existing guidance regarding electronic delivery.[678] This framework consists of

the following elements: (i) Notice to the investor that information is available electronically; (ii) access to information comparable to that which would have been provided in paper form and that is not so burdensome that the intended recipients cannot effectively access it; and (iii) evidence to show delivery, i.e., reason to believe that electronically delivered information will result in the satisfaction of the delivery requirements under the federal securities laws.[679] In the Proposing Release, we also provided proposed guidance that a firm would be able to deliver the relationship summary to new or prospective clients or customers in a manner that is consistent with how the retail investor requested information about the firm or financial professional, and that this method of initial delivery for the relationship summary would be consistent with the Commission's electronic delivery guidance.[680] We have included this provision in the final instructions to provide additional clarity and certainty on what is permissible for initial delivery of the relationship summary.[681] This approach applies only to the initial delivery of the relationship summary to new or prospective clients or customers, and not to any other delivery obligation of any other required disclosure. With respect to existing clients or customers, as proposed, firms should deliver the relationship summary in a manner consistent with the firm's existing arrangement with that client or customer and with the Commission's electronic delivery guidance. The above delivery instructions are based on the assumption that retail investors are able to access and prefer to receive communications and disclosures through the same medium in which they request information from the firm or financial professional. If this assumption is not correct, retail investors can request a copy of the relationship summary in a format they prefer, as discussed below, and can establish their delivery preferences with the firm once they have entered into a relationship.

[678] See Use of Electronic Media by Broker-Dealers, Transfer Agents, and Investment Advisers for Delivery of Information; Additional Examples Under the Securities Act of 1933, Securities Exchange Act of 1934, and Investment Company Act of 1940, Exchange Act Release No. 37182 (May 9, 1996) [61 FR 24644 (May 15, 1996)] (“96 Guidance”); see also Use of Electronic Media, Exchange Act Release No. 42728 (Apr. 28, 2000) [65 FR 25843 (May 4, 2000)] (“2000 Guidance”); and Use of Electronic Media for Delivery Purposes, Exchange Act Release No. 36345 (Oct. 6, 1995) [60 FR 53458 (Oct. 13, 1995)] (“95 Guidance”). Recognizing the growth of different forms of electronic media, other technological developments, and the passage of time since these releases were issued, the Commission plans to revisit its existing guidance regarding electronic delivery.

[679] 96 Guidance, supra footnote 678.

[680] See Proposing Release, supra footnote 5, at nn.344-45 and accompanying text; see also 2000 Guidance, supra footnote 678, at 65 FR 25845-46; 96 Guidance, supra footnote 678, at 61 FR 24647; and 95 Guidance, supra footnote 678, at 60 FR 53461.

[681] General Instruction 9.B. to Form CRS (“You may deliver the relationship summary to new or prospective clients or customers in a manner that is consistent with how the retail investor requested information about you or your financial professional.”).

Numerous commenters expressed support for electronic delivery, including for modifications to the instructions to make electronic delivery a more accessible option for the relationship summary as well as other disclosures.[682] A number of commenters further advocated for the “notice plus access” model, in which posting the relationship summary to the firm's website, in combination with a notice to the retail investor that the relationship summary is available there, would constitute delivery.[683] Some of these commenters argued that this approach should suffice for delivery, even if the retail investor had not previously consented to electronic delivery in an affirmative way.[684] A few commenters cited to the Commission's recently adopted rule 30e-3 under the Investment Company Act [685] as a possible model for delivering the relationship summary.[686] Some of these commenters also advocated for a more comprehensive updating of the Commission's guidance concerning electronic delivery, not just for the relationship summary but for other disclosures as well.[687] Commenters advocating for more widespread use of electronic delivery cited to arguments including the potential cost savings and improved security of delivery to investors.[688]

[682] See, e.g., CFA Institute Letter I (“Whatever design is finalized for CRS, it should accommodate electronic delivery to investors. We also believe a design with interactive components is needed in today's electronically savvy investor base.”); TIAA Letter (“the SEC could make the disclosure requirements in . . . Form CRS more flexible, such that broker-dealers have more options with respect to the method of delivery of required disclosures. . . .”); MassMutual Letter; SIFMA Letter; SPARK Letter; Morgan Stanley Letter; Cetera Letter II; Fidelity Letter.

[683] See, e.g., Primerica Letter; Cetera Letter II; Schwab Letter (advocating a notice plus access model for annual or more frequent updates to the relationship summary); Pickard Djinis and Pisarri Letter; IAA Letter I; SIFMA Letter; MassMutual Letter; Comment Letter of the Money Management Institute (Aug. 7, 2018) (“MMI Letter”); Wells Fargo Letter.

[684] See, e.g., LPL Financial Letter (supporting an implicit consent model on the basis that, among other things “It simply is not feasible to obtain an investor's affirmative consent to electronic delivery before the investor makes a final decision about the [investment relationship]”); FSI Letter I (supporting a negative consent model, rather than an opt-in approach); IAA Letter I (supporting an implied consent model).

[685] 17 CFR 270.30e-3 (internet availability of reports to shareholders); Shareholder Reports Release, supra footnote 665.

[686] See, e.g., T. Rowe Letter (“In cases where no email address is on file with the firm, we think a notice and access protocol akin to Rule 30e-3 is appropriate.”); SPARK Letter (“The SEC has recently demonstrated a willingness to embrace electronic disclosure as the default delivery method for other disclosures and we encourage the SEC to consider whether the disclosures added by the SEC's Proposal, including Form CRS, should be able to tap into the benefits of electronic delivery.”).

[687] See, e.g., LPL Financial Letter (“Modern communication practices underscore the need for the Commission to provide more flexibility to broker-dealers and investment advisers to satisfy their document delivery obligations by delivering materials to customers and clients who have implicitly consented to electronic delivery as well as to current customers and clients who have affirmatively consented to electronic delivery in a manner contemplated by the existing guidance.”); SPARK Letter (“strongly urges the SEC to permit . . . electronic delivery as the default delivery method for satisfying the disclosure requirements under [Regulation Best Interest, as well as Form CRS].”); Cetera Letter II (“We believe that adoption of Reg. BI and the Form CRS represents something of a watershed moment. . . .”); Pickard Djinis and Pisarri Letter; IAA Letter I; MMI Letter.

[688] See, e.g., Cetera Letter II (asserting that electronic delivery is safer and more environmentally friendly); IRI Letter; SPARK Letter; Primerica Letter.

On the other hand, some commenters expressed reservations about a notice plus access equals delivery approach and supported the Commission's proposed approach.[689] The RAND 2018 survey and another investor survey also showed mixed results relating to electronic delivery, with many participants indicating that they would prefer to receive the disclosures in paper.[690] Similarly, the IAC has stated that nearly half of investors (49%) still prefer to receive paper disclosures through the mail, compared with only 33% who prefer to receive disclosures electronically, either through email (27%) or by accessing them online (6%).[691] Additionally, we are aware,

based on our filing data, that a number of firms do not host public websites and would not be able to make available an updated, electronic version of their relationship summary for their retail investors at all times.[692] Some commenters noted that some retail investors may lack readily available internet access.[693]

[689] CFA Letter I (“We greatly appreciate that, in discussing this issue, the Release specifically references the obligation to provide evidence to show delivery.' This should help to clarify that firms could not meet the disclosure requirement simply by making the disclosures accessible on a public website and providing notice of their availability, under an access equals delivery' model. . . .”); AARP Letter (“The SEC should prohibit advisers from simply providing an electronic address for disclosures. . . . A paper copy should be provided to the retail investor.”).

[690] See supra footnote 699.

[691] IAC Electronic Delivery Recommendation, supra footnote 153 (citing FINRA Investor Education Foundation, Investors in the United States 2016 (Dec. 2016), available at http://www.usfinancialcapability.org/downloads/NFCS_2015_Inv_Survey_Full_Report.pdf). While the FINRA 2016 Investors Study was conducted prior to the Form CRS proposal (and does not specify what disclosure materials are contemplated in the survey, e.g., shareholder reports, summary prospectuses, statutory prospectuses, account statements, etc.), it presents general investor survey data regarding investor disclosure preferences.

[692] Based on IARD system data, 8.4% of investment advisers with individual clients do not report at least one public website.

[693] See, e.g., Comment Letter of C. Frederick Reish (Sept. 12, 2018); SIFMA Letter (acknowledging that firms would need to provide linked disclosures to customers and prospective customers who do not have internet access); LPL Financial Letter (citing Investment Company Institute, 2015 Investment Company Fact Book, (55th ed. 2015), at 129, available at https://www.ici.org/pdf/2015_factbook.pdf. The study found the following with respect to internet access in mutual fund owning households: (i) Head of household age 65 or older, 14% lack access; (ii) education level of high school diploma or less, 16% lack access; and (iii) household income of less than $50,000, 16% lack access.).

The relationship summary is designed to be delivered when a retail investor selects a firm or financial professional and which services to receive, including updated versions upon certain events when retail investors are again making decisions about whether to invest through an advisory account or a brokerage account. These selections affect all of the retail investor's subsequent investments under that relationship. In comparison, documents such as shareholder reports and prospectuses typically relate to investment decisions on single products; once the product is purchased, reporting is most commonly delivered at regular intervals, unlike the relationship summary. We are preserving an investor's ability to receive the relationship summary in paper, by maintaining the protections provided by the Commission's electronic delivery guidance.[694]

[694] See supra footnote 678.

We recognize the benefits to retail investors of receiving the relationship summary as early as possible when considering a firm or financial professional and that electronic communication can facilitate earlier delivery, provided that retail investors can readily access the form of communication used. As noted above, we have adopted the instruction that delivery of the relationship summary to new or prospective clients or customers in a manner that is consistent with how that retail investor requested information about the firm or financial professional would be consistent with the Commission's electronic delivery guidance.[695] This approach applies only to the initial delivery of the relationship summary to new or prospective clients or customers, and not to any other delivery obligation of any other required disclosure. Moreover, to ensure that a relationship summary delivered electronically is noticeable for retail investors and not hidden among other disclosures, we are adopting a new instruction that a relationship summary delivered electronically must be presented prominently in the electronic medium and must be easily accessible for retail investors.[696] For example, a firm can use a direct link or provide the relationship summary in the body of an email or message.[697] We are also requiring firms to post the current version of the relationship summary prominently on their public website, if they have one, as proposed.[698]

[695] See Proposing Release, supra footnote 5, at nn.344-45 and accompanying text; see also 2000 Guidance, supra footnote 678, at 65 FR 25845-46; 96 Guidance, supra footnote 678, at 61 FR 24647; and 95 Guidance, supra footnote 678, at 60 FR 53461.

[696] General Instruction 10.C. to Form CRS.

[697] General Instruction 10.C. to Form CRS.

[698] Advisers Act rule 204-5(b)(3) and Exchange Act rule 17a-14(c)(3); General Instruction 10.A. to Form CRS. The most recent versions of firms' relationship summaries will be accessible through Investor.gov. Firms will be required to include in their relationship summaries a phone number where investors can request up-to-date information and (if applicable) request a copy of the relationship summary. See Item 5.B. of Form CRS. Firms also could include their relationship summaries on other electronic media, such as mobile apps and other similar technologies.

We understand that, while many investors prefer receiving disclosures about investment advice in electronic format, many also value the option to receive them in paper.[699] We are adopting several additional requirements relating to relationship summaries in paper format. First, in a relationship summary that is delivered in paper format, firms may link to additional information by including URL addresses, QR codes, or other means of facilitating access to such information.[700] Second, if a relationship summary is delivered in paper format as part of a package of documents, the firm must ensure that the relationship summary is the first among any documents that are delivered at that time, substantially as proposed.[701] All firms will be required to make a copy of the relationship summary available upon request without charge.[702] However, we are not requiring that firms make the relationship summary available in paper format. We understand that some firms' business models—for example, those of advisers providing automated investment advisory services and broker-dealers that provide services only online—are based on delivering substantially all disclosures and conducting substantially all correspondence with clients and customers electronically. We do not intend to change these practices and believe that retail investors that prefer paper communications will have the opportunity to establish relationships with firms that accommodate paper delivery.

[699] See RAND 2018, supra footnote 13 (when surveyed about how and when they would prefer to receive the relationship summary, “two-fifths reported that they would be most likely to view a paper document”); Schwab Letter I (Koski) supra footnote 21 (26% of survey participants preferred to receive disclosures about investment advice on paper; 46% preferred online or digital disclosures with the option for paper).

[700] General Instruction 3.B. to Form CRS.

[701] General Instruction 10.D. to Form CRS. Cf. Proposed General Instruction 8.(c) to Form CRS (“If the relationship summary is delivered on paper and not as a standalone document, you must ensure that the relationship summary is the first among any documents that are delivered at that time.”).

[702] General Instructions 1.C. to Form CRS.

b. Initial Delivery

The final instructions require an investment adviser registered with the SEC to deliver a relationship summary to each retail investor before or at the time the firm enters into an investment advisory contract, even if the agreement is oral, as proposed.[703] The timing for standalone investment advisers to deliver the relationship summary to new or prospective retail clients generally tracks the initial delivery requirement for Form ADV Part 2A.[704] As described further below, we are changing the instruction for broker-dealers to require delivery before or at earliest of one of three triggers.[705] In

comparison, under the proposal, broker-dealers would have delivered the relationship summary before or at the time the retail investor first engages their services.[706] Under the final rules, dual registrants, and affiliated broker-dealers and investment advisers that jointly offer their services to retail investors, must deliver at the earlier of the initial delivery triggers for an investment adviser or a broker-dealer, including a recommendation of account type.[707] This applies whether the dual registrant or affiliated firms prepare one single relationship summary describing both brokerage and investment advisory services, or two separate relationship summaries describing each type of service.

[703] General Instruction 7.B.(i) to Form CRS. The final instructions for investment advisers are streamlined from the proposal, but remain substantively the same. Compare to Proposed Advisers Act rule 204-5(b)(1) and Proposed General Instruction 5.(b) to Form CRS (“You must give a relationship summary to each retail investor, if you are an investment adviser, before or at the time you enter into an investment advisory agreement with the retail investor, or if you are a broker-dealer, before or at the time the retail investor first engages your services. See Advisers Act rule 204-5(b)(1) and Exchange Act rule 17a-14(c)(1). You must deliver the relationship summary even if your agreement with the retail investor is oral.”). We replaced the word “agreement” with “contract” to mirror the wording in the current Advisers Act rules and Form ADV instructions. See, e.g., Item 5.D of Part 2.A. of Form ADV. We also clarified that the delivery requirements apply to investment advisers registered with the SEC.

[704] See General Instruction 1 to Part 2A of Form ADV.

[705] General Instruction 7.B.(ii) to Form CRS (“If you are a broker-dealer, you must deliver a relationship summary to each retail investor, before or at the earliest of: (i) A recommendation of an account type, a securities transaction, or an investment strategy involving securities; (ii) placing an order for the retail investor; or (iii) the opening of a brokerage account for the retail investor.”). As described below, dual registrants will continue to deliver the relationship summary at the earlier of the requirements for investment advisers or broker-dealers. General Instruction 7.B.(iii) to Form CRS (“A dual registrant must deliver the relationship summary at the earlier of the timing requirements in General Instruction 7.B.(i) or (ii).”).

[706] See Proposed Exchange Act rule 17a-14(c)(1); Proposed General Instruction 5.(b) to Form CRS.

[707] General Instruction 7.B.(iii) to Form CRS (“A dual registrant must deliver the relationship summary at the earlier of the timing requirements in General Instruction 7.B.(i) or (ii).”).

Some commenters supported keeping the initial delivery requirements as proposed.[708] Other commenters expressed concern that under the proposal, the relationship summary would be delivered only after the investor has already made a decision about which firm to engage and which type of account to open, and recommended variations on the proposed initial delivery requirements, including mandating even earlier delivery.[709] The variations include, for example, delivery at the point of first contact or inquiry between the retail investor and firm, whenever possible; [710] at the earlier of when a customer contacts the firm or enters into an advisory agreement or engagement of services; [711] and upon the first interaction with a prospective retail investor.[712] For dual registrants, one commenter recommended requiring delivery no later than the point at which a recommendation is made regarding which type of account to open.[713] One commenter asserted that the Commission should not permit delivery “at” the time of service but rather should always require delivery “before” the provision of service.[714] The IAC recommended providing “a uniform, plain English disclosure document . . . to customers and potential customers of broker-dealers and investment advisers at the start of the engagement, and periodically thereafter.” [715]

[708] See, e.g., Trailhead Consulting Letter; Schnase Letter (agreeing that the relationship summary should be required to be delivered along the lines proposed in the Proposing Release); SIFMA Letter (“For the initial delivery most brokerage firms likely will include [the relationship summary] with account applications or other account opening materials, while investment advisers will include it with their Form ADV.”).

[709] See, e.g., CFA Letter I; CFA Institute Letter I; AARP Letter; NASAA Letter; Consumers Union Letter; Consumer Reports Letter. In the RAND 2018 survey, supra footnote 13, 70% of respondents reported that they would prefer to receive the relationship summary at the outset of the relationship, i.e., “before or at the time you first engage the investment professional” and slightly more than 30% of respondents would prefer to receive the relationship summary “before the investment professional first recommends a transaction or investment strategy”; see also Schwab Letter I (Koski), supra footnote 21 (when asked “[w]hich of the following best describes your preference for when you would like to receive information about how a Brokerage Firm or a Registered Investment Adviser (RIA) does business with you?”, 41% preferred “[a]t or before I open my account, plus any updates on an annual basis,” 22% preferred “[a]vailable on an ongoing basis, such as on a firm's website,” 19% preferred at “[a]t or before I open my account only,” and 17% preferred “[e]very single time I receive investment advice.”).

[710] See CFA Letter I.

[711] See CFA Institute Letter I.

[712] See AARP Letter.

[713] See CFA Letter I.

[714] See NASAA Letter.

[715] See IAC Broker-Dealer Fiduciary Duty Recommendations, supra footnote 10.

A few commenters supported requiring a period of time between delivery of the relationship summary and the beginning of the relationship.[716] One commenter suggested allowing time for retail investors to review the relationship summary, subsequent to delivery when the firm first interacts with a retail investor.[717] A number of investors at Commission-held roundtables also supported a waiting period.[718] Other commenters, however, opposed a mandated delay between delivery of the relationship summary and engaging in services.[719]

[716] See, e.g., AARP Letter; CFA Institute Letter I; NASAA Letter.

[717] See AARP Letter.

[718] See, e.g., Houston Roundtable, at 51 (one investor suggesting a “cool-off period”); Washington, DC Roundtable, at 58 (at least two investors supporting a “lapse” of time between receipt of a relationship summary and having to sign it).

[719] Comment Letter of John Neil Conkle (Aug. 7, 2018) (arguing that a waiting period is not necessary for the relationship summary to fulfill its purpose); Edward Jones Letter (arguing that a waiting period could harm investors by preventing them from meeting IRA contribution or rollover deadlines, for example, or at a minimum cause frustration); SIFMA Letter (arguing that the relationship summary is designed to be contemporaneously read and understood).

Various commenters explained logistical and recordkeeping issues if firms were required to deliver the relationship summary at first contact or prior to engaging a firm's services.[720] For example, one commenter stated that it would not be feasible to obtain an investor's affirmative consent to electronic delivery before the investor decides to engage the firm.[721] Tracking whether or not prospective customers had consented to electronic delivery of the relationship summary would be difficult because prospective customers who do not open accounts would not have account numbers or other unique identifiers for the firm's recordkeeping purposes.[722] Other commenters argued that keeping records of when a relationship summary was given to a prospective retail investor would be unnecessarily burdensome for firms and would likely provide de minimis benefits.[723] Still other commenters discussed the difficulty of defining when a customer first engages the firm's services, the terminology used in the proposal.[724]

[720] See, e.g., Edward Jones Letter (asserting that requiring firms to record the delivery of the relationship summary to prospective clients that subsequently become clients would impose a significant burden without providing meaningful benefits to investors); SIFMA Letter (“[I]t would be very burdensome and not practical in many instances to keep track of Forms CRS that are provided to retail investors who never seek to establish a relationship with a firm.”); Primerica Letter; LPL Financial Letter.

[721] See LPL Financial Letter.

[722] See LPL Financial Letter.

[723] See infra footnote 803; see also infra footnotes 798-816 and accompanying text regarding recordkeeping requirements.

[724] See, e.g., Fidelity Letter; SIFMA Letter; Primerica Letter; TIAA Letter.

We encourage investment advisers and broker-dealers to deliver the relationship summary far enough in advance of a prospective retail investor's final decision to engage the firm to allow for meaningful discussion between the financial professional and retail investor, including by using the conversation starters, so that the retail investor has time to understand the relationship summary and to weigh available options. We believe that prospective clients or customers would benefit from receiving the relationship summary as early as possible when deciding whether to engage the services of a firm or financial professional. In response to comments on initial delivery, including those relating specifically to broker-dealers, we are modifying the broker-dealer initial delivery requirements, as discussed below. However, we are declining to mandate a delivery requirement based on first contact or inquiry, or to impose a waiting period. First, “first contact or inquiry” may include circumstances that are not limited to the seeking of investment services, such as business

interactions for other purposes or social interactions, and therefore could create compliance uncertainty. Second, we believe the availability of each firm's relationship summary through Investor.gov and on its own website, if the firm has one, helps to address the concern that investors will not have the opportunity to review and compare relationship summaries before entering into an investment advisory contract or receiving services from a broker-dealer.[725] Third, some investors may not want to wait to begin services,[726] and those who do can always take as much time as needed to review the relationship summary and wait to sign an advisory agreement or begin receiving brokerage services at a later time. Fourth, firms will be permitted to deliver the relationship summary well before they enter into an advisory agreement or provide brokerage services, and as noted, we encourage firms to deliver the relationship summary early in the process. Finally, dual registrants, and affiliated broker-dealers and investment advisers that jointly offer their services to retail investors, must deliver their relationship summaries at the earlier of the delivery triggers for broker-dealers or investment advisers. To the extent the initial delivery requirements for a broker-dealer are earlier than the delivery requirements would be for an investment adviser, the earlier requirements will apply to an investment adviser that is a dual registrant or that offers services jointly with a broker-dealer affiliate. We believe this will provide a significant benefit to retail investors, given the substantial percentage of regulatory assets under management (“RAUM”) managed by dual registrants and investment advisers with broker-dealer affiliates, relative to the total RAUM managed by investment advisers overall.[727]

[725] See CFA Institute Letter I (“We strongly support the requirement that firms with public websites must post their CRSs on their sites in an easily accessible location and format. . . . Investors can review the disclosures provided there before deciding on a service provider and showing up for a meeting. Then when presented with the CRS `before or at the time' of entering into an agreement or engaging a firm's services, an investor will have already had an opportunity to review the disclosures and come armed with questions.”).

[726] See, e.g., Edward Jones Letter (stating that some investors have a very specific timeframe for opening a new account, such as meeting an IRA contribution or rollover deadline); SIFMA Letter (stating that requiring a waiting period would frustrate a retail customer's efforts to begin his or her relationship with a financial services provider).

[727] As of December 31, 2018, 1,878 SEC-registered investment advisers report in their Form ADV an affiliate that is a broker-dealer also registered with the SEC. These 1,878 SEC-registered investment advisers manage approximately $58.48 trillion, or approximately 70% of total RAUM managed by SEC-registered investment advisers. Furthermore, 359 SEC-registered investment advisers that are also dually-registered as broker-dealers manage approximately $5.18 trillion, or 6.12% of total RAUM. Thus, SEC-registered investment advisers that report registered broker-dealer affiliates and dual registrants together manage over 75% of RAUM. See also infra footnotes 855, 888-889, and accompanying text.

To facilitate earlier delivery, as discussed above, the final instructions allow firms to deliver the relationship summary to a new or prospective client or customer in a manner that is consistent with how the retail investor requested information about the firm or financial professional, clarifying that this approach would be consistent with the SEC's electronic delivery guidance.[728] We believe this approach alleviates concerns expressed by commenters that obtaining the consent of prospective clients or customers to receive electronic delivery and maintaining records of that consent would be challenging.[729] While we recognize recordkeeping burdens relating to the delivery of the relationship summary to prospective clients—for example, we are not imposing a delivery requirement upon first contact or inquiry by a retail investor, as discussed above—we disagree that they are insurmountable and would outweigh the benefits to retail investors. As discussed further in Section II.E. below, investment advisers and broker-dealers have experience with similar recordkeeping requirements.[730] Moreover, we believe there is considerable benefit to retail investors in receiving the relationship summary before deciding to engage a firm, to allow time for questions and discussion with the financial professional, to understand the relationship summary, and to weigh available options.

[728] General Instruction 10.B. to Form CRS.

[729] See supra footnotes 720-722 and accompanying text.

[730] See infra footnotes 809-810 and accompanying text.

Commenters suggested modifications to the proposed initial delivery requirements specifically for broker-dealers. Several commenters requested that we require broker-dealers to deliver the relationship summary at the point of first contact, inquiry, or interaction with a retail investor.[731] A number of commenters also raised questions about the meaning of “engaging the services” of a broker-dealer, noting that it was unclear when that may ultimately occur and that it is a new and undefined concept in the context of a customer relationship with a broker-dealer.[732] Other commenters suggested that we exclude or exempt certain types of broker-dealers that provide limited services to retail investors from the requirement to deliver the relationship summary or from the requirements of Form CRS more generally.[733]

[731] See CFA Institute Letter I; AARP Letter; and NASAA Letter.

[732] See Primerica Letter; SIFMA Letter; and Fidelity Letter.

[733] See, e.g., Fidelity Letter (recommending “that the SEC exclude limited-purpose broker-dealers acting solely as mutual fund general distributors from the obligation to deliver Form CRS to direct mutual fund investors that invest on an unsolicited basis, and shareholders investing through an intermediary (such as a full service broker-dealer or bank) that has an independent obligation to deliver such information to its client” and suggesting “that the SEC explicitly exempt from the Form CRS requirement certain categories of broker-dealers, including clearing firms, principal underwriters, and distributors of mutual funds, as these firms do not have a direct relationship with the end investor based on their business models”); ICI Letter; Wells Fargo Letter; Invesco Letter; ACLI Letter; Comment Letter of Great-West Financial (Aug. 6, 2018); T. Rowe Letter and Oppenheimer Letter.

In response to these concerns, we are modifying the initial delivery requirements for broker-dealers. Instead of “at the time the retail investor first engages a broker-dealer's services,” broker-dealers will be required to deliver the relationship summary to each retail investor before or at the earliest of: (i) A recommendation of an account type, a securities transaction, or an investment strategy involving securities; (ii) placing an order for the retail investor; or (iii) the opening of a brokerage account for the retail investor.[734] We believe that these more concrete initial delivery triggers for broker-dealers avoid the uncertainty of when a retail investor first engages a broker-dealer's services and include scenarios that encompass earlier delivery, in response to commenters' concerns.

[734] See Exchange Act rule 17a-14(c)(1); General Instruction 6.B.(ii) to Form CRS.

As noted, the proposal would have required broker-dealers to deliver the relationship summary before or at the time the retail investor first engages the firm's services. This proposed requirement was intended to capture the earliest point in time at which a retail investor engages the services of a broker-dealer, including instances when a customer opens an account with the broker-dealer, or effects a transaction through the broker-dealer in the absence of an account, for example, by purchasing a mutual fund through the broker-dealer via “check and application”. The proposed rule would not have required delivery to a retail investor to whom a broker-dealer makes a recommendation, if that retail investor did not open or have an account with

the broker-dealer, or that recommendation did not lead to a transaction with that broker-dealer.[735] If the recommendation led to a transaction with the broker-dealer who made the recommendation, the retail investor would have been considered to be “engaging the services” of that broker-dealer at the time the customer places the order or an account is opened, whichever occurred first. Instead, in response to comments advocating for earlier delivery, the final requirement expands on the proposed initial delivery requirement and potentially pushes it earlier, to require delivery (even where a brokerage account has not been established) before or at the time a broker-dealer recommends an account type, a securities transaction, or an investment strategy involving securities without regard to whether the retail investor acts on the recommendation. We believe that revising the delivery requirement in this way will give retail investors the opportunity to consider the information included in the relationship summary earlier in the process of determining whether to establish a brokerage relationship with the broker-dealer, as well as in evaluating the recommendation.

[735] Proposing Release, supra footnote 5.

Compared to the proposal, the final requirement also pushes earlier the time at which broker-dealers must deliver the relationship summary in instances in which the retail investor does not open an account but still engages in a securities transaction such as the “check and application” example described above. Under these circumstances, broker-dealers must deliver the relationship summary before or at the time an order is placed for the retail investor, instead of before or at the time the transaction is effected, as proposed. This delivery obligation would be triggered to the extent this type of transaction were unsolicited, because, as described above, if a recommendation preceded this type of transaction, delivery would have been triggered before or at the time of the recommendation.

To the extent the broker-dealer had not already made a recommendation of an account type, a securities transaction or an investment strategy involving securities, or placed an order for the retail investor, delivery would be triggered before or at the time the retail investor opens a brokerage account with the broker-dealer. As revised, we believe that the initial delivery triggers for broker-dealers avoid the uncertainty of the proposed initial delivery standard and include scenarios that encompass earlier delivery, in response to commenters' concerns.

In response to the comments requesting exemptions or exclusions from the relationship summary obligations generally and the delivery obligations for certain broker-dealers that engage in limited activities, we are clarifying that we do not intend for the Form CRS requirements to apply to certain types of relationships between a broker-dealer and a retail investor. Pursuant to Exchange Act Rule 17a-14, the scope of the Form CRS requirement applies “to every broker or dealer registered with the Commission pursuant to section 15 of the Act that offers services to a retail investor” (emphasis added). Solely for purposes of Form CRS, we are describing here the types of relationships between a broker-dealer and a retail customer that we would not consider to be “offer[s] [of] services to a retail investor”.

Specifically, clearing and carrying broker-dealers that are solely providing services to third party or affiliated introducing broker-dealers would not be considered to be offering services to a retail investor for purposes of Exchange Act Rule 17a-14, and would not be subject to the Form CRS requirements when acting in such capacity. As described above, the relationship summary is designed to make it easier for retail investors to get the facts they need when deciding among investment firms or financial professionals and the accounts and services available to them. When a retail investor is establishing or has a relationship with an introducing broker-dealer, we believe that the retail investor would benefit most from focusing on that broker-dealer's services, fees, standard of conduct, conflicts of interest and disciplinary history. In these circumstances, we believe that receiving an additional relationship summary from a clearing or carrying broker-dealer could create confusion and detract from the goals of this disclosure.

Additionally, we would not consider a broker-dealer that is serving solely as a principal underwriter to a mutual fund or variable annuity or variable life insurance contract issuer to be offering services to a retail investor for purposes of Exchange Act Rule 17a-14, when acting in such capacity. As with clearing and carrying broker-dealers, broker-dealers serving solely as principal underwriters do not typically establish the kind of relationship with retail investors that Form CRS has been designed to address. To the extent such broker-dealers interact with a retail customer in a different capacity (beyond serving as a principal underwriter to the mutual fund or variable contract that the retail investor owns), we believe the nature of their relationship could become one where delivery of the Relationship Summary would be useful. Accordingly, Form CRS's obligations would apply in those instances.[736]

[736] For example, we would expect the requirements of Form CRS to apply in the event the broker-dealer makes a recommendation of an account type, securities transaction or investment strategy involving securities, the retail investor places an order for the purchase of different securities, or the retail investor opens a new brokerage account with the broker-dealer.

We are adopting as proposed the approach to delivery for dual registrants, whereby they must deliver the relationship summary to a new or prospective retail investor at the earlier of the delivery triggers applicable to investment advisers and broker-dealers.[737] One commenter argued that a dual registrant should be required to deliver the relationship summary at the earlier of providing an investment recommendation or the time a retail investor opens an account with the firm.[738] We believe that the broker-dealer initial delivery requirements, as adopted, accommodate this comment. Another commenter asserted that dual registrants should be required to deliver the relationship summary no later than when a recommendation is made as to the type of account to open.[739] We believe that the final initial delivery requirements accommodate this comment also. Broker-dealers will be required to deliver the relationship summary before or at the earliest of (i) a recommendation of an account type, a securities transaction, or an investment strategy involving securities, (ii) placing an order for the retail investor, or (iii) the opening of a brokerage account for the retail investor.[740] Investment advisers will be required to deliver the relationship summary before or at the time of entering into an investment advisory contract with the retail investor.[741] Dual registrants will be required to deliver the relationship summary when recommending an account type to the retail investor if it is the earliest occurrence among the initial delivery triggers for broker-dealers and investment advisers, which we believe will typically precede the opening of a brokerage account or

entering into an investment advisory contract.[742]

[737] Advisers Act rule 204-5(b)(1) and Exchange Act rule 17a-14(c)(1); see also General Instruction 7.B.(iii) to Form CRS.

[738] See State Farm Letter.

[739] See CFA Letter I.

[740] See Exchange Act rule 17a-14(c)(1); General Instruction 7.B.(ii) to Form CRS.

[741] See Advisers Act rule 204-5(b)(1); General Instruction 7.B.(i) to Form CRS.

[742] See General Instruction 7.B.(iii) to Form CRS.

c. Additional Delivery Requirements to Existing Clients and Customers

We are adopting requirements for firms to re-deliver the relationship summary to existing clients and customers under certain circumstances, with some modifications from the proposal. We continue to believe that these investors will benefit from being reminded of the information contained in the relationship summary, including about the different services and fees that the firm offers, when they are again making decisions about whether to invest through an advisory account or a brokerage account. Specifically, after an initial delivery of the relationship summary to existing clients and customers who are retail investors, firms will be required to deliver the most recent version of the relationship summary to a retail investor if they (i) open a new account that is different from the retail investor's existing account(s); (ii) recommend that the retail investor roll over assets from a retirement account into a new or existing account or investment; or (iii) recommend or provide a new brokerage or investment advisory service or investment that does not necessarily involve the opening of a new account and would not be held in an existing account, for example, the first time purchase of a direct-sold mutual fund or insurance product that is a security through a “check and application” process, i.e., not held directly within an account.

In comparison, as proposed, the instructions would have required a firm to deliver a relationship summary to existing clients or customers when: (i) A new account is opened that is different from the retail investor's existing account, or (ii) changes are made to the existing account that would materially change the nature and scope of the relationship. The proposed instructions provided that whether a change was material for these purposes would depend on the specific facts and circumstances and gave as examples transfers from an investment advisory account to a brokerage account, transfers from a brokerage account to an investment advisory account, and moves of assets from one type of account to another in a transaction not in the normal, customary or already agreed course of dealing.

In the RAND 2018 survey, 50% of respondents reported that they would like to receive an updated relationship summary “whenever there is a material change in the Relationship Summary, such as a change in fees or commission structure,” about 30% would prefer to receive the relationship summary periodically and almost 40% preferred to receive the summary on request.[743] One commenter supported the additional delivery requirements to existing clients and customers as proposed, agreeing that investors are again making decisions about relationships and account types under these circumstances and would benefit from the information the relationship summary provides.[744] Another commenter recognized the value of delivering the relationship summary to existing clients and customers but recommended specific limitations to the requirements.[745] One commenter supported once a year or periodic updates and continued availability of a current version on a firm's website,[746] while another commenter opposed any requirement to provide periodic updates.[747] Several commenters argued that some or all of the additional delivery requirements are not necessary, given the prior initial delivery and online availability of relationship summaries.[748] A few commenters argued that the additional delivery requirements could confuse investors because of either an apparent duplication or difference from delivery requirements of existing disclosures.[749] One commenter also stated that the proposed additional delivery requirements could overwhelm investors in a counterproductive way.[750] Furthermore, commenters requested additional guidance or examples for what would “materially change” the relationship.[751]

[743] RAND 2018, supra footnote 13.

[744] See CFA Letter I (“We support this proposal and agree with the Commission that, in these instances, `retail investors are again making decisions about whether to invest through an advisory account or a brokerage account and would benefit from information about the different services and fees that the firm offers to make an informed choice.' ”).

[745] See SIFMA Letter (arguing that a “material change” should be defined as changes from an advisory account to a brokerage account or vice versa, and not include asset movements from one type of account to another or “other material changes”).

[746] See Schwab Letter I; Schwab Letter III.

[747] See CFN Letter.

[748] See, e.g., LPL Financial Letter (“It is not clear what additional benefits obtain from delivering an identical copy of a document an investor has already received.”); SIFMA Letter (“[W]e do not believe these additional trigger points [other than changing from one type of account to another] are necessary because customers will receive Form CRS at periodic intervals throughout the relationship, and customers will have continual online access to a firm's Form CRS via a website posting, making the need to “push out” the Form CRS at additional points unnecessary.”); Institute for Portfolio Alternatives Letter (“We suggest that delivery of a new or updated Form CRS with every transaction would be excessive, impractical and without commensurate investor benefit”); UBS Letter (“If a client already has both a brokerage account and an advisory account and is transferring assets from one to another . . . the client already would have the critical disclosures applicable to both account types . . . .”).

[749] See, e.g., Comment Letter of AXA (Aug. 7, 2019) (“[E]xisting customers have already decided which firm to work with, so requiring firms to send the Relationship Summary to those customers is likely to cause customer confusion.”); Pickard Djinis and Pisarri Letter (“The disharmony between the existing ADV brochure delivery requirements and the proposed requirements under Rule 204-5 are likely to confuse clients. . . .”); UBS Letter (“[R]eceiving the Form CRS again in such circumstances would likely lead to confusion rather than an improved understanding.”).

[750] See SIFMA Letter (“Providing Form CRS to investors beyond [changes from one type of account to another] could overwhelm them with duplicative or redundant information,” making it “less likely they will digest the information.”).

[751] See, e.g., Prudential Letter (“[M]ore guidance is needed on this point; additional examples of triggering events would provide clarity.”); TIAA Letter (“SEC should identify additional instances beyond account changes that would trigger re-delivery.”); Cambridge Letter (requesting further guidance on a material change to the nature and scope of the relationship and encouraging SEC to provide a broad set of examples); SIFMA Letter (“[I]t is not clear what other material' changes or assets movements not in the normal, customary, or already agreed course of dealing' would be”); Institute for Portfolio Alternatives Letter (requesting guidance on what facts and circumstances would trigger a “material” change and require delivery of a new, or updated, Form CRS); Comment Letter of Sorrento Pacific Financial, LLC (Aug. 7, 2018).

In addition, some commenters expressed concerns about administrative and operational burdens relating to the proposed additional delivery requirements.[752] For example, one commenter asserted that firms would be required to build entirely new operational and supervisory processes to identify asset movements divorced from any account opening process that could trigger an additional delivery requirement.[753] This commenter also argued that the review that would be required prior to effecting potentially triggering asset movements could cause delays that are detrimental to the retail

investor.[754] Similarly, another commenter explained that most of the proposed additional delivery triggers would be relatively easy to identify and address through existing processes, such as new account openings and when a brokerage account is converted to an investment advisory account and vice versa.[755] Other potential delivery triggers, however, such as investments of inheritances or proceeds of a property sale, or a significant migration from savings to investment, would present operational challenges and compliance costs.[756] These commenters recommended limiting additional delivery requirements to circumstances in which a brokerage account is converted to an investment advisory account and vice versa.[757]

[752] See SIFMA Letter; LPL Financial Letter; Institute for Portfolio Alternatives Letter; Pickard Djinis and Pisarri Letter (additional delivery requirements “would impose unjustifiable administrative burdens on advisers, the majority of whom are small businesses.”).

[753] See SIFMA Letter (explaining that, because additional delivery triggers could be divorced from any account opening process, entirely new operational and supervisory processes would need to be designed (i) to identify potentially triggering asset movements; (ii) to review for whether a proposed asset movement is not in the normal, customary, or already agreed course of dealing; and (iii) depending on whether delivery were required, create and preserve either a record of the delivery or of the conclusion that no such delivery was required).

[754] See SIFMA Letter.

[755] See LPL Financial Letter.

[756] See LPL Financial Letter (explaining that its existing systems are not designed to monitor and record dates of non-ordinary course events or to distinguish those events from routine account changes).

[757] See SIFMA Letter; LPL Financial Letter.

We disagree that delivery of the relationship summary to existing clients and customers is unnecessary if the investor has already received one. As noted above, when investors are again making decisions about whether to choose an investment advisory or brokerage account, we believe they will benefit from being reminded that different options are available and where they can get more information to inform their choice. We are not requiring that the relationship summary be delivered at periodic intervals or at every transaction; thus we disagree with comments that the additional delivery obligations will not provide commensurate benefit to investors, or will confuse or overwhelm investors. We are therefore adopting additional delivery requirements that apply to a firm's existing clients and customers, with some modifications from those proposed.

First, as proposed (and supported by two commenters as noted above), we are adopting the requirement that a firm deliver the relationship summary when opening any new account that is different from the retail investor's existing account(s).[758] Second, in response to comments we are replacing the proposed standard of “materially change the nature and scope of the relationship” with two, more specific and easily identifiable, triggers that we believe would not implicate the same operational or supervisory burdens described by commenters to meet the proposed requirement.[759] Instead, firms will be required to deliver a relationship summary to existing clients and customers when recommending that the retail investor roll over assets from a retirement account, or recommending or providing a new brokerage or investment advisory service or investment that does not necessarily involve the opening of a new account and would not be held in an existing account, for example, the first-time purchase of a direct-sold mutual fund or insurance product (e.g., variable annuities) that is a security through a “check and application” process, i.e., not held directly within an account.[760] While these requirements will still impose operational and supervisory burdens, we believe they are more easily identified and monitored, such that firms will not need to create new systems or processes to the extent that commenters said would be necessary to comply with the proposed “material change” standard. These more specific triggers are intended to provide investor protection under these circumstances in a more cost-effective manner, while still addressing the objectives that the “material changes” language sought to address, that is, to ensure that a firm does not switch existing customers or clients into accounts or services without explaining or giving them the opportunity to consider other available options.[761] Also, as proposed, we are adopting the instruction that firms must deliver the relationship summary to a retail investor within 30 days upon the retail investor's request.[762] While some commenters requested changes to the proposed delivery requirements, they nonetheless supported requiring delivery upon request.[763]

[758] General Instruction 9.A. to Form CRS.

[759] See supra footnotes 752-757 and accompanying text.

[760] General Instruction 9.A. to Form CRS.

[761] Recommendations of account types to existing customers and clients also are addressed in the Regulation Best Interest Release and Fiduciary Release, supra footnote 47.

[762] General Instruction 9.B. to Form CRS.

[763] See Fidelity Letter; SIFMA Letter.

Finally, delivery of the relationship summary will not necessarily satisfy any other disclosure obligations the firm has under the federal securities laws or other laws or regulations, as proposed. The relationship summary requirement will be in addition to, and not in lieu of, other disclosure and reporting requirements or other obligations for broker-dealers and investment advisers.[764] One commenter suggested that we require that the relationship summary include a prominent statement that it does not replace, but rather should be read in conjunction with, Form ADV or Form BD.[765] This commenter also suggested that the relationship summary should include a hyperlink to the appropriate Form ADV or Form BD, as applicable.[766] We believe that the required links in the Additional Information section, discussed in Section II.B.5. above, addresses these comments.

[764] For example, the relationship summary would not necessarily satisfy the disclosure requirements under Regulation Best Interest. See Regulation Best Interest Release, supra footnote 47.

[765] See Financial Engines Letter.

[766] See Financial Engines Letter.

Some commenters argued that investment advisers should not be required to deliver a relationship summary to retail clients because they already deliver a Form ADV Part 2A brochure.[767] We disagree. By requiring both investment advisers and broker-dealers to deliver a relationship summary that discusses at a high level both types of services and their differences in a comparable format, the relationship summary would help all retail investors compare not only among investment advisory services, but also between investment advisory and brokerage services. We do not believe that existing disclosures provide this level of transparency and comparability across investment advisers, broker-dealers, and dual registrants. Form CRS is a summary disclosure designed to provide a high-level overview of services, fees, costs, conflicts of interest, standard of conduct, and disciplinary history, to retail investors in order to help them decide whether to engage a particular firm or financial professional, including deciding whether to seek investment advisory or brokerage services. Form ADV Part 2A, in contrast, requires more detailed disclosures specific to advisory services. If a firm does not have retail investor clients or customers and is not required to deliver a relationship summary to any clients or customers, the firm will not be required to prepare or file a relationship summary, as proposed.[768]

[767] Comment Letter of Registered Advisor Services (Apr. 20, 2018); Comment Letter of Franklin Templeton Investments (Aug. 6, 2018); IAA Letter I; Triad Letter; Pickard Djinis and Pisarri Letter; Prudential Letter; see also State Farm Letter (arguing that investment advisers should be required to include in their relationship summaries only those disclosures that are not otherwise available, provided that a representative heading or introductory statement and a hyperlink to such disclosures are provided in the Relationship Summary).

[768] See amended Advisers Act rule 203-1, note to paragraph (a)(1); Exchange Act rule 17a-14(a), (b). See introduction of General Instructions to Form CRS.

Updating Requirements

We are adopting substantially as proposed a requirement for firms to update the relationship summary within 30 days whenever the relationship summary becomes materially inaccurate.[769] Firms also must post the latest version on their website (if they have one), and electronically file the relationship summary with the Commission.[770] Although some commenters expressed different views on the requirement to communicate updated information to retail investors, as discussed below, most commenters did not object to the proposed requirements to update the relationship summary within 30 days of a material change and the associated posting and filing obligations.[771] On the other hand, one commenter advocated that firms be allowed 60 days to update the relationship summary to address operational issues, but did not describe the specific operational challenges.[772] Based on our experience with other similar filings, we believe the proposed approach is consistent with the current requirements for investment advisers to update the Form ADV Part 2A brochure,[773] and with broker-dealers' current obligations, including to update Form BD if its information is or becomes inaccurate for any reason.[774] We continue to believe that allowing 30 days for firms to make updates provides sufficient time for firms to make the necessary revisions. Therefore, we are adopting these requirements as proposed.

[769] Advisers Act rule 204-1(a)(2) and Exchange Act rule 17a-14(b)(3); General Instruction 8.A. to Form CRS. For investment advisers, we are also adopting amendments to the General Instructions to Form ADV to mirror this requirement and to clarify the filing type. See amended General Instruction 4 to Form ADV (revised to add the following language: “If you are registered with the SEC, you must amend Part 3 of your Form ADV within 30 days whenever any information in your relationship summary becomes materially inaccurate by filing with the SEC an additional other-than-annual amendment or by including the relationship summary as part of an annual updating amendment.”); see also supra footnotes 673-677 and accompanying text.

[770] Advisers Act rules 203-1(a)(1), 204-5(b)(3) and Exchange rules 17a-14(b)(2), 17a-14(c)(3); General Instructions 8.A., 8.C., and 10.A. to Form CRS.

[771] See, e.g., Trailhead Consulting Letter (“If the form is kept to a more generalized and educational nature, material changes shouldn't occur too often.”); NASAA Letter; LPL Financial Letter; Prudential Letter; Primerica Letter.

[772] See Morgan Stanley Letter (30 days “may not be sufficient to address the related operational issues”).

[773] See, e.g., Advisers Act rule 204-5(b)(4); General Instruction 8 to Form CRS. Generally, an investment adviser registered with the SEC is required to amend its Form ADV promptly if information provided in its brochure becomes materially inaccurate. See Advisers Act rule 204-1(a)(2); General Instruction 4 to Form ADV.

[774] See, e.g., Exchange Act rule 15b3-1.

The proposed instructions also would have required firms, without charge to the retail investor, to communicate updated information by delivering the amended relationship summary or by communicating the information another way.[775] As noted above, commenters expressed different views regarding this approach. Some commenters advocated for posting the relationship summary on a firm's website in order to meet the communication requirement.[776] On the other hand, one commenter advocated for requiring firms to deliver updated relationship summaries whenever a change is made, rather than permitting firms to communicate the information in another way.[777] We are adopting slightly revised final instructions to eliminate the proposed wording “another way” in order to clarify that a firm may communicate the information through another disclosure, and that disclosure must be delivered to the retail investor.[778] In other words, merely providing notice of or access to another disclosure or the relationship summary would not satisfy this final instruction. For example, if an investment adviser communicated a material change to information contained in its relationship summary to a retail investor by delivering an amended Form ADV brochure or Form ADV summary of material changes that also contained the updated information, this would support a reasonable belief that the information had been communicated to the retail investor, and the investment adviser will not be required to deliver an updated relationship summary to that retail investor. This requirement provides firms the flexibility to disclose changes to the relationship summary without requiring them to incur additional delivery costs.

[775] See Proposed General Instruction 6.(b) to Form CRS.

[776] See, e.g., Fidelity Letter (“We also support the SEC's position that with respect to material changes of information provided in a Form CRS, firms must either provide an updated Form CRS to retail investors or communicate the changes in another way such as posting on the firm's website.”); Morgan Stanley Letter; Primerica Letter.

[777] See NASAA Letter.

[778] General Instruction 8.B. to Form CRS (“You can make the communication by delivering the amended relationship summary or by communicating the information through another disclosure that is delivered to the retail investor.”).

In another modification from the proposal, the rules as adopted will allow firms to communicate the information in an amended relationship summary to retail investors who are existing clients or customers within 60 days after the updates are required to be made, instead of 30 days as proposed.[779] Two commenters advocated that allowing 60 days for the communication would increase the likelihood that firms could deliver an updated relationship summary along with other disclosures that firms commonly deliver on a quarterly basis, rather than in a separate delivery.[780] Delivery with other disclosures is consistent with the instructions regarding the way in which relationship summary updates may be communicated. We are clarifying this, as noted above, and adopting the requirement that firms must communicate updates to the relationship summary within 60 days after the updates are required to be made.

[779] Advisers Act rule 204-5(b)(4) and Exchange Act rule 17a-14(c)(4); Proposed General Instruction 6.(b) to Form CRS.

[780] See LPL Financial Letter; Morgan Stanley Letter. For example, NASD Rule 2340 requires broker-dealers to deliver account statements generally on a quarterly basis.

In a further change from the proposal, firms must highlight the changes in an amended relationship summary by, for example, marking the revised text or including a summary of material changes and attaching the changes as an exhibit to the unmarked amended relationship summary.[781] The unmarked amended relationship summary and exhibit must be filed with the Commission.[782] We believe that including this exhibit is important in assisting retail investors to assess changes that may impact their accounts or their relationships with their firm or financial professional. A retail investor will be able to find the latest version of the relationship summary through Investor.gov and on the firm's website, if it has one, and firms will be required to deliver a relationship summary within 30 days upon the retail investor's request, as proposed.[783]

[781] General Instruction 8.C. to Form CRS (“Each amended relationship summary that is delivered to a retail investor who is an existing client or customer must highlight the most recent changes by, for example, marking the revised text or including a summary of material changes. The additional disclosure showing revised text or summarizing the material changes must be attached as an exhibit to the unmarked amended relationship summary.”). As an addition to the proposal, we are also amending General Instruction 4 to Form ADV to mirror this requirement (“You must include an exhibit highlighting the most recent changes required by Form ADV, Part 3 (Form CRS), General Instruction 8.C.”); see also supra footnotes 673-677 and accompanying text.

[782] General Instruction 8.A. to Form CRS; see also General Instruction 4 to Form ADV.

[783] Advisers Act rules 204-5(b)(3) and 204-5(b)(5) and Exchange Act rules 17a-14(c)(3) and 17a-14(c)(5); General Instruction 9.B. to Form CRS.

As discussed in the proposal, for purposes of the requirement to communicate updates to the

relationship summary, it is important that broker-dealers identify their existing customers who are retail investors and recognize that a customer relationship may take many forms. For example, a broker-dealer will be required to provide the relationship summary to customers who have so-called “check and application” arrangements with the broker-dealer, under which a broker-dealer directs the customer to send the application and check directly to the issuer. We continue to believe this approach will facilitate broker-dealers building upon their current compliance infrastructure in identifying existing customers [784] and will enhance investor protections to retail investors engaging the financial services of broker-dealers.

[784] For example, broker-dealers may already have compliance infrastructure to identify customers pursuant to FINRA's suitability rule, which applies to dealings with a person (other than a broker or dealer) who opens a brokerage account at a broker-dealer or who purchases a security for which the broker-dealer receives or will receive, directly or indirectly, compensation even though the security is held at an issuer, the issuer's affiliate or custodial agent, or using another similar arrangement. See Guidance on FINRA's Suitability Rule, FINRA Regulatory Notice 12-55 (Dec. 2012), at Q6(a).

D. Transition Provisions

To provide adequate notice and opportunity to comply with the adopted relationship summary filing requirements, firms that are registered, or investment advisers who have an application for registration pending, with the Commission prior to June 30, 2020 will have a period of time beginning on May 1, 2020 until June 30, 2020 to file their initial relationship summaries with the Commission.[785] On and after June 30, 2020, newly registered broker-dealers will be required to file their relationship summary with the Commission by the date on which their registration with the Commission becomes effective, and the Commission will not accept any initial application for registration as an investment adviser that does not include a relationship summary that satisfies the requirements of Form ADV, Part 3: Form CRS.[786] The adopted transition period is longer than we proposed. The proposal would have required broker-dealers to comply with their relationship summary obligations beginning six months after the effective date of the new rules and rule amendments.[787] Similarly, in the proposal, investment advisers or dual registrants would have been required to comply with the new filing requirements as part of the firm's next annual updating amendment to Form ADV that would have been required after six months after the rule's effective date.[788] The extended time to comply with the relationship summary requirements reflects our consideration of comments we received from firms and the modifications to the proposed requirements of the relationship summary.

[785] See Exchange Act rule 17a-14(f), Advisers Act rules 203-1(a)(2) and 204-1(e); Instruction 7.C. to Form CRS.

[786] See Exchange Act rule 17a-14(f) and Advisers Act rule 203-1(a)(2); Instruction 7.C. to Form CRS.

[787] See Proposed Instruction 5.c. to Form CRS. See Advisers Act proposed rule 203-1(a)(2) and Exchange Act proposed rule 17a-14 (f)(1).

[788] See id.

In the proposal, we asked for comment on the proposed implementation requirements and whether the six-month period was enough time for newly registered broker-dealers and investment advisers to prepare an initial relationship summary.[789] A number of commenters requested a longer implementation period, ranging from 12 to 24 months from the effective date.[790] One commenter suggested a phased-in approach, such that requirements may be effected at different points in time.[791] Commenters cited a number of reasons for a longer implementation period, including the time needed to hire additional staff and create and deploy new disclosures, procedures, training, and technology,[792] as well as to have the opportunity to apply innovative technology and designs.[793]

[789] See Proposing Release.

[790] See, e.g., IAA Letter I (requesting a 12 month implementation period from the effective date); CCMC Letter (requesting 18 months); IRI Letter (requesting 18-24 months); Comment Letter of HD Vest Financial Services (Aug. 7, 2018) (“HDVest Letter”) (requesting 18 months); Cetera Letter I; SIFMA Letter (requesting at least 24 months from the date the final rules are approved).

[791] See SIFMA Letter.

[792] See HDVest Letter.

[793] See IAA Letter I.

We are mindful of the time needed to create the relationship summary, as well as to update a firm's policies, procedures, and systems in order to provide these new disclosures. We are, however, lengthening the time that firms will have to comply relative to the proposal after considering commenters' suggestions for a longer implementation period. We expect that approximately twelve months will be adequate for firms to conduct the requisite operational changes to their systems and to establish internal processes to satisfy their relationship summary obligations.

Some commenters expressed the view that the proposed one-time, initial delivery to existing clients and customers is not necessary.[794] One survey reported, on the other hand, that over 90% of survey respondents with an existing financial professional relationship stated that they knew more about their relationship with the adviser after reading the proposed relationship summary.[795] We believe the information contained in the relationship summary could improve existing investors' ability to monitor and make more informed decisions related to their existing relationships with firms during their duration, including whether to terminate a relationship. For example, as discussed above in Section II.A., retail investors that may learn of account types whose minimum requirements they did not meet when they first opened their existing account, through a one-time, initial delivery to existing clients and customers. Upon seeing this range of options, existing clients and customers could seek to take advantage of cost savings or additional services offered through these other account types. We believe that existing clients and customers would benefit from this one-time delivery of the relationship summary and therefore are adopting the requirement as proposed. Firms will be required to deliver their relationship summary to new and prospective clients and customers who are retail investors as of the date by which they are first required to electronically file their relationship summary with the Commission.[796] In addition, as proposed, firms will be required, as part of the transition, to

deliver their relationship summaries to all existing clients and customers who are retail investors on an initial one-time basis within 30 days after the date the firm is first required to file its relationship summary with the Commission.[797]

[794] See, e.g., Fidelity Letter (existing customers are already familiar with the services offered to them by their broker-dealer or investment adviser. . . but can of course access a copy posted on the firm's website); AXA Letter (delivering the relationship summary to existing customers is likely to be confusing); Cetera Letter I (firms should not be required to deliver a new or amended Form CRS to [existing] clients except in limited circumstances, such as when the client establishes a different type of account than they already have).

[795] See Cetera Letter II (Woelfel), supra footnote 17 (84% of respondents stated that they knew a lot or a little more about their financial adviser after reviewing the Form CRS than they did before; among respondents with current relationships with a broker or adviser, over 90% said they knew more); see also CCMC Letter (investor polling), supra footnote 21 (in a survey of investors with investments outside of a work sponsored 401(k), pension or personal real estate, 72% of participants responding to a question describing that new rules could require financial professionals to deliver ” a standardized four page document that explains the relationship between the financial professional and clients” agreed that the new disclosure document “will boost transparency and help build stronger relationships between me and my financial professional” and 62% indicated that they were “very interested” in reading the document).

[796] See Advisers rule 204-5(e)(2) and Exchange Act rule 17a-14(f)(4); Instruction 7.C.iii. to Form CRS.

[797] See Advisers rule 204-5(e)(1) and Exchange Act rule 17a-14(c) and (f)(3); adopted Instruction 7.C.iv. to Form CRS.

E. Recordkeeping Amendments

We are adopting amendments to the recordkeeping and record retention requirements under Advisers Act rule 204-2 and Exchange Act rules 17a-3 and 17a-4, as proposed. These rules set forth requirements for firms to make, maintain, and preserve specified books and records. Pursuant to paragraph (a)(14)(i) of Advisers Act Rule 204-2 as amended, investment advisers will be required to make and preserve a record of the dates that each relationship summary was given to any client or prospective client who subsequently becomes a client.[798] New paragraph (a)(24) of Exchange Act Rule 17a-3 as adopted will require broker-dealers to create a record of the date on which each relationship summary was provided to each retail investor, including any relationship summary provided before such retail investor opens an account.[799] In addition, paragraph (a)(14)(i) of Advisers Act rule 204-2, as amended, will require investment advisers to retain copies of each relationship summary and each amendment or revision thereto while paragraph (e)(10) of Exchange Act rule 17a-4, as amended, will require broker-dealers to maintain and preserve a copy of each version of the relationship summary as well as the records required to be made pursuant to new paragraph (a)(24) of Exchange Act rule 17a-3 as adopted by the Commission.[800] The amended rules set forth the manner in which and the period of time for which these record must be retained.[801] These records will facilitate the Commission's ability to inspect for and enforce compliance with the relationship summary requirements.

[798] See amended Advisers Act rule 204-2(a)(14)(i).

[799] See Exchange Act rule 17a-3(a)(24).

[800] The effect of the amended and adopted rules will require both investment advisers and broker-dealers to maintain copies of all versions of the relationship summary and the dates they are provided or given to existing or prospective retail customers; see also General Instruction 6.A. to Form CRS (requiring firms to maintain a copy of each version of the relationship summary and make it available to the SEC staff upon request). The Commission notes that pursuant to Exchange Act rule 17a-3(e), for purposes of transactions in municipal securities by municipal securities broker-dealers, compliance with Rule G-8 of the Municipal Securities Rulemaking Board (“MSRB”) will be deemed to be in compliance with the recordkeeping requirements for broker-dealers. Accordingly, for purposes of transactions in municipal securities, a broker-dealer may satisfy its recordkeeping obligations under Exchange Act rule 17a-3(a)(24), as adopted, by complying with Rule G-8 of the MSRB. See Exchange Act rule 17a-3(e).

[801] Investment advisers will be required to maintain and preserve these records in an easily accessible place for a period of not less than five years from the end of the fiscal year during which the last entry was made on such record, the first two years in an appropriate office of the investment adviser. See Advisers Act rule 204-2(e)(1). Broker-dealers will be required to maintain these records in an easily accessible place until six years after such record or relationship summary is created. See Exchange Act rules 17a-3(a)(24) and 17a-4(e)(10) as amended.

We received no comments on the proposed manner and time period for records preservation or the requirement to maintain a copy of each version of the relationship summary and each amendment or revision to the relationship summary.[802] We are adopting these requirements as proposed. Some commenters expressed concern with the potential costs and feasibility of complying with the proposed recordkeeping requirements for broker-dealers.[803] Several commenters argued that keeping records of when a relationship summary was given to a prospective retail investor would be unnecessarily burdensome for firms and would likely provide de minimis benefits.[804] Some investment adviser and broker-dealer commenters stated that most firms' recordkeeping systems and procedures are not designed to maintain records relating to prospective clients and that conforming such systems and procedures to the proposed rule requirements would be burdensome and costly and would not result in an offsetting benefit.[805] Others noted they may have to retain records for an indefinite length of time because their interactions with prospective clients about engaging services often span weeks, months or years and may include numerous phone calls, meetings or other forms of contact.[806]

[802] See Exchange Act rule 17a-4(e)(10) as proposed to be amended and Advisers Act rule 204-2(e)(1) (which would apply to amended rule 204-2(a)(14)(i) as proposed to be amended). The recordkeeping requirements for investment advisers will mirror the current recordkeeping requirements for Form ADV Part 2. See Advisers Act amended rule 204-2(a)(14)(i) as proposed to be amended and rule 204-2(e)(1).

[803] See, e.g., CCMC Letter; Committee of Annuity Insurers Letter; Edward Jones Letter; Morgan Stanley Letter; Primerica Letter; SIFMA Letter; IPA Letter.

[804] See id.

[805] See, e.g., Committee of Annuity Insurers Letter; Edward Jones Letter; Morgan Stanley Letter; Primerica Letter; SIFMA Letter.

[806] See, e.g., Edward Jones Letter; Primerica Letter; SIFMA Letter.

As an alternative, commenters suggested that firms only be required to maintain a record of the most recent date they delivered the relationship summary to a prospective client that becomes an actual client preceding the opening of an account.[807] Commenters suggested only requiring a record that the relationship summary was delivered at account opening or when a retail investor becomes an investment advisory client.[808]

[807] See, e.g., CCMC Letter; SIFMA Letter.

[808] See, e.g., SIFMA Letter; Morgan Stanley; Edward Jones Letter.

Based on our experience with similar recordkeeping requirements for the Form ADV Part 2A brochure, requiring firms to create and maintain records of the dates they provide or give a relationship summary to an existing, new, or potential retail investor will facilitate examiners' ability to inspect and examine for compliance with the relationship summary delivery and content requirements. Specifically, the dates will help examiners to identify the relationship summary disclosures that retail investors may have relied on to decide whether to engage a firm's services. Absent having these dates to examine, we believe that it would be exceedingly difficult for examiners to evaluate firms' compliance with the relationship summary delivery and content requirement. These records also may assist firms in monitoring their compliance with the relationship summary delivery requirements.

Recordkeeping obligations for the relationship summary may be less burdensome if firms' recordkeeping and compliance systems are already capable of creating and maintaining records related to communications with prospective clients. For example, investment advisers are required to keep similar records for the delivery of the Form ADV Part 2A brochure [809] and broker-dealers, especially those registered with FINRA, are subject to comparable recordkeeping requirements with respect to communications and correspondence with prospective retail investors.[810]

[809] See, e.g., Advisers Act rule 204-2.

[810] See, e.g., Exchange Act rule 17a-4(b)(4) requiring broker-dealers to maintain a record of all communications sent relating to its business as such; see also, e.g., FINRA Rule 2210(a)(5) (defining “retail communication” to mean “any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period.”); FINRA Rule 2210(b)(4) (requiring all FINRA members to “maintain all retail communications and institutional communications for the retention period required by SEA Rule 17a-4(b) and in a format and media that comply with SEA Rule 17a-4 . . . [and] . . . all correspondence in accordance with the record-keeping requirements of [FINRA] Rules 3110.09 [on supervision, requiring FINRA members to retain the internal communications and correspondence of associated persons relating to the member's investment banking or securities business for the period of time and accessibility specified in SEA Rule 17a-4(b)] and 4511 [establishing general requirements for members to “preserve books and records as required under the FINRA rules, the Exchange Act and the applicable Exchange Act rules”]).

Several firms also requested clarification and expressed concern regarding the potential recordkeeping implications related to the “Key Questions to Ask” provision of the proposal.[811] Some commenters stated that requiring firms to make and maintain records of their answers to the “Key Questions to Ask” and of supplemental information cross-referenced in or linked from the relationship summary would result in substantial and unnecessary burdens and/or might stifle potentially beneficial discussions between firms, clients and/or prospective clients.[812] Commenters requested clarification that “Key Questions to Ask” are intended to promote dialog between firms and clients rather than creating any sort of recordkeeping requirement, which commenters believed could lead to less robust discussions between firms and clients.[813]

[811] See, e.g., CCMC Letter; TIAA Letter; LPL Financial Letter; IPA Letter; NSCP Letter.

[812] See, e.g., Edward Jones Letter; CCMC Letter; NSCP Letter; SIFMA Letter; Morgan Stanley Letter; TIAA Letter; LPL Financial Letter.

[813] See, e.g., Edward Jones Letter; CCMC Letter; TIAA Letter; LPL Financial Letter.

As discussed above, the “Key Questions to Ask” section of the relationship summary has been eliminated, but firms will be required to include “conversation starters” in their relationship summary.[814] We are not establishing new or separate recordkeeping obligations related to the conversation starters or the answers provided by firms in response to the conversation starters. We are also not adding separate or new recordkeeping obligations related to the use of layered disclosure in the relationship summary. Current recordkeeping rules for investment advisers and broker-dealers already impose recordkeeping and retention requirements related to a firm's disclosures and other communications with retail investors, which will include responses to conversation starters or information cross-referenced in the relationships summary.[815] Responses to conversation starters or hyperlinked material may trigger recordkeeping requirements under other federal securities statutes and rules or the rules of self-regulatory organizations of which firms are members or registrants.[816] Further, firms may wish to develop scripts for their financial professionals in responding to conversation starters to ensure the quality and consistency of responses and then preserve the scripts for compliance purposes.

[814] See supra Section II.A.4.

[815] For example, with respect to investment advisers, if a conversation starter prompts a written communication that includes a recommendation made or proposed to be made or any advice given or proposed to be given by the investment adviser, such a communication may be subject to the recordkeeping requirements of Advisers Act rule 204-(2)(a)(7). Also, for example, broker-dealers, under Exchange Act Rule 17a-4(b)(4), are required to maintain records of the “[o]riginals of all communications received and copies of all communications sent (and any approvals thereof) by the member, broker or dealer (including inter-office memoranda and communications) relating to its business as such. . .”; see also the recordkeeping requirements of FINRA Rule 2210.

[816] See id.

III. Disclosures About a Firm's Regulatory Status and a Financial Professional's Association

In connection with Form CRS, we recognized that the education and information that Form CRS provides to retail investors could potentially be overwhelmed by the way in which financial professionals present themselves to potential or current retail investors, including through advertising and other communications.[817] This concern was particularly acute where such communications could be misleading in nature, or where advertising and communications precede the delivery of Form CRS and may have a disproportionate impact on shaping or influencing retail investor perceptions.[818] To mitigate these concerns, we proposed additional rules as part of the Proposing Release. One of our proposed rules required disclosure of a firm's regulatory status and a financial professional's association with a firm. Specifically, we proposed rules under the Exchange Act and the Advisers Act that would have required a broker-dealer and an investment adviser to prominently disclose that it is registered as a broker-dealer or investment adviser, as applicable, with the Commission in print or electronic retail investor communications.[819] The proposed Exchange Act rule also would have required an associated natural person of a broker or dealer to prominently disclose that he or she is an associated person of a broker-dealer registered with the Commission in print or electronic retail investor communications.[820] Similarly, the proposed Advisers Act rule would have required a supervised person of an investment adviser registered under section 203 to prominently disclose that he or she is a supervised person of an investment adviser registered with the Commission in print or electronic retail investor communications.[821] As we discussed in the Proposing Release, we believed that requiring a firm to disclose whether it is a broker-dealer or an investment adviser in print or electronic retail investor communications would assist retail investors in determining which type of firm is more appropriate for their specific investment needs.[822] For similar reasons, we noted that because retail investors interact with a firm primarily through financial professionals, it is important that financial professionals disclose the firm type with which they are associated.[823]

[817] See Proposing Release, supra footnote 5, at footnotes 374-375 and accompanying text.

[818] See id.

[819] See id., at footnotes 437-439 and accompanying text.

[820] See id.

[821] See id.

[822] See Proposing Release, supra footnote 5, at footnotes 440-441 and accompanying text.

[823] See id. We also proposed rules that would have restricted broker-dealers and their associated persons from using the terms “adviser” or “advisor” as part of a name or title when communicating with retail investors in certain circumstances. We are not adopting those rules, as further discussed in the Regulation Best Interest Release. See Regulation Best Interest Release, supra footnote 47.

Several commenters expressed general support for the proposed Affirmative Disclosures.[824] Some of these commenters believed that the rules could be beneficial in helping investors to understand the legal distinctions between broker-dealers and investment advisers.[825] Another commenter in support of the Affirmative Disclosures stated that investors would benefit more if they were also provided with readily accessible regulatory and disciplinary histories of the financial professional.[826] However, one commenter noted that while “the required disclosure could have some modest benefit, . . . it is important not to overstate [its] likely value.” [827]

[824] See CFA Letter I; CFA Institute Letter I (stating that “[r]equiring them to call themselves what they legally are will enable investors to better understand the distinction”); Better Markets Letter.

[825] See CFA Institute Letter I; CFA Letter I; LPL Financial Letter.

[826] See Better Markets Letter.

[827] See CFA Letter I.

Several commenters also opposed the Affirmative Disclosures.[828] Some commenters believed that the proposed rules were duplicative, noting that

Regulation Best Interest, Form CRS, and/or other required disclosure obligations (e.g., Form ADV, FINRA Rule 2210) would inform retail investors of the capacity of a firm and its financial professionals, obviating the need for the additional rules.[829] Some of these commenters stated that Form CRS alone or in combination with FINRA Rule 2210(d)(3) (providing specific requirements for disclosure of the broker-dealer's name in retail communications and correspondence) would provide retail investors with a firm's capacity and its name, making the Affirmative Disclosures duplicative.[830]

[828] Some commenters also opposed the proposed Affirmative Disclosures because investors do not understand what it means to be registered or what the legal terms mean. See Altruist Letter; IRI Letter. See also LPL Financial Letter (noting that regulatory status is not important to an investor when being casually introduced for the first time to a financial professional and receiving a business card); Bank of America Letter; SIFMA Letter.

[829] See, e.g., LPL Financial Letter (stating that Form ADV, Form CRS, and Regulation Best Interest already “communicate to investors the capacity in which they are acting on behalf of the investor and the material facts related to the investor's relationship with the firm and its financial professionals.”); SIFMA Letter (stating that “information regarding regulatory status is contained in Proposed Form CRS, and Proposed Form CRS is available at all times on a firm's website, in addition to periodic distribution to clients.”); IRI Letter; Committee of Annuity Insurers Letter; Letter from Mari-Anne Pisarri, Pickard Djinis and Pisarri LLP (“Pickard Letter”) (stating “the Commission should determine whether the existing Form ADV brochure supplement adequately informs retail investors of the registration status of the advisory representatives they deal with . . . .”)

[830] See, e.g., IRI Letter; Bank of America Letter; Committee of Annuity Insurers Letter. See also SIFMA Letter (noting that Form CRS resolves any confusion that may exist regarding whether a financial professional or firm is a broker-dealer or an investment adviser and would be available on a firm website and given periodically to investors).

Several commenters also opposed the Affirmative Disclosures because they believed the costs to implement and comply with the proposed rules did not justify the benefits.[831] In particular, these commenters noted a range of cost-related impacts, such as replacing new and existing business cards [832] and amending numerous electronic and print marketing materials.[833] Several commenters also noted the difficultly in implementing and supervising specific types of communication including business cards, oral communications, and voice overlay and on-screen text in televised or video presentations.[834]

[831] See, e.g., LPL Financial Letter; Bank of America Letter; IRI Letter; SIFMA Letter.

[832] See IRI Letter. See also SIFMA Letter (noting also that firms would need to reprint all business cards and modify “firm technologies and electronic communications”).

[833] See LPL Financial Letter (noting “significant financial costs”).

[834] See Bank of America Letter; IRI Letter; SIFMA Letter; Altruist Letter. See also Committee of Annuity Insurers Letter (noting also that there are operational challenges in situations where marketing materials or account statements are used or distributed by a product sponsor rather than the firm itself).

After considering the comments received and the obligations we are adopting under Regulation Best Interest and Form CRS, we have concluded that the capacity disclosure requirement in Regulation Best Interest and Form CRS are sufficient to achieve the objectives of the proposed Affirmative Disclosures. These rules enhance retail investor awareness of the firm and professional type that they are engaging or seeking to engage and would therefore assist a retail investor in choosing the type that best suits his or her financial goals.

As discussed in the Regulation Best Interest Release, as part of its disclosure obligations, a broker-dealer and its associated natural persons must disclose when they are acting as a broker-dealer when making a recommendation. This type of disclosure is designed to improve awareness among retail customers such that a retail customer can more readily identify and understand their relationship.[835] This capacity disclosure requires a broker-dealer and its financial professionals to disclose that the firm or the financial professional is acting as a broker-dealer, as a material fact relating to the scope and terms of the relationship subject to its disclosure obligation.[836] As noted in the Regulation Best Interest Release, a broker-dealer and its financial professionals must disclose the required information prior to or at the time of a recommendation but Regulation Best Interest does not mandate the form, specific time, or method of delivering disclosures pursuant to its disclosure obligation.[837] In fulfilling this obligation, a broker-dealer that is not a dual registrant generally will be able to satisfy the requirement to disclose the broker-dealer's capacity by delivering the Relationship Summary to the retail customer. For broker-dealers who are dually registered, and for associated persons who are either dually licensed or are not dually licensed and only offer broker-dealer services through a firm that is dually registered, the information contained in the Relationship Summary will not be sufficient to disclose their capacity in making a recommendation.[838] As discussed in the Regulation Best Interest Release, although some commenters expressed concerns about potential investor confusion caused by “additional” disclosure regarding a dual registrant's capacity, the disclosure obligations of Regulation Best Interest will not duplicate or confuse, but instead will provide clarifying detail on capacity to supplement the information contained in the Relationship Summary.[839]

[835] See Regulation Best Interest Release, supra footnote 47, at Section II.C.1.a.

[836] See id.

[837] See id.

[838] See id.

[839] See id.

Additionally, as discussed above, Form CRS includes a requirement for firms to state their name and whether they are “registered with the Securities and Exchange Commission as a broker-dealer, investment adviser, or both.” [840] Form CRS is required to be delivered before or at the time the financial professional enters into an investment advisory relationship or, for a broker-dealer, before or at the earliest of a certain recommendation, the execution of a securities transaction, or the opening of a brokerage account.[841] Additionally, Form CRS will need to be prominently posted on the firm's public website, if it maintains one, in a location and format that is easily accessible to retail investors [842] and must be provided to retail investors 60 days after a material change is made.[843] These requirements highlight for an investor's attention, and promote access to, the capacity information at times that we believe are crucial to a retail investor when seeking to make a choice of financial firms.

[840] See Item 1.A. of Form CRS. See also supra Section II.B.1.

[841] See General Instruction 7.B to Form CRS. See also supra Section II.C.

[842] See General Instruction 10.A. to Form CRS. See also supra Section II.C.3.a.

[843] See General Instruction 8.B. to Form CRS. See also supra Section II.C.4. In addition, the most recent versions of firms' relationship summaries will be accessible through Investor.gov. See supra footnote 698 and accompanying text.

We recognize that the proposed Affirmative Disclosures would have included capacity requirements on more communications than what is required by Form CRS and capacity disclosure requirement in Regulation Best Interest. Specifically, under the Affirmative Disclosures, all forms of communications used by broker-dealers, investment advisers and their financial professionals, such as business cards, letterheads, social media profiles, and signature blocks would have included these required capacity disclosures. However, several commenters questioned whether the benefit provided by covering more communications justified the costs of implementing the requirements.[844]

While commenters did not provide quantitative data that would demonstrate the cost impact on firms, certain commenters did describe the scope of the impact along with the operational challenges in implementing the rule.[845] One commenter stated that “the costs of such requirement would be significant” as firms would need to reprint all business cards to include this disclosure and make changes to firm technology and electronic communications to make the disclosure.[846] Additionally, another commenter stated that adding a voice overlay and on-screen text for video presentations would be difficult to implement, costly, and challenging to supervise.[847]

[844] See, e.g., IRI Letter (stating that the costs to amend “tens of thousands of business cards to add the new required disclosure outweighs any intended benefit, particularly since the Form CRS already accomplishes the same objective . . .”); Committee of Annuity Insurers Letter (stating that the Affirmative Disclosure rules provide little benefit to investors and present operational challenges with respect to marketing materials created by product sponsors or issuers); LPL Financial Letter (noting that the benefits of these rules are outweighed by the “significant financial cost” to amend “numerous electronic and print marketing materials, business cards, and other retail customer communications.”)

[845] See IRI Letter (noting that a voice overlay and on-screen text may be difficult to implement and to effectively supervise. Additionally, firms will incur “significant costs and resources to monitor such presentations” for the required disclosures “even though that same client already received the Form CRS disclosure.”); LPL Financial Letter. See also Bank of America Letter (“the [Affirmative Disclosure rules] will impose significant costs to implement since tens of thousands of business cards will need to be amended in order to add the new required disclosures.”)

[846] See SIFMA Letter (noting that “we do not believe the regulatory status disclosure would have an obvious benefit to investors. At the same time, the costs of such a requirement would be significant.”)

[847] See Bank of America Letter (stating further that “it would be virtually impossible to supervise whether [the required] disclosure was made in oral communications.”); see also Altruist Letter (stating that including the disclosure in oral communications would be “awkward for a practitioner to implement.”); Committee of Annuity Insurers Letter (stating that “it may not be feasible for a broker-dealer to include this information on marketing materials for investment products created and provided by a product sponsor.”)

After considering the comments received and the obligations we are adopting under Regulation Best Interest and Form CRS, we have concluded that the policy concerns underlying the Affirmative Disclosures are addressed by the rulemaking package we are adopting, particularly the disclosure obligations in Regulation Best Interest and Form CRS, as discussed above.[848] We therefore believe that the costs of the Affirmative Disclosures do not justify any incremental benefit of requiring registration status on all communications and as a result, we are not adopting the Affirmative Disclosures.

[848] See Regulation Best Interest Release, supra footnote 47.

IV. Economic Analysis

A. Introduction

The Commission is sensitive to the economic effects, including the benefits and costs and the effects on efficiency, competition, and capital formation that will result from the new rules and amendments to existing rules. Whenever the Commission engages in rulemaking and is required to consider or determine whether an action is necessary or appropriate in the public interest, section 3(f) of the Exchange Act requires the Commission to consider whether the action would promote efficiency, competition, and capital formation, in addition to the protection of investors.[849] Further, when making rules under the Exchange Act, section 23(a)(2) of the Exchange Act requires the Commission to consider the impact such rules would have on competition.[850] Section 23(a)(2) of the Exchange Act also prohibits the Commission from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act.[851]

[849] See 15 U.S.C. 77b(b) and 15 U.S.C. 78c(f).

[850] See 15 U.S.C. 78w(a)(2).

[851] Id.

Section 202(c) of the Advisers Act requires the Commission, when engaging in rulemaking and required to consider or determine whether an action is necessary or appropriate in the public interest, to also consider whether the action will promote efficiency, competition, and capital formation, in addition to the protection of investors.[852] The Commission provides both a qualitative assessment of the potential effects and where feasible, quantitative estimates of the potential aggregate initial and aggregate ongoing costs. In some cases, however, quantification is not feasible due to lack of relevant data, or the difficulty of predicting how market participants would act under the conditions of the proposed rules. For example, to the extent that the relationship summary will increase retail investors' understanding of the services provided to them, investors are likely to respond differently to the increased understanding. Such responses could be transferring to a different financial firm or professional, hiring a financial professional for the first time, not taking any action, deciding to invest on their own without advice, or entirely abandoning the brokerage or investment advisory market while moving their assets to other products or markets (e.g., bank deposits or insurance products). Given the number and complexity of assumptions that would be required to be able to estimate how the relationship summary will affect investors' understanding and their decision-making, the Commission is not able to estimate the propensity of investors to respond in one way or another.

[852] 15 U.S.C. 80b-2(c).

In the economic analysis that follows, we first examine the current regulatory and economic landscape to form a baseline for our analysis. The economic effects of the adopted changes are discussed below.

B. Baseline

This section discusses, as it relates to this rulemaking, the current state of the broker-dealer and investment adviser markets, the current regulatory environment, and the current state of retail investor perceptions in the market.

Providers of Financial Services [853]

[853] In addition to broker-dealers and Commission-registered investment advisers discussed below in the baseline, there are a number of other entities, such as state registered investment advisers, commercial banks and bank holding companies, and insurance companies, which also provide financial advice services to retail customers; however, because of unavailability of data, the Commission is unable to estimate the number of some of those other entities that are likely to provide financial advice to retail customers. A number of broker-dealers (see infra footnote 862) have non-securities businesses, such as insurance or tax services. As of December 2018, there are approximately 17,300 state-registered investment advisers. The Department of Labor in its Regulatory Impact Analysis identifies approximately 398 life insurance companies that could provide advice to retirement investors. See U.S. Department of Labor, Regulating Advice Markets: Definition of the Term `Fiduciary,' Conflicts of Interest, Retirement Investment Advice: Regulatory Impact Analysis for Final Rule and Exemptions (Apr. 2016), available at https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf (“Regulatory Impact Analysis”)

a. Broker-Dealers

This rule will affect registrants in the market for broker-dealer services, including dual registrants [854] and broker-dealers offering services to retail investors that are affiliated with an investment adviser.[855] The market for broker-dealer services encompasses a small set of large and medium sized broker-dealers and thousands of smaller broker-dealers competing for niche or regional segments of the market.[856] The market for broker-dealer services includes many different markets for a variety of services, including, but not limited to, managing orders for customers and routing them to various trading venues; providing advice to customers that is in connection with and reasonably related to their primary business of effecting securities transactions; holding retail customers' funds and securities; handling clearance and settlement of trades; intermediating between retail customers and carrying/clearing brokers; dealing in corporate debt and equities, government bonds, and municipal bonds, among others; privately placing securities; and effecting transactions in mutual funds that involve transferring funds directly to the issuer. Some broker-dealers may specialize in just one narrowly defined service, while others may provide a wide variety of services.

[854] Not all firms that are dually registered as an investment adviser and a broker-dealer offer both brokerage and advisory accounts to retail investors. For example, some dually registered firms offer advisory accounts to retail investors but offer only brokerage services, such as underwriting services, to institutional clients. For the purposes of the relationship summary, we define a dual registrant as a firm that is dually registered as a broker-dealer and an investment adviser and offers services to retail investors as both a broker-dealer and investment adviser. General Instruction 11.C to Form CRS.

[855] Some broker-dealers may be affiliated with investment advisers but are not dually registered. From Question 10 on Form BD, 2,098 (55.7%) broker-dealers report that directly or indirectly, they control, are controlled by, or are under common control with an entity that is engaged in the securities or investment advisory business. Comparatively, 2,421 (18.2%) SEC-registered investment advisers report an affiliate that is a broker-dealer in Section 7A of Schedule D of Form ADV, including 1,878 SEC-registered investment advisers that report an affiliate that is a registered broker-dealer. Approximately 77% of total regulatory assets under management of investment advisers are managed by these 2,421 SEC-registered investment advisers.

[856] See Risk Management Controls for Brokers or Dealers with Market Access, Securities Exchange Act Release No. 63241 (Nov. 3, 2010) [75 FR 69791 (Nov. 15, 2010)]. For simplification, we present our analysis as if the market for broker-dealer services encompasses one broad market with multiple segments, even though, in terms of competition, it could also be discussed in terms of numerous interrelated markets.

As of December 2018, there were approximately 3,764 registered broker-dealers with over 140 million customer accounts. In total, these broker-dealers have over $4.3 trillion in total assets, which are total broker-dealer assets as reported on Form X-17a-5.[857] More than two-thirds of all brokerage assets and close to one-third of all customer accounts are held by the 17 largest broker-dealers, as shown in Table 1, Panel A.[858] Of the broker-dealers registered with the Commission as of December 2018, 359 broker-dealers are dually registered as investment advisers.[859] These firms hold over 90 million (63%) customer accounts. Approximately 539 broker-dealers (14%) report at least one type of non-securities business, including insurance, retirement planning, mergers and acquisitions, and real estate, among others.[860] Approximately 73.5% of registered broker-dealers report retail customer activity.[861]

[857] Assets are estimated by Total Assets (allowable and non-allowable) from Part II of the FOCUS filings (Form X-17A-5 Part II, available at https://www.sec.gov/files/formx-17a-5_2.pdf) and correspond to balance sheet total assets for the broker-dealer. The Commission does not have an estimate of the total amount of customer assets for broker-dealers. We estimate broker-dealer size from the total balance sheet assets as described above.

[858] Approximately $4.27 trillion of total assets of broker-dealers (99%) are at firms with total assets in excess of $1 billion. Of the 39 dually registered broker-dealers with total assets in excess of $1 billion, total assets for these dually registered broker-dealers are $2.32 trillion (54%) of aggregate broker-dealer assets. Of the remaining 99 broker-dealers with total assets in excess of $1 billion that are not dually registered, 91 have affiliated investment advisers.

[859] Because this number does not include the number of broker-dealers who are also registered as state investment advisers, the number undercounts the full number of broker-dealers that operate in both capacities.

[860] We examined Form BD filings to identify broker-dealers reporting non-securities business. For the 539 broker-dealers reporting such business, staff analyzed the narrative descriptions of these businesses on Form BD, and identified the most common types of businesses: Insurance (202), management/financial/other consulting (99), advisory/retirement planning (71), mergers and acquisitions (70), foreign exchange/swaps/other derivatives (28), real estate/property management (30), tax services (15), and other (146). Note that a broker-dealer may have more than one line of non-securities business.

[861] The value of customer accounts is not available from FOCUS data for broker-dealers. Therefore, to obtain estimates of firm size for broker-dealers, we rely on the value of broker-dealers' total assets as obtained from FOCUS reports. Retail sales activity is identified from Form BR, which categorizes retail activity broadly (by marking the “sales” box) or narrowly (by marking the “retail” or “institutional” boxes as types of sales activity). We use the broad definition of sales as we preliminarily believe that many firms will just mark “sales” if they have both retail and institutional activity. However, this may capture some broker-dealers that do not have retail activity, although we are unable to estimate that frequency.

Panel B of Table 1 is limited to the broker-dealers that report some retail investor activity. As of December 2018, there are approximately 2,766 broker-dealers that served retail investors, with over $3.8 trillion in total assets (89% of total broker-dealer assets) and almost 139 million (97%) customer accounts.[862] Of those broker-dealers serving retail investors, 318 are dually registered as investment advisers.[863]

[862] Total assets and customer accounts for broker-dealers that serve retail customers also include institutional accounts. Data available from Form BD and FOCUS data is not sufficiently granular to identify the percentage of retail and institutional accounts at firms.

[863] Of the 31 dually registered firms in the group of retail broker-dealers with total assets in excess of $500 million, total assets for these dually registered firms are nearly $2.32 trillion (60%) of aggregate retail broker-dealer assets (Table 1, Panel B). Of the remaining 81 retail broker-dealers with total assets in excess of $500 million that are not dually registered, 69 have affiliated investment advisers.

Table 1—Panel A: Registered Broker-Dealers as of December 2018

[Cumulative broker-dealer total assets and customer accounts]

```
Number of Cumulative
Total number dually Cumulative number of Size of broker-dealer (total assets) of broker- registered total assets customer dealers broker-dealers (billion) accounts \864\

---------------------------------------------------------------------------------------------------------------- >$50 billion.................................. 17 10 $2,879 40,550,200 $1 billion to $50 billion..................... 114 22 1,363 96,037,591 $500 million to $1 billion.................... 35 7 23 397,814 $100 million to $500 million.................. 105 19 23 1,603,818 $10 million to $100 million................... 490 101 17 4,277,432 $1 million to $10 million..................... 1,021 130 3.6 460,748 <$1 million................................... 1,982 70 0.5 5,675

----------------------------------------------------------------- Total \865\ \866......................... 3,764 359 4,309 143,333,278

--------------------------------------------------------------------------- ```

[864] Customer Accounts includes both broker-dealer and investment adviser accounts for dually-registered firms.

Lineage: No known changes