SEC Regulation Best Interest: The Broker-Dealer Standard of Conduct

Conformed to Federal Register version
SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
Release No. 34-86031; File No. S7-07-18
RIN 3235-AM35
Regulation Best Interest: The Broker-Dealer Standard of Conduct AGENCY: Securities and Exchange Commission. ACTION: Final rule. SUMMARY: The Securities and Exchange Commission (the “Commission”) is adopting a new rule under the Securities Exchange Act of 1934 (“Exchange Act”), establishing a standard of conduct for broker-dealers and natural persons who are associated persons of a broker-dealer (unless otherwise indicated, together referred to as “broker-dealer”) when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities (“Regulation Best Interest”). Regulation Best Interest enhances the brokerdealer standard of conduct beyond existing suitability obligations, and aligns the standard of conduct with retail customers’ reasonable expectations by requiring broker-dealers, among other things, to: act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker-dealer ahead of the interests of the retail customer; and address conflicts of interest by establishing, maintaining, and enforcing policies and procedures reasonably designed to identify and fully and fairly disclose material facts about conflicts of interest, and in instances where we have determined that disclosure is insufficient to reasonably address the conflict, to mitigate or, in certain instances, eliminate the conflict. The standard of conduct established by Regulation Best Interest cannot be satisfied through disclosure alone. The standard of conduct draws from key principles underlying

fiduciary obligations, including those that apply to investment advisers under the Investment Advisers Act of 1940 (“Advisers Act”). Importantly, regardless of whether a retail investor chooses a broker-dealer or an investment adviser (or both), the retail investor will be entitled to a recommendation (from a broker-dealer) or advice (from an investment adviser) that is in the best interest of the retail investor and that does not place the interests of the firm or the financial professional ahead of the interests of the retail investor. DATES: Effective date: This rule is effective September 10, 2019.. Compliance date: The compliance date is discussed in Section II.E of this final release. FOR FURTHER INFORMATION CONTACT: Lourdes Gonzalez, Assistant Chief Counsel – Office of Sales Practices; Emily Westerberg Russell, Senior Special Counsel; Alicia Goldin, Senior Special Counsel; John J. Fahey, Branch Chief; Daniel Fisher, Branch Chief; Bradford Bartels, Special Counsel; and Geeta Dhingra, Special Counsel, Office of Chief Counsel, Division of Trading and Markets, at (202) 551-5550, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-8549. SUPPLEMENTARY INFORMATION: The Commission is adopting new rule 17 CFR 240.15l-1 under the Exchange Act to establish a standard of conduct for broker-dealers and natural persons who are associated persons of a broker-dealer when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities. The Commission is also adopting amendments to rules 17 CFR 240.17a-3 and 17 CFR 240.17a-4 to establish new record-making and recordkeeping requirements for broker-dealers with respect to certain information collected from or provided to retail customers.

Table of Contents
I. INTRODUCTION
A. Background
B. Overview of Regulation Best Interest
C. Overview of Modifications to the Proposed Rule Text and Guidance Provided
D. Overview of Key Enhancements
II. DISCUSSION OF REGULATION BEST INTEREST
A. General Obligation
1. Commission’s Approach
2. General Obligation to “Act in Best Interest”
B. Key Terms and Scope of Best Interest Obligation
1. Natural Person who is an Associated Person
2. Recommendation of Any Securities Transaction or Investment Strategy
Involving Securities
3. Retail Customer
C. Component Obligations
1. Disclosure Obligation
2. Care Obligation
3. Conflict of Interest Obligation
4. Compliance Obligation
D. Record-Making and Recordkeeping
E. Compliance Date
III. ECONOMIC ANALYSIS
A. Introduction and Primary Goals of the Regulation, Comments on Market Failure and Quantification, and Broad Economic Considerations
1. Introduction and Primary Goals of the Regulation
2. Broad Economic Considerations
3. Comments on Market Failure of the Principal-Agent Relationship and
Quantification; Comments that the Broker-Dealer, Commission-Based Model Should Be Severely Restricted or Eliminated B. Economic Baseline
1. Providers of Financial Services
2. Regulatory Baseline and Current Market Practices
3. Investment Advice and Evidence of Potential Investor Harm
4. Trust, Financial Literacy, and the Effectiveness of Disclosure
C. Benefits and Costs
1. General
2. Disclosure Obligation
3. Care Obligation

4. Conflict of Interest Obligation
5. Compliance Obligation
6. Record-Making and Recordkeeping
7. Approaches to Quantifying the Potential Benefits
D. Efficiency, Competition, and Capital Formation
1. Competition
2. Capital Formation and Efficiency
E. Reasonable Alternatives
1. Fiduciary Standard for Broker-Dealers
2. Prescribed Format for Disclosure
3. Disclosure-Only
IV. PAPERWORK REDUCTION ACT
A. Respondents Subject to Regulation Best Interest and Amendments to Rule 17a3(a)(35) and Rule 17a-4(e)(5)
1. Broker-Dealers
2. Natural Persons Who Are Associated Persons of Broker-Dealers
B. Summary of Collections of Information
1. Disclosure Obligation
2. Care Obligation
3. Conflict of Interest Obligation
4. Compliance Obligation
5. Record-Making and Recordkeeping Obligations
V. FINAL REGULATORY FLEXIBILITY ACT ANALYSIS
A. Need for and Objectives of the Rule
B. Significant Issues Raised by Public Comments
C. Small Entities Subject to the Rule
D. Projected Reporting, Recordkeeping, and Other Compliance Requirements
1. Disclosure Obligation
2. Care Obligation
3. Conflict of Interest Obligation
4. Compliance Obligation
5. Record-Making and Recordkeeping Obligations
E. Agency Action to Minimize Effect on Small Entities
VI. STATUTORY AUTHORITY AND TEXT OF THE RULE
I. INTRODUCTION
We are adopting a new rule 15l-1under the Exchange Act (“Regulation Best Interest”) that will improve investor protection by: (1) enhancing the obligations that apply when a broker-

dealer makes a recommendation to a retail customer and natural persons who are associated persons of a broker-dealer (“associated persons”) (unless otherwise indicated, together referred to as “broker-dealer”) and (2) reducing the potential harm to retail customers from conflicts of interest that may affect the recommendation. Regulation Best Interest enhances the brokerdealer standard of conduct beyond existing suitability obligations, and aligns the standard of conduct with retail customers’ reasonable expectations by requiring broker-dealers, among other things, to: (1) act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker-dealer ahead of the interests of the retail customer; and (2) address conflicts of interest by establishing, maintaining, and enforcing policies and procedures reasonably designed to identify and fully and fairly disclose material facts about conflicts of interest, and in instances where we have determined that disclosure is insufficient to reasonably address the conflict, to mitigate or, in certain instances, eliminate the conflict. Regulation Best Interest establishes a standard of conduct under the Exchange Act that cannot be satisfied through disclosure alone. A. Background Broker-dealers play an important role in helping Americans organize their finances, accumulate and manage retirement savings, and invest toward other important long-term goals, such as buying a house or funding a child’s college education. Broker-dealers offer a wide variety of brokerage (i.e., agency) services and dealer (i.e., principal) services and products to

both retail and institutional customers.
Specifically, the brokerage services provided to retail customers range from execution-only services to providing personalized investment advice in the form of recommendations of securities transactions or investment strategies involving securities to customers.

Investment advisers play a similarly important, though distinct, role. As described in the Fiduciary Interpretation, investment advisers provide a wide range of services to a large variety of clients, from retail clients with limited assets and investment knowledge and experience to institutional clients with very large portfolios and substantial knowledge, experience, and analytical resources.3 As a general matter, broker-dealers and investment advisers have different types of relationships with investors, offer different services, and have different compensation models when providing investment recommendations or investment advisory services to customers. Broker-dealers typically provide transaction-specific recommendations and receive

1 See Regulation Best Interest, Release No. 34-83062 (Apr. 18, 2018) [83 FR 21574] (May 9, 2018) (“Proposing Release”) at 21574-75; see also Staff of the U.S. Securities and Exchange Commission, Study on Investment Advisers and Broker-Dealers As Required by Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Jan.
2011) (“913 Study”) at 8-12, available at
www.sec.gov/news/studies/2011/913studyfinal.pdf (discussing the range of brokerage and dealer services provided by broker-dealers). 2 See Proposing Release at 21574-21575; see also 913 Study. 3 See Commission Interpretation Regarding Standard of Conduct for Investment Advisers, Advisers Act Release No. 5248 (June 5, 2019) (“Fiduciary Interpretation”).

compensation on a transaction-by-transaction basis (such as commissions) (“transaction-based” compensation or model). A broker-dealer’s recommendations may include recommending transactions where the broker-dealer is buying securities from or selling securities to retail customers on a principal basis or recommending proprietary products. Investment advisers, on the other hand, typically provide ongoing, regular advice and services in the context of broad investment portfolio management, and are compensated based on the value of assets under management (“AUM”), a fixed fee or other arrangement (“fee-based” compensation or model).

This variety is important because it presents investors with choices regarding the types of relationships they can have, the services they can receive, and how they can pay for those services. It is also common for a firm to provide both broker-dealer and investment adviser services. Like many principal-agent relationships—including the investment adviser-client relationship—the relationship between a broker-dealer and a customer has inherent conflicts of interest, including those resulting from a transaction-based (e.g., commission) compensation structure and other broker-dealer compensation. 6 These and other conflicts of interest may

4 See Proposing Release at 21574-21575; see also 913 Study.
5 See 913 Study.
6 The investment adviser-client relationship also has inherent conflicts of interest, including those resulting from an asset-based compensation structure that may provide an incentive for an investment adviser to encourage its client to invest more money through an adviser in order increase its AUM at the expense of the client. See Fiduciary

provide an incentive to a broker-dealer to seek to increase its own compensation or other financial interests at the expense of the customer to whom it is making investment recommendations. Notwithstanding these inherent conflicts of interest in the broker-dealer-customer relationship, there is broad acknowledgment of the benefits of, and support for, the continuing existence of the broker-dealer business model, including a commission or other transaction-based compensation structure, as an option for retail customers seeking investment recommendations.7

For example, retail customers that intend to buy and hold a long-term investment may find that paying a one-time commission to a broker-dealer recommending such an investment is more cost effective than paying an ongoing advisory fee to an investment adviser merely to hold the same investment. Retail customers with limited investment assets may benefit from broker-dealer recommendations when they do not qualify for advisory accounts because they do not meet the account minimums often imposed by investment advisers. Other retail customers who hold a variety of investments, or prefer differing levels of services (e.g., both episodic recommendations from a broker-dealer and continuous advisory services including discretionary asset management from an investment adviser), may benefit from having access to both brokerage and advisory accounts. Nevertheless, concerns exist regarding (1) the potential harm to retail customers

Interpretation at footnotes 53-72 and accompanying text for a discussion of how investment advisers satisfy their fiduciary duty when conflicts of interest are present. 7 See Proposing Release at 21579.

resulting from broker-dealer recommendations provided where conflicts of interest exist and (2) the insufficiency of existing broker-dealer regulatory requirements to address these conflicts when broker-dealers make recommendations to retail customers.8 More specifically, there are concerns that existing requirements do not require a broker-dealer’s recommendations to be in the retail customer’s best interest.9 B. Overview of Regulation Best Interest On April 18, 2018, we proposed enhancements to the standard of conduct that applies when broker-dealers make recommendations to retail customers. 10 Specifically, the proposal would have established an express best interest obligation that would require all broker-dealers and associated persons, when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer, to act in the best interest of the retail customer at the time the recommendation is made without placing the financial or other interest of the broker-dealer or associated person making the recommendation ahead of the interest of the retail customer. The Commission received substantial comment on proposed Regulation Best Interest. We received over 6,000 comment letters in connection with the Proposing Release, of which

8 Id. at 21577-21579.
9 Id. See also Section I.C, Overview of Modifications to the Proposed Rule Text and Guidance Provided. 10 Proposing Release at 21575.

approximately 3,000 are unique comment letters, from a variety of commenters including individual investors, consumer advocacy groups, financial services firms (including brokerdealers, investment advisers, and insurance companies), investment professionals, industry and trade associations, state securities regulators, bar associations, and others.11 The Commission also solicited individual investors’ input through a number of forums in addition to the traditional requests for comment in the Proposing Release. Among other things, seven investor roundtables were held in different locations across the country to solicit further comment on the proposed relationship summary,12 and the Commission and its staff received in-

11 Comments received in response to the Proposing Release are available at:
https://www.sec.gov/comments/s7-07-18/s70718.htm.
12 In a separate, concurrent rulemaking, the Commission proposed to, among other things, require broker-dealers and investment advisers to deliver to retail investors a short relationship summary (“Relationship Summary”). See Form CRS Relationship Summary; Amendments to Form ADV; Required Disclosures in Retail Communications and Restrictions on the use of Certain Names or Titles, Release No. 34-83063, IA-4888, File No. S7-08-18 (Apr. 18, 2018), 83 FR 23848 (May 23, 2018) (“Relationship Summary Proposal”). Along with adopting Regulation Best Interest, the Commission is adopting Exchange Act Rule 17a-14 (CFR 240.17a-14) and Form CRS (17 CFR 249.640) under the Exchange Act (“Form CRS”). See Form CRS Relationship Summary; Amendments to Form ADV Exchange Act Release No. 86032, Advisers Act Release No. 5247, File No. S7-08-18 (June 5, 2019) (“Relationship Summary Adopting Release”). The Commission is also providing interpretations: (1) clarifying standards of conduct for investment advisers, and (2) regarding when a broker-dealer’s advisory services are solely incidental to the conduct of the business of a broker or dealer. See Fiduciary Interpretation; 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 Interpretation”).

person feedback from almost 200 attendees in total.13 The Commission also received input and recommendations from a majority of its Investor Advisory Committee (“IAC”) on proposed Regulation Best Interest.14

13 The transcripts from the seven investor roundtables, which took place in Atlanta, Baltimore, Denver, Houston, Miami, Philadelphia, and Washington D.C., are available in the comment file at https://www.sec.gov/comments/s7-08-18/s70818.htm#transcripts. The Commission also 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. The feedback forms are available in the comment file at https://www.sec.gov/comments/s7-08- 18/s70818.htm. Finally, the Commission’s Office of the Investor Advocate engaged the RAND Corporation to conduct investor testing of the proposed relationship summary. 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-formcrs-relationship-summary.pdf (“RAND 2018”). See also Investor Testing of the Proposed Relationship Summary for Investment Advisers and Broker-Dealers, Commission Press Release 2018-257 (Nov. 7, 2018), available at https://www.sec.gov/news/press-release/2018-257. As noted in the Relationship Summary Adopting Release, the amount of information available from the various investor surveys and investor testing described in this release is extensive. We considered all of this information thoroughly, using our decades of experience with investor disclosures, when evaluating changes to the disclosure required by Regulation Best Interest, as well as to the Relationship Summary. See Relationship Summary Adopting Release. 14 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-committee2012/iac110718-investor-as-purchaser-subcommittee-recommendation.pdf (“IAC 2018 Recommendation”). Generally, a majority of the IAC made the following

After careful review and consideration of comments received and upon further consideration, the Commission is adopting Regulation Best Interest, with certain modifications as compared to the Proposing Release. As discussed below, while the Commission is generally retaining the overall structure and scope set forth in the Proposing Release, we are making modifications to the text of the rule and also providing interpretations and guidance to address points raised during the comment process. The Commission has crafted Regulation Best Interest to draw on key principles underlying fiduciary obligations, including those that apply to investment advisers under the Advisers Act, while providing specific requirements to address certain aspects of the relationships between broker-dealers and their retail customers. Regulation Best Interest

recommendations related to Regulation Best Interest: (1) that the meaning of the best interest obligation should be clarified to require both broker-dealers, investment advisers, and their associated persons to recommend the investments, investment strategies, accounts, or services, from among those they have reasonably available to recommend, that they reasonably believe represent the best available options for the investor; (2) that the best interest obligation be expanded to apply to the implicit “no recommendation” recommendation that a broker makes when reviewing an account and recommending no change, to rollover recommendations and recommendations by dual registrant firms regarding account types; and (3) that the best interest obligation should be explicitly characterized as the fiduciary duty that it is, while making clear that the specific obligations that flow from that duty will vary based on differences in business models. The Commission is statutorily obligated to respond to the recommendations of the IAC, which we are doing in this section and throughout the adopting release in the relevant sections, for example, in the discussion of the General Obligation in Section II.A.1, the discussion of recommendations in Section II.B.1, Recommendation of Any Securities Transaction or Investment Strategy Involving Securities, and the Care Obligation in
Section II.C.2.

enhances the existing standard of conduct applicable to broker-dealers and their associated persons at the time they recommend to a retail customer a securities transaction or investment strategy involving securities. This includes recommendations of account types and rollovers or transfers of assets and also covers implicit hold recommendations resulting from agreed-upon account monitoring. When making a recommendation, a broker-dealer must act in the retail customer’s best interest and cannot place its own interests ahead of the customer’s interests (hereinafter, “General Obligation”).15 The General Obligation is satisfied only if the brokerdealer complies with four specified component obligations. The obligations are: (1) providing certain prescribed disclosure before or at the time of the recommendation, about the recommendation and the relationship between the retail customer and the broker-dealer (“Disclosure Obligation”); (2) exercising reasonable diligence, care, and skill in making the recommendation (“Care Obligation”); (3) establishing, maintaining, and enforcing policies and procedures reasonably designed to address conflicts of interest (“Conflict of Interest Obligation”), and (4) establishing, maintaining, and enforcing policies and procedures reasonably designed to achieve compliance with Regulation Best Interest (“Compliance Obligation”).

15 See generally Section II.A, General Obligation.
16 As discussed in further detail below, although Regulation Best Interest identifies specified obligations with which a broker-dealer must comply in order to meet its General Obligation, compliance with each of the component obligations of Regulation Best Interest will be principles-based. In other words, whether a broker-dealer has acted in the retail customer’s best interest will turn on an objective assessment of the facts and

First, under the Disclosure Obligation,
17 before or at the time of the recommendation, a broker-dealer must disclose, in writing, all material facts about the scope and terms of its relationship with the customer. This includes a disclosure that the firm or representative is acting in a broker-dealer capacity; the material fees and costs the customer will incur; and the type and scope of the services to be provided, including any material limitations on the recommendations that could be made to the retail customer. Moreover, the broker-dealer must disclose all material facts relating to conflicts of interest associated with the recommendation that might incline a broker-dealer to make a recommendation that is not disinterested, including, for example, conflicts associated with proprietary products, payments from third parties, and compensation arrangements. Second, under the Care Obligation, 18 a broker-dealer must exercise reasonable diligence, care, and skill when making a recommendation to a retail customer. The broker-dealer must understand potential risks, rewards, and costs associated with the recommendation. The brokerdealer must then consider those risks, rewards, and costs in light of the customer’s investment profile and have a reasonable basis to believe that the recommendation is in the customer’s best interest and does not place the broker-dealer’s interest ahead of the retail customer’s interest. A

circumstances of whether the specific components of Regulation Best Interest are satisfied at the time that the recommendation is made. 17 See generally Section II.C.1, Disclosure Obligation. 18 See generally Section II.C.2, Care Obligation.

broker-dealer should consider reasonable alternatives, if any, offered by the broker-dealer in determining whether it has a reasonable basis for making the recommendation. Whether a broker-dealer has complied with the Care Obligation will be evaluated as of the time of the recommendation (and not in hindsight). When recommending a series of transactions, the broker-dealer must have a reasonable basis to believe that the transactions taken together are not excessive, even if each is in the customer’s best interest when viewed in isolation. Third, under the Conflict of Interest Obligation, 19 a broker-dealer must establish, maintain, and enforce reasonably designed written policies and procedures addressing conflicts of interest associated with its recommendations to retail customers. These policies and procedures must be reasonably designed to identify all such conflicts and at a minimum disclose or eliminate them. Importantly, the policies and procedures must be reasonably designed to mitigate conflicts of interests that create an incentive for an associated person of the brokerdealer to place its interests or the interest of the firm ahead of the retail customer’s interest. Moreover, when a broker-dealer places material limitations on recommendations that may be made to a retail customer (e.g., offering only proprietary or other limited range of products), the policies and procedures must be reasonably designed to disclose the limitations and associated conflicts and to prevent the limitations from causing the associated person or broker-dealer from placing the associated person’s or broker-dealer’s interests ahead of the customer’s interest.

19 See generally Section II.C.3, Conflict of Interest Obligation.

Finally, the policies and procedures must be reasonably designed to identify and eliminate sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sale of specific securities or specific types of securities within a limited period of time. Fourth, under the Compliance Obligation, 20 a broker-dealer must also establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Regulation Best Interest as a whole. Thus, a broker-dealer’s policies and procedures must address not only conflicts of interest but also compliance with its Disclosure and Care Obligations under Regulation Best Interest. The enhancements contained in Regulation Best Interest are designed to improve investor protection by enhancing the quality of broker-dealer recommendations to retail customers and reducing the potential harm to retail customers that may be caused by conflicts of interest. Regulation Best Interest will complement the related rules, interpretations, and guidance that the Commission is concurrently issuing.21 Individually and collectively, these actions are designed to help retail customers better understand and compare the services offered by broker-dealers and investment advisers and make an informed choice of the relationship best suited to their needs and circumstances, provide clarity with respect to the standards of conduct applicable to

20 See generally Section II.C.4, Compliance Obligation.
21 See Relationship Summary Adopting Release; Fiduciary Interpretation; Solely Incidental Interpretation.

investment advisers and broker-dealers, and foster greater consistency in the level of protections provided by each regime, particularly at the point in time that a recommendation is made.22 At the time a recommendation is made, key elements of the Regulation Best Interest standard of conduct that applies to broker-dealers will be similar to key elements of the fiduciary standard for investment advisers. 23 Importantly, regardless of whether a retail investor chooses a broker-dealer or an investment adviser (or both), the retail investor will be entitled to a recommendation (from a broker-dealer) or advice (from an investment adviser) that is in the best interest of the retail investor and that does not place the interests of the firm or the financial professional ahead of the interests of the retail investor. There are also key differences between Regulation Best Interest and the Advisers Act fiduciary standard that reflect the distinction between the services and relationships typically offered under the two business models. For example, an investment adviser’s fiduciary duty generally includes a duty to provide ongoing advice and monitoring,24 while Regulation Best Interest imposes no such duty and instead requires that a broker-dealer act in the retail

22 We believe each rule and interpretation stands on its own and enhances the effectiveness of existing rules, and is reinforced by the other rules and interpretations being adopted contemporaneously. 23 Specifically, an investment adviser’s fiduciary duty under the Advisers Act comprises a duty of care and a duty of loyalty. This combination of care and loyalty obligations has been characterized as requiring the investment adviser to act in the “best interest” of its client at all times. See Fiduciary Interpretation. 24 See Fiduciary Interpretation, Section II.B.3 (Duty to Provide Advice and Monitoring over the Course of the Relationship).

customer’s best interest at the time a recommendation is made. In addition, the new obligations applicable to broker-dealers under Regulation Best Interest are more prescriptive than the obligations applicable to investment advisers under the Advisers Act fiduciary duty and reflect the characteristics of the generally applicable broker-dealer business model.25 The Commission has been studying and carefully considering the issues related to the standard of conduct for broker-dealers for many years, which led to the development of Regulation Best Interest.26 In designing Regulation Best Interest, we considered a number of options to enhance investor protection, while preserving, to the extent possible, retail investor access (in terms of choice and cost) to differing types of investment services and products. There were several options, including, among others: (1) applying the fiduciary standard under the Advisers Act to broker-dealers; (2) adopting a “new” uniform fiduciary standard of conduct that would apply equally to both broker-dealers and investment advisers, such as that recommended by the staff in the 913 Study; 27 and (3) the path we ultimately chose, adopting a

25 See, e.g., Sections II.A and III.E.
26 Proposing Release at 21579-21583.
27 One of the staff’s primary recommendations was that the Commission engage in rulemaking to adopt and implement a uniform fiduciary standard of conduct for brokerdealers and investment advisers when providing personalized investment advice about securities to retail customers. The staff’s recommended standard would require firms “to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer or investment adviser providing the advice.” The staff made a number of specific recommendations for implementing the uniform fiduciary standard of conduct, including that the Commission should: (1) require firms to eliminate or disclose conflicts

new standard of conduct specifically for broker-dealers, which draws from key principles underlying fiduciary obligations, including those that apply to investment advisers under the Advisers Act. 28 The standard also provides specific requirements to address certain aspects of the relationships between broker-dealers and their retail customers, including certain conflicts related to compensation of associated persons.29 We have declined to subject broker-dealers to a wholesale and complete application of the existing fiduciary standard under the Advisers Act because it is not appropriately tailored to the structure and characteristics of the broker-dealer business model (i.e., transaction-specific recommendations and compensation), and would not properly take into account, and build upon, existing obligations that apply to broker-dealers, including under FINRA rules. 30 Moreover, we believe (and our experience indicates), that this approach would significantly reduce retail investor access to differing types of investment services and products, reduce retail investor

of interest; (2) consider whether rulemaking would be appropriate to prohibit certain conflicts, to require firms to mitigate conflicts through specific action, or to impose specific disclosure and consent requirements; and (3) consider specifying uniform standards for the duty of care owed to retail customers, such as specifying what basis a broker-dealer or investment adviser should have in making a recommendation to a retail customer by referring to and expanding upon broker-dealers’ existing suitability requirements. See generally 913 Study. 28 See supra footnote 23. 29 In addition to these alternatives, we also considered several other reasonable alternatives. See Section III.E. 30 See also 913 Study at 139-143.

choice in how to pay for those products and services, and increase costs for retail investors of obtaining investment recommendations.31 We have also declined to craft a new uniform standard that would apply equally and without differentiation to both broker-dealers and investment advisers. Adopting a “one size fits all” approach would risk reducing investor choice and access to existing products, services, service providers, and payment options, and would increase costs for firms and for retail investors in both broker-dealer and investment adviser relationships. Moreover, applying a new uniform standard to advisers would mean jettisoning to some extent the fiduciary standard under the Advisers Act that has worked well for retail clients and our markets and is backed by decades of regulatory and judicial precedent. Our concerns about the ramifications for investor access, choice, and cost from adopting either of these approaches are not theoretical. With the adoption of the now vacated Department of Labor (“DOL”) Fiduciary Rule,32 there was a significant reduction in retail investor access to

31 See, e.g., Section 913 Study. at 143-159 for the study’s consideration of the potential costs, expenses, and impacts of various regulatory changes related to the provision of personalized investment advice to retail investors. See also Section II.A.1, Commission’s Approach. 32 As discussed in more detail in the Proposing Release, on April 8, 2016, the DOL adopted a new, expanded definition of “fiduciary” that treats persons who provide investment advice or recommendations for a fee or other compensation with respect to assets of a plan subject to the Employee Retirement Income Security Act of 1974 (“ERISA”) (an “ERISA plan”) or individual retirement account (“IRA”) as fiduciaries in a wider array of advice relationships than under the previous regulation and issued certain related prohibited transaction exemptions (“PTEs”) ( together, the “DOL Fiduciary Rule”). The

brokerage services,
33 and we believe that the available alternative services were higher priced in many circumstances.34 Moreover, because key elements of the standard of conduct that

rule was subsequently vacated in toto by the United States Court of Appeals for the Fifth Circuit. See Chamber of Commerce v. U.S. Dep’t of Labor, 885 F.3d 360 (5th Cir. 2018). We understand that in the absence of a PTE, broker-dealers that would be considered to be a “fiduciary” for purposes of ERISA and the Internal Revenue Code (the “Code”) would be prohibited from engaging in purchases and sales of certain investments for their own account (i.e., engaging in principal transactions) and would be prohibited from receiving common forms of broker-dealer compensation (notably, transaction-based compensation). See DOL, Best Interest Contract Exemption, 81 FR 21002 (Apr. 8, 2016) (“BIC Exemption Release”). To avoid this result, the DOL published, among other PTEs, the Best Interest Contract Exemption (“BIC Exemption”), which would have provided conditional relief for an “adviser,” as that term is used in the context of the BIC Exemption, and the adviser’s firm, to receive common forms of “conflicted” compensation, such as commissions and third-party payments (such as revenue sharing), provided that the adviser’s firm met certain conditions. See id. Generally, the BIC Exemption and other PTEs required that, among other things, the advice be provided pursuant to a written contract that commits the firm and the adviser to adhere to standards of impartial conduct, including providing advice in the investor’s best interest; charging only reasonable compensation; and avoiding misleading statements about fees and conflicts of interest) (“Impartial Conduct Standards”). See generally id. See also Proposing Release at 21580-21582. 33 While the full effects of the DOL Fiduciary Rule were not realized as it was vacated during the transition period, a number of industry studies indicated that, as a result of the DOL Fiduciary Rule, industry participants had already or were planning to alter services and products available to retail customers. For example, of the 21 members of the Securities Industry and Financial Markets Association (“SIFMA”) that participated in the SIFMA Study, 53% eliminated or reduced access to brokerage advice services and 67% migrated away from open choice to fee-based or limited brokerage services. See SIFMA & Deloitte, The DOL Fiduciary Rule: A Study on How Financial Institutions Have Responded and the Resulting Impacts on Retirement Investors (Aug. 9, 2017), available at https://www.sifma.org/wp-content/uploads/2017/08/Deloitte-White-Paper-on-theDOL-Fiduciary-Rule-August-2017.pdf (“SIFMA Study”). Other studies also saw shifts from commission-based accounts to fee-based accounts. See infra footnote 1009. In

Regulation Best Interest applies to broker-dealers at the time that a recommendation is made to a retail customer will be substantially similar to key elements of the standard of conduct that applies to investment advisers pursuant to their fiduciary duty under the Advisers Act, we do not believe that applying the existing fiduciary standard under the Advisers Act to broker-dealers or adopting a new uniform fiduciary standard of conduct applicable to both broker-dealers and investment advisers would provide any greater investor protection (or, in any case, that any benefits would justify the costs imposed on retail investors in terms of reduced access to services, products, and payment options, and increased costs for such services and products). We acknowledge certain commenters urged the Commission to take additional or different regulatory actions than the approach we have adopted, including the alternatives discussed above. We do not believe that any rulemaking governing retail investor-advice

addition, an industry study found that some customers were shifted from commissionbased brokerage accounts to self-directed accounts, while the same study observed that 29% of their survey participants expected to move clients, particularly those with low account balances, to robo-advisors. See infra footnote 1010. 34 It was widely reported that a number of firms responded to the DOL Fiduciary Rule by either requiring customers to enter into more expensive advice relationships or by passing through higher compliance costs to customers, which altered many retail customer relationships with their financial professionals. See infra footnote 1007. From the SIFMA Study, for those firms whose retail customers faced eliminated or reduced brokerage advice services, 63% of firms had customers that chose to move to selfdirected accounts rather than fee-based accounts and cited the customers’ reasons as “not wanting to move to a fee-based model, not in the best interest to move to a fee-based model, did not meet account minimums, or wanted to maintain positions in certain asset classes prohibited by the fee-based models.”

relationships can solve for every issue presented. After careful consideration of the comments and additional information we have received,35 we believe that Regulation Best Interest, as modified, appropriately balances the concerns of the various commenters in a way that will best achieve the Commission’s important goals of enhancing retail investor protection and decision making, while preserving, to the extent possible, retail investor access (in terms of choice and cost) to differing types of investment services and products.36 The Commission’s staff will offer firms significant assistance and support during the transition period and thereafter with the aim of helping to ensure that the investor protections and other benefits of the final rule are implemented in an efficient and effective manner. Further, we will continue to monitor the effectiveness of Regulation Best Interest in achieving the Commission’s goals.
C. Overview of Modifications to the Proposed Rule Text and Guidance
Provided
The vast majority of commenters supported the Commission’s rulemaking efforts to address the standards of conduct that apply to broker-dealers when making recommendations,

35 See supra footnotes 11-13 and accompanying text.
36 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.

but nearly all commenters suggested modifications to proposed Regulation Best Interest. These suggestions touch on almost every aspect of the proposal, as discussed in more detail below. A variety of commenters offered suggestions on the overall structure and scope of the proposed rule, including: whether the standard should be a fiduciary standard; 38 whether the standard should apply to both investment advisers and broker-dealers; 39 whether the standard

37 See, e.g., Letter from David Certner, Legislative Counsel and Legislative Policy Director, AARP (Aug. 7, 2018) (“AARP August 2018 Letter”); Letter from Christopher Gilkerson, Senior Vice President and General Counsel, and Tara Tune, Director and Corporate Counsel, Charles Schwab & Co., Inc. (Aug. 6, 2018) (“Schwab Letter”); Letter from Barbara Roper, Director of Investor Protection, and Micah Hauptman, Financial Services Counsel, Consumer Federation of America (“CFA”) (Aug. 7, 2018) (“CFA August 2018 Letter”); Letter from Joseph Borg, President, North American Securities Administrators Association, Inc. (“NASAA”) (Aug. 23, 2018) (“NASAA August 2018 Letter”); Letter from Kenneth E. Bentsen, Jr., President and Chief Executive Officer, SIFMA (Aug. 7,
2018) (“SIFMA August 2018 Letter”).
38 See, e.g., Letter from Jon Stein, Founder and CEO, Benjamin T. Alden, General Counsel, and Seth Rosenbloom, Associate General Counsel, Betterment (Aug. 7, 2018) (“Betterment Letter”); Letter from Kurt N. Schacht, Managing Director, James Allen, Head, Capital Markets Policy, and Linda L. Rittenhouse, Director, Capital Markets, CFA Institute (Aug. 7, 2018) (“CFA Institute Letter”); Letter from Jill I. Gross, Associate Dean for Academic Affairs, Professor of Law, Elisabeth Haub School of Law, Pace University (Mar. 11, 2019) (“Pace March 2019 Letter”); Letter from Sharon Cheever, Senior Vice President and General Counsel, Pacific Life Insurance Company (Aug. 3,
2018) (“Pacific Life August 2018 Letter”); Letter from Melanie Fein, Fein Law Offices
(Jun. 6, 2018) (“Fein Letter”); Letter from Elizabeth Warren, U.S. Senator (Aug. 3, 2018) (“Warren Letter”); Letter from Dean P. McDermott, McDermott Investment Advisors (Jul. 7, 2018) (“McDermott Letter”); Letter from Brian Hamburger, President and CEO, MarketCounsel (Aug. 7, 2018) (“MarketCounsel Letter”). 39 See, e.g., AARP August 2018 Letter; Letter from Americans for Financial Reform et al. (Aug. 7, 2018) (“Americans for Financial Reform Letter”); Letter from Robert J. Moore, Chief Executive Officer, Cetera Financial Group (“Cetera”) (Aug. 7, 2018) (“Cetera

should be principles-based or more prescriptive; 40 whether the standard should define “best interest;”41 whether the standard is or should be a safe harbor; 42 what should be considered a

August 2018 Letter”); Letter from L.A. Schnase, Individual Investor and Attorney at Law (Jul. 30, 2018) (“Schnase Letter”); Pacific Life August 2018 Letter; Pace March 2019 Letter; MarketCounsel Letter; Letter from Dennis M. Kelleher, President and CEO, Stephen Hall, Legal Director and Securities Specialist, Lev Bagramian, Senior Securities Policy Advisor, Better Markets (Aug. 7, 2018) (“Better Markets August 2018 Letter”); Letter from Attorneys General of New York, California, Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Mexico, Oregon, Pennsylvania, Rhode Island, Vermont, Washington, and the District of Columbia (Aug. 7, 2018) (“State Attorneys General Letter”). 40 See, e.g., SIFMA August 2018 Letter; Letter from Mortimer J. Buckley, President and Chief Executive Officer, Vanguard (Aug. 7, 2018) (“Vanguard Letter”); Letter from Chris Lewis, General Counsel, Edward Jones (Aug. 7, 2018) (“Edward Jones Letter”); Letter from Joseph E. Sweeney, President, Advice & Wealth Management Products and Service Delivery, Ameriprise Financial (Aug. 6, 2018) (“Ameriprise Letter”); Letter from Sheila Kearney Davidson, Executive Vice President, Chief Legal Officer & General Counsel, New York Life Insurance Company (“NY Life”) (Aug. 7, 2018) (“NY Life Letter”); Letter from Keith Gillies, NAIFA President, National Association of Insurance and Financial Advisors (“NAIFA”) (Aug. 2, 2018) (“NAIFA Letter”); Letters from Tom Quaadman, Executive Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce (“CCMC”) (Aug. 7, 2018) (supplemented by letter dated Sep. 5,
2018) (“CCMC Letters”); Letter from Dave Paulsen, Executive Vice President, Chief
Distribution Officer, Transamerica (Aug. 7, 2018) (“Transamerica August 2018 Letter”). 41 See, e.g., Letter from Seth A. Miller, General Counsel, Senior Vice President, Chief Risk Officer, Cambridge (Aug. 7, 2018) (“Cambridge Letter”); SIFMA August 2018 Letter; Vanguard Letter; Edward Jones Letter; Ameriprise Letter; NY Life Letter; NAIFA Letter; CCMC Letters; Letter from Aron Szapiro, Director of Policy Research, Morningstar (Aug. 7, 2018) (“Morningstar Letter”); Letter from David Kowach, Head of Wells Fargo Advisors, Wells Fargo (Aug. 7, 2018) (“Wells Fargo Letter”). 42 See, e.g., CFA August 2018 Letter; Letter from Anthony Chereso, President & CEO, Institute for Portfolio Alternatives (“IPA”) (Aug. 7, 2018) (“IPA Letter”); Letter from Heather Slavkin Corzo, AFL-CIO et al. (Apr. 26, 2019) (“AFL-CIO April 2019 Letter”).

recommendation, including whether Regulation Best Interest should apply to recommendations to roll over or transfer assets or take plan distributions, and to recommendations of particular account types (i.e., brokerage or advisory); 43 whether Regulation Best Interest should apply to account monitoring services provided by a broker-dealer, or impose a continuing duty; 44 and

43 See, e.g., Letter from Jason Bortz, Senior Counsel, Capital Research and Management Company (Aug. 7, 2018) (“Capital Group Letter”); Letter from Andrew Stoltmann, President, Public Investors Arbitration Bar Association (“PIABA”) (Aug. 7, 2018) (“PIABA Letter”); SIFMA August 2018 Letter; NASAA Letter; Letter from Robert K. Shaw, President, Individual Markets, Great-West Financial (Aug. 7, 2018) (“Great-West Letter”); NAIFA Letter; Transamerica August 2018 Letter; Letter from Tim Rouse, Executive Director, The SPARK Institute (Aug. 7, 2018) (“SPARK Letter”); Letter from Robin C. Swope, Director, Global Product Governance & Support, Invesco (Aug. 7,
2018) (“Invesco Letter”); Letter from R. Keith Overly, President, National Association of
Government Defined Contribution Administrators (“NAGDCA”) (Aug. 7, 2018) (“NAGDCA Letter”); Letter from Kevin R. Keller, Chief Executive Officer, CFP Board, et al., Financial Planning Coalition (“FPC”) (Aug. 7, 2018) (“FPC Letter”); Letter from Dennis Simmons, Executive Director, Committee on Investment of Employee Benefit Assets, Committee on Investment of Employee Benefit Assets (“CIEBA”) (Aug. 6, 2018) (“CIEBA Letter”). 44 See, e.g., SIFMA August 2018 Letter; Letter from Lisa D. Crossley, Executive Director, National Society of Compliance Professionals (“NSCP”) (Aug. 7, 2018) (“NSCP Letter”); PIABA Letter; FPC Letter; Better Markets August 2018 Letter; Letter from Karen L. Barr, President and CEO, Investment Adviser Association (“IAA”) (Aug. 6,
2018) (“IAA August 2018 Letter”).
We also received comments addressing when a broker-dealer’s advisory services are “solely incidental to the conduct of his business as a broker or dealer” under the “brokerdealer exclusion” from the definition of investment adviser—and thus from the application of the Advisers Act—provided in Section 202(a)(11)(C) of the Advisers Act. We have addressed these comments in the context of the Solely Incidental Interpretation.

whether Regulation Best Interest’s protections should apply to a broader or narrower set of “retail customers.”45 In addition, most commenters from both industry and consumer advocate groups requested modifications to each of the Disclosure, Care, and Conflict of Interest Obligations, and also called for more specific examples of conduct that would—or would not—satisfy these obligations. With respect to the Disclosure Obligation, most commenters generally sought greater clarity or made suggestions regarding what material facts and material conflicts would need to be disclosed, the form and manner (e.g., written versus oral, individualized versus standardized, and the use of electronic and/or layered) and the timing and frequency of the disclosure (e.g., whether the disclosure should be prior to, at the time of, or could be after a recommendation), as well as whether the Disclosure Obligation could be satisfied by complying

45 See, e.g., Letter from Carl B. Wilkerson, Vice President and Chief Counsel, American Council of Life Insurers (“ACLI”) (Aug. 3, 2018) (“ACLI Letter”); Letter from Brian H. Graff, Executive Director and CEO, Craig P. Hoffman, General Counsel, Dough Fisher, Director of Retirement Policy, and Joseph A. Caruso, Government Affairs Counsel, American Retirement Association (“ARA”) (Aug. 3, 2018) (“ARA August 2018 Letter”); Letter from Anne Tennant, Managing Director and General Counsel, Morgan Stanley (Aug. 7, 2018) (“Morgan Stanley Letter”); CCMC Letters; Letter from Thomas Roberts, Groom Law Group (Aug. 7, 2018) (“Groom Letter”); Letter from Catherine J. Weatherford, President and CEO, Insured Retirement Institute (“IRI”) (Aug. 7, 2018) (“IRI Letter”); NSCP Letter; Letter from Raymond J. Manista, Executive Vice President, Chief Legal Officer and Secretary, Northwestern Mutual (Aug. 7, 2018) (“Northwestern Mutual Letter”); State Attorneys General Letter; Letter from Mari-Anne Pisarri, Pickard Djinis and Pisarri LLP (Aug. 14, 2018) (“Pickard Letter”); SIFMA August 2018 Letter; Invesco Letter; Letter from Tom Clark, Managing Director, Sean Murphy, Vice President, Blackrock (Aug. 7, 2018) (“Blackrock Letter”).

with other existing disclosure requirements.
46 In particular, several commenters recommended that the Commission require broker-dealers provide “full and fair” disclosure. Regarding the Care Obligation, commenters from certain investor groups supported incorporating a “prudence” standard, 48 while a number of industry commenters expressed

46 See, e.g., Ameriprise Letter; Great-West Letter; Letter from Ram Subramaniam, Head of Brokerage and Investment Solutions, David Forman, Chief Legal Officer, Fidelity Investments (Aug. 7, 2018) (“Fidelity Letter”); Morgan Stanley Letter; CCMC Letters; Letter from Bret C. Hester, Senior Managing Director, Head of Regulatory Affairs, Teachers Insurance and Annuity Association of America (“TIAA”) (Aug. 7, 2018) (“TIAA Letter”); Letter from James Sonne, Assistant Vice President, Federal Government Relations, Mass Mutual (Feb. 19, 2019) (“Mass Mutual Letter”); Letter from Edmund F. Murphy III, President, Empower Retirement (Aug. 2, 2018) (“Empower Retirement Letter”); IRI Letter; Letter from Paul Schott Stevens, President and CEO, Investment Company Institute (“ICI”) (Aug. 7, 2018) (“ICI Letter”); SIFMA August 2018 Letter; Edward Jones Letter; Letter from Michelle Bryan Oroschakoff, Chief Legal Officer, LPL Financial (Aug. 7, 2018) (“LPL August 2018 Letter”); NASAA August 2018 Letter; AARP August 2018 Letter; PIABA Letter; Letter from Ann M. Kappler, Senior Vice President, Deputy General Counsel, Prudential Financial (Aug. 7, 2018) (“Prudential Letter”), CFA Institute Letter; State Attorneys General Letter; CFA August 2018 Letter; Letter from Jason Chandler, Group Managing Director, Co-Head Investment Platforms and Solutions, and Michael Crowl, Group Managing Director, General Counsel, UBS (Aug. 7, 2018) (“UBS Letter”), Letter from William F. Galvin, Secretary of the Commonwealth of Massachusetts (Aug. 7, 2018) (“Galvin Letter”); Letter from David T. Bellaire, Executive Vice President & General Counsel, Financial Services Institute (“FSI”) (Aug. 7, 2018) (“FSI August 2018 Letter”); Mass Mutual Letter; Schwab Letter; Letter from Michael F. Anderson, Senior Vice President and Chief Legal Officer, CUNA Mutual (Aug. 7, 2018) (“CUNA Letter”); Transamerica August 2018 Letter. 47 See, e.g., CFA August 2018 Letter; Better Markets August 2018 Letter; Pace Letter. 48 See, e.g., AARP August 2018 Letter; CFA August 2018 Letter; FPC Letter.

concern about including this standard.
49 Numerous commenters requested further clarity on what would be required to meet the Care Obligation, including what factors a broker-dealer should consider in developing a retail customer’s investment profile and when making a recommendation, and in particular the role of cost and other relevant factors when making a recommendation, and also asked for more specific examples of how to weigh costs against other factors when making a recommendation.50 A majority of the IAC and other commenters requested clarification on how to consider “reasonably available alternatives” when making a recommendation and suggested clarifying the scope of the inquiry into potential reasonably available alternatives when a broker-dealer offers a limited product menu versus when the broker-dealer has an “open architecture” model.51 Several industry commenters made recommendations regarding the application of proposed Regulation Best Interest to

49 See, e.g., Letter from Karen L. Sukin, Executive Vice President, Deputy General Counsel, Primerica (Aug. 7, 2018) (“Primerica Letter”); Transamerica August 2018 Letter; IPA Letter; Cetera August 2018 Letter. 50 See, e.g., Letter from Felice R. Foundos, Partner, Chapman and Cutler (Aug. 6, 2018) (“Chapman Letter”); Vanguard Letter; ICI Letter; Morgan Stanley Letter; Wells Fargo Letter; Primerica Letter; Great-West Letter; NASAA August 2018 Letter; Cambridge Letter; Blackrock Letter. 51 See, e.g., IAC 2018 Recommendation; Fidelity Letter; ICI Letter; SIFMA August 2018 Letter; Prudential Letter; LPL August 2018 Letter; Morningstar Letter. See also AFLCIO April 2019 Letter (stating that the rule “must make clear that brokers are required to recommend the investments they reasonably believe are the best match for the investor from among the reasonably available investment options”).

recommendations of specific categories of securities, such as variable annuities or leveraged exchange-traded products. With respect to the Conflict of Interest Obligation, many commenters questioned the distinction between financial incentives that would have to be mitigated and other conflicts that would only need to be disclosed, and recommended generally that the distinction be eliminated. 53 In addition, some commenters suggested that the obligation to establish policies and procedures to mitigate conflicts should apply to material conflicts at the level of the natural person who is an associated person (as opposed to the firm). 54 Commenters also asked for more clarity and examples of what conflicts must be mitigated versus eliminated and more guidance

52 See, e.g., Letter from Brian Winikoff, Senior Executive Director and Head of U.S. Life, Retirement and Wealth Management, AXA (Aug. 7, 2018) (“AXA Letter”); Letter from Clifford Kirsch, Susan Krawczyk, Eversheds Sutherland, Committee of Annuity Insurers (Aug. 7, 2018) (“Committee of Annuity Insurers Letter”); Pacific Life August 2018 Letter; Letter from Angela Brickl, General Counsel, Rafferty Asset Management (“Direxion”) (Aug. 7, 2018) (“Direxion Letter”); Letter from Mark F. Halloran, VP Managing Director, Business Development, Transamerica (Nov. 9, 2018) (“Transamerica November 2018 Letter”). 53 See, e.g., CFA August 2018 Letter; SIFMA August 2018 Letter; Primerica Letter; Letter from Jeff Hartney, Executive Director, Bank Insurance and Securities Association (“BISA”) (Aug. 7, 2018) (“BISA Letter”); Committee of Annuity Insurers Letter; IPA Letter; CFA Institute Letter; Morgan Stanley Letter; CCMC Letters. 54 See, e.g., Primerica Letter; TIAA Letter; ICI Letter; Letter from Craig D. Pfeiffer, President and CEO, Money Management Institute (Aug. 7, 2018) (“Money Management Institute Letter”).

on appropriate mitigation methods.
55 Some commenters also expressed the view that by requiring mitigation of financial incentives, proposed Regulation Best Interest would require more of broker-dealers than what is required of investment advisers under their fiduciary duty, which could create a competitive disadvantage for broker-dealers that could further encourage migration from the broker-dealer to investment adviser business model and result in a loss of retail investor access (in terms of choice and cost) to differing types of investment services and products. In addition, a number of commenters agreed with the Commission’s statement that it was not intended to create a private right of action, but many requested that the Commission explicitly state in the final rule that Regulation Best Interest does not confer a private right of action.57 One commenter requested that the Commission elaborate and make clear the remedies

55 See, e.g., AALU Letter; CFA August 2018 Letter; Letter from Quinn Curtis, Professor of Law, University of Virginia School of Law (“UVA”), (Aug. 3, 2018) (“UVA Letter”); Primerica Letter; Committee of Annuity Insurers Letter; Cetera August 2018 Letter; Wells Fargo Letter; NASAA August 2018 Letter; Morningstar Letter. 56 See, e.g., Letter from Craig S. Tyle, Executive Vice President and General Counsel, Franklin Templeton Investments, (Aug. 6, 2018) (“Franklin Templeton Letter”); Primerica Letter; LPL August 2018 Letter; CCMC Letters; UBS Letter; ICI Letter; Letter from Christopher A. Iacovella, Chief Executive Officer, American Securities Association (“ASA”) (Aug. 7, 2018) (“ASA Letter”); Schwab Letter. 57 See, e.g., Letter from Paul C. Reilly, Chairman and CEO, Raymond James Financial (Aug. 7, 2018) (“Raymond James Letter”); NAIFA Letter; ASA Letter; CCMC Letters; UBS Letter; LPL August 2018 Letter; Cambridge Letter. Contra Letter from Elise Sanguinetti, President, American Association for Justice (Aug. 6, 2018) (“American Association for Justice Letter”).

available to investors when broker-dealers violate Regulation Best Interest and emphasize that scienter is not required to establish a violation of Regulation Best Interest. Finally, numerous commenters urged the Commission to coordinate with other regulators, in particular the DOL59 and state securities and insurance regulators, 60 and several commenters opined that the Commission should preempt (or avoid preempting) state law.

58 NASAA August 2018 Letter.
59 See, e.g., ICI Letter; Franklin Templeton Letter; Morningstar Letter; Wells Fargo Letter; Edward Jones Letter; IRI Letter; Letter from Cynthia Lo Bessette, Executive Vice President and General Counsel, Letter from Oppenheimer Funds (Aug. 7, 2018) (“Oppenheimer Letter”); Vanguard Letter. 60 See, e.g., CCMC Letters; Letter from Robert Reynolds, President and CEO, Putnam Investments (Aug. 7, 2018) (“Putnam Letter”); Letter from Will H. Fuller, Executive Vice President, President, Annuity Solutions, Lincoln Financial Group (Nov. 13, 2018) (“Lincoln Financial Letter”); Cetera August 2018 Letter; Great-West Letter; Letter from Marc Cadin, Chief Operating Officer, Association of Advanced Life Underwriting (“AALU”) (Aug. 7, 2018) (“AALU Letter”); IRI Letter; Pacific Life August 2018 Letter; Vanguard Letter; Fidelity Letter; Letter from Andrew J. Bowden, Senior Vice President and General Counsel, Jackson National Life Insurance Company (Aug. 7, 2018) (“Jackson National Letter”); Invesco Letter; Lincoln Letter; CUNA Mutual Letter; GreatWest Letter. 61 See, e.g., Cetera August 2018 Letter; ICI Letter; Franklin Templeton Letter; Putnam Investments Letter; but see NASAA August 2018 Letter; PIABA Letter; Letter from Teresa J. Verges, Director, Investor Rights Clinic, University of Miami School of Law (Aug. 2, 2018) (“U. of Miami Letter”); Letter from Kayla Martin, Legal Intern, Christine Lazaro, Director and Professor Clinical Legal Education, Securities Arbitration Clinic, St. John’s University School of Law (Aug. 7, 2018) (“St. John’s U. Letter”); Letter from Kevin M. Carroll, Managing Director & Associate General Counsel, SIFMA (Mar. 29,
2019) (“SIFMA March 2019 Letter”); Letter from Michael Pieciak, NASAA President
and Commissioner, Vermont Department of Regulation, NASAA (Apr. 25, 2019); Letter from Tom Quaadman, Executive Vice President, CCMC (May 16, 2019) (“CCMC May 2019 Letter”); AFL-CIO April 2019 Letter.

After carefully reviewing the comments on the proposed rule, we have determined to retain its overall structure and scope. However, we have modified the proposed rule in a number of respects and are also providing additional interpretations and guidance to address and clarify issues raised by commenters. Summarized below are the key modifications from the proposal, as well as the interpretations and guidance provided.

Retail Customer Definition: We are modifying the definition of “retail customer” to
include any natural person who receives a recommendation from the broker-dealer for the natural person’s own account (but not an account for a business that he or she works for), including individual plan participants. 62 We are interpreting “legal representative of such natural person” to include the nonprofessional legal representatives of such a natural person (e.g., nonprofessional trustee who represents the assets of a natural person).
Implicit Hold Recommendations: While broker-dealers will not be required to
monitor accounts, in instances where a broker-dealer agrees to provide the retail customer with specified account monitoring services, it is our view that such an

62 As discussed in Section II.B.3.a, Retail Customer, Focus on Natural Persons and Legal Representatives of Natural Persons, to the extent a plan representative who decides service arrangements for a workplace retirement plan is a sole proprietor or other selfemployed individual who will participate in the plan, the plan representative will be a retail customer to the extent that the sole proprietor or self-employed individual receives recommendations directly from a broker-dealer primarily for personal, family or household purposes.

agreement will result in buy, sell or hold recommendations subject to Regulation Best Interest, even when the recommendation to hold is implicit.

Recommendations of account types, including recommendations to roll over or
transfer assets from one type of account to another: We are modifying Regulation Best Interest to expressly apply to account recommendations including, among others, recommendations to roll over or transfer assets in a workplace retirement plan account to an IRA, recommendations to open a particular securities account (such as brokerage or advisory), and recommendations to take a plan distribution for the purpose of opening a securities account.64 We are also providing guidance under the Care Obligation on what factors a broker-dealer generally should consider when making such recommendations.
Dual-Registrants: We are providing additional guidance on how dual-registrants can
comply with Regulation Best Interest, and confirming that Regulation Best Interest does not apply to advice provided by a broker-dealer that is dually registered as an investment adviser (“dual-registrant”) when acting in the capacity of an investment adviser, and that a dual-registrant is an investment adviser solely with respect to

63 See Section II.B.2.b, Interpretation of Any Securities Transaction or Investment Strategy Involving Securities. 64 See id.

accounts for which a dual-registrant provides advice and receives compensation that subjects it to the Advisers Act.65 We are also clarifying the relationship between the General Obligation and the specific component obligations, and in particular, what it means to “act in the best interest” of the retail customer. As is the case with the fiduciary duty applicable to investment advisers under the Advisers Act, we are not expressly defining in the rule text the term “best interest,” and instead are providing in Regulation Best Interest and through interpretations, what “acting in the best interest” means. 66 Whether a broker-dealer has acted in the retail customer’s best interest in compliance with Regulation Best Interest will turn on an objective assessment of the facts and circumstances of how the specific components of Regulation Best Interest—including its Disclosure, Care, Conflict of Interest, and Compliance Obligations—are satisfied at the time that the recommendation is made (and not in hindsight). In response to commenters, we are addressing, among other things, what the General Obligation does and does not require (for example, that it does not impose a continuing duty beyond a particular recommendation), providing specific examples of what would violate Regulation Best Interest, and its application to certain scenarios, particularly in the context of satisfying the Care Obligation.

65 See Section II.B.3.d, Retail Customers, Treatment of Dual-Registrants. 66 In the investment adviser context, an investment adviser’s fiduciary duty under the Advisers Act comprises a duty of care and a duty of loyalty. This combination of care and loyalty obligations has been characterized as requiring the investment adviser to act in the “best interest” of its client at all times. See Fiduciary Interpretation.

We are also modifying and clarifying the component obligations that a broker-dealer would be required to satisfy in order to meet the General Obligation:
Disclosure Obligation. We are refining the treatment of conflicts of interest by: (1) defining in the rule text a “conflict of interest” for purposes of Regulation Best Interest (as opposed to interpreting the phrase “material conflict of interest” as in the Proposing Release) as an interest that might incline a broker-dealer—consciously or unconsciously—to make a recommendation that is not disinterested; and (2) revising the Disclosure Obligation to require disclosure of “material facts” regarding conflicts of interest associated with the recommendation. 67 Similar to the proposal, all such conflicts of interest will be covered by Regulation Best Interest (e.g., subject to the Conflict of Interest Obligation), however, only “material facts” regarding these conflicts would be required to be disclosed under the Disclosure Obligation. Furthermore, we are modifying the Disclosure Obligation to explicitly require brokerdealers to provide “full and fair” disclosure of material facts, rather than requiring broker-dealers to “reasonably disclose” such information. We are providing the Commission’s view regarding what it means to provide “full and fair” disclosure to retail customers, including the level of specificity of disclosure required, and the form and manner and timing and frequency of such

67 See Section II.C.1.b, Disclosure Obligation, Material Facts Regarding Conflicts of Interest.

disclosure.
68 We are explicitly requiring the disclosure of material facts relating to the scope and terms of the relationship that were specifically identified in the proposal (i.e., capacity, material fees and charges, and type and scope of services).69 In connection with disclosure requirements regarding the type and scope of services, we are also clarifying that at a minimum, a brokerdealer needs to disclose whether or not account monitoring services will be provided (and if so, the scope and frequency of those services), account minimums, and any material limitations on the securities or investment strategies involving securities that may be recommended to the retail customer. 70 Also we conclude that the basis for a broker-dealer’s recommendations as a general matter (i.e., what might commonly be described as the firm’s investment approach, philosophy, or strategy) and the risks associated with a broker-dealer’s recommendations in standardized (as opposed to individualized) terms are material facts relating to the scope and terms of the relationship that should be disclosed.71 Below, we outline a method to address oral disclosure and written disclosure provided after the fact.72

68 See Section II.C.1.c, Disclosure Obligation, Full and Fair Disclosure. 69 See Section II.C.1.a, Disclosure Obligation, Material Facts Regarding Scope and Terms of the Relationship. 70 Id. 71 Id. 72 See Section II.C.1, Disclosure Obligation, Oral Disclosure or Disclosure After a Recommendation.

Care Obligation. We are adopting the Care Obligation largely as proposed; however, we are expressly requiring that a broker-dealer understand and consider the potential costs associated with its recommendation, and have a reasonable basis to believe that the recommendation does not place the financial or other interest of the broker-dealer ahead of the interest of the retail customer.73 Nevertheless, we emphasize that while cost must be considered, it should never be the only consideration. Cost is only one of many important factors to be considered regarding the recommendation and that the standard does not necessarily require the “lowest cost option.” Relatedly, we are emphasizing the need to consider costs in light of other factors and the retail customer’s investment profile. We are also providing additional guidance on what it means to make a recommendation in a retail customer’s “best interest.” As in the Proposing Release, determining whether a broker-dealer’s recommendation satisfies the Care Obligation will be an objective evaluation turning on the facts and circumstances of the particular recommendation and the particular retail customer. We recognize that a facts and circumstances evaluation of a recommendation makes it difficult to draw bright lines around whether a particular recommendation will meet the Care Obligation. Accordingly, we focus on how a broker-dealer could establish a reasonable basis to believe that a recommendation is in the best interest of its retail customer and does not place the

73 See generally Section II.C.2, Care Obligation.

broker-dealer’s interest ahead of the retail customer’s interest, and the circumstances under which a broker-dealer could not establish such a reasonable belief. We are clarifying that an evaluation of reasonably available alternatives does not require an evaluation of every possible alternative (including those offered outside the firm) nor require broker-dealers to recommend one “best” product, and what this evaluation will require in certain contexts (such as a firm with open architecture). Furthermore, we clarify that, when a brokerdealer materially limits its product offerings to certain proprietary or other limited menus of products, it must still comply with the Care Obligation—even if it has disclosed and taken steps to prevent the limitation from placing the interests of the broker-dealer ahead of the retail customer, as required by the Disclosure and Conflict of Interest Obligation—and thus could not use its limited menu to justify recommending a product that does not satisfy the obligation to act in a retail customer’s best interest. Conflict of Interest Obligation. We are revising the Conflict of Interest Obligation by:
(1) similar to the proposal, establishing an overarching obligation to establish written policies and procedures to identify and at a minimum disclose (pursuant to the Disclosure Obligation), or eliminate, all conflicts of interest associated with the recommendation; 74 and (2) setting forth

74 This obligation achieves greater consistency with the treatment of conflicts under the Advisers Act. As discussed in the Fiduciary Interpretation, in seeking to meet its duty of loyalty, an adviser must make full and fair disclosure to its clients of all material facts relating to the advisory relationship. An adviser must eliminate or at least expose through full and fair disclosure all conflicts of interest which might incline an investment adviser

explicit requirements to establish written policies and procedures reasonably designed to mitigate or eliminate certain identified conflicts of interest, specifically:

Mitigation of Associated Person Conflicts of Interest. We are revising the proposal’s
mitigation requirement to: (1) eliminate the distinction between financial incentives and all other conflicts of interest; and (2) focus on mitigating conflicts of interest associated with recommendations that create an incentive for the associated person of the brokerdealer to place the interest of the firm or the associated person ahead of the interest of the retail customer.75 We are providing further guidance regarding the types of incentives covered by this revised obligation, in particular focusing on compensation or employment related incentives and other incentives provided to the associated person (whether by the broker-dealer or third-parties). We are also confirming, clarifying and expanding on the proposal’s guidance on potential mitigation methods to further promote compliance with this obligation.
Address Any Material Limitations on Recommendations to Retail Customers. To address
the conflicts of interest presented when broker-dealers place any material limitations on the securities or investment strategies involving securities that may be recommended to a

—consciously or unconsciously—to render advice which was not disinterested. See Fiduciary Interpretation. 75 See generally Section II.C.3.e, Conflict of Interest Obligation, Mitigation of Certain Incentives to Associated Persons.

retail customer (i.e., only make recommendations of proprietary or other limited range of products), we are requiring broker-dealers to establish, maintain and enforce written policies and procedures reasonably designed to: (1) identify and disclose any material limitations placed on the securities or investment strategies involving securities that may be recommended and any associated conflicts of interest; and (2) prevent the limitations and associated conflicts of interest from causing the broker-dealer or their associated persons to make recommendations that place the interest of the broker-dealer or associated person ahead of the interest of the retail customer (for example, a brokerdealer could establish product review processes or establish procedures addressing which retail customers would qualify for the product menu).76

Elimination of Certain Conflicts. We are requiring broker-dealers to establish written
policies and procedures reasonably designed to identify and eliminate any sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sale of specific securities or the sale of specific types of securities within a limited period of time. 77 By explicitly focusing on policies and procedures to eliminate these incentives, it does not mean that all other incentives are presumptively compliant with Regulation Best Interest.

76 See generally Section II.C.3.f, Conflict of Interest Obligation, Mitigation of Material Limitations on Recommendations to Retail Customers. 77 See generally Section II.C.3.g, Conflict of Interest Obligation, Elimination of Certain Conflicts of Interest.

Rather, such other incentives and practices that are not explicitly prohibited are permitted provided that the broker-dealer establishes reasonably designed policies and procedures to disclose and mitigate the incentive created to the representative, and the broker-dealer and its associated persons comply with the Care Obligation and the Disclosure Obligation. General Compliance Obligation. We are establishing a new, general “Compliance Obligation” to require broker-dealers to establish policies and procedures to achieve compliance with Regulation Best Interest in its entirety. Books and Records. In addition to adopting Regulation Best Interest, we are also adopting the record-making and recordkeeping requirements largely as proposed, with certain explanations and clarifications regarding the scope of these requirements and the extent to which new obligations have been created. Interaction with Other Standards, Waivers and Private Right of Action. Compliance with Regulation Best Interest will not alter a broker-dealer’s obligations under the general antifraud provisions of the federal securities laws. Regulation Best Interest applies in addition to any obligations under the Exchange Act, along with any rules the Commission may adopt thereunder,

78 See generally Section II.C.4, Compliance Obligation.
79 See generally Section II.D, Record-Making and Recordkeeping.

and any other applicable provisions of the federal securities laws and related rules and regulations.80 Scienter will not be required to establish a violation of Regulation Best Interest. We note that the preemptive effect of Regulation Best Interest on any state law governing the relationship between regulated entities and their customers would be determined in future judicial proceedings based on the specific language and effect of that state law. We believe that Regulation Best Interest, Form CRS, and the related rules, interpretations and guidance that the Commission is concurrently issuing will serve as focal points for promoting clarity, establishing greater consistency in the level of retail customer protections provided, and easing compliance across the regulatory landscape and the spectrum of investment professionals and products. In addition, under Section 29(a) of the Exchange Act, a broker-dealer will not be able to waive compliance with Regulation Best Interest, nor can a retail customer agree to waive her protections under Regulation Best Interest. Furthermore, we do not believe Regulation Best Interest creates any new private right of action or right of rescission, nor do we intend such a result.

80 For example, any transaction or series of transactions, whether or not subject to the provisions of Regulation Best Interest, remain subject to the antifraud and antimanipulation provisions of the securities laws, including, without limitation, Section 17(a) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. 77q(a)] and Sections 9, 10(b), and 15(c) of the Exchange Act [15 U.S.C. 78i, 78j(b), and 78o(c)] and the rules thereunder.

D. Overview of Key Enhancements
With these modifications and clarifications, Regulation Best Interest is designed to improve investor protection by:

requiring broker-dealers to have a reasonable basis to believe that recommendations are
in the retail customer’s best interest, which enhances existing suitability obligations by:
requiring compliance not only with the explicit Care Obligation, but also with Disclosure, Conflict of Interest, and Compliance Obligations; expressly requiring consideration of cost in evaluating a recommendation as part of the Care Obligation; expressing our views regarding the consideration of reasonably available alternatives when making a recommendation as part of the Care Obligation; applying Regulation Best Interest to recommendations of account types and rollovers and to any recommendations resulting from agreed-upon account monitoring services (including implicit hold recommendations); and, applying the Care Obligation to a series of recommended transactions (currently referred to as “quantitative suitability”) irrespective of whether a broker-dealer exercises actual or de facto control over a customer’s account;
requiring broker-dealers to establish, maintain, and enforce written policies and
procedures reasonably designed to mitigate (and in some cases, eliminate) certain identified conflicts of interest that create incentives to make recommendations that are not in the retail customer’s best interest; these new requirements are a significant and critical enhancement as existing requirements under the federal securities laws largely center upon conflict disclosure rather than conflict mitigation;
requiring disclosure under the Disclosure Obligation of the material facts relating to the
scope of terms of a broker-dealer’s relationship with the retail customer and the conflicts

of interest associated with a broker-dealer’s recommendations, which will foster retail customers’ understanding of their relationship with the broker-dealer and help them to evaluate the recommendations received; and

requiring broker-dealers to establish, maintain and enforce written policies and
procedures reasonably designed to achieve compliance with Regulation as a whole, which will further promote broker-dealer compliance with Regulation Best Interest. Through these new requirements, we believe that Regulation Best Interest will improve investor protection by enhancing the quality of broker-dealer recommendations to retail customers and reducing the potential harm to retail customers that may be caused by conflicted brokerage recommendations. We also believe Regulation Best Interest achieves these enhancements in a manner that is workable for the transaction-based relationship offered by broker-dealers, thus preserving, to the extent possible, retail investor access (in terms of choice and cost) to different types of quality investment services and products. As discussed above, Regulation Best Interest will complement Form CRS and related rules, interpretations, and guidance that the Commission is concurrently issuing.
II. DISCUSSION OF REGULATION BEST INTEREST
A. General Obligation
As in the Proposing Release, Regulation Best Interest is set forth in two subparagraphs:
(1) an overarching provision setting forth a general best interest obligation (“General

Obligation”); and (2) a second provision requiring compliance with specific obligations in order to satisfy the overarching standard (discussed below in Section II.C). 81 Specifically, as in the Proposing Release, the General Obligation requires that a broker-dealer “shall act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of [the broker-dealer]…ahead of the interest of the retail customer.”82 Most commenters, including a majority of the IAC, expressed opinions on this approach, and in particular on the General Obligation, including whether the obligation should be a “fiduciary” standard, whether it should be a uniform standard for broker-dealers and investment advisers,83 and whether the standard should be more principles-based or more prescriptive (in particular, whether to define “best interest”).84

81 See Proposing Release at 21585 et seq.
82 See Paragraph (a)(1) of Regulation Best Interest.
83 See IAC 2018 Recommendation; Letter from Rob Foregger, Co-Founder, NextCapital (Aug. 7, 2018) (“NextCapital Letter”) (recommending that the Commission adopt a uniform fiduciary standard of conduct applicable to both broker-dealers and investment advisers); Letter from Sharon Cheever, Senior Vice President and General Counsel, Pacific Life Insurance Company (May 28, 2019) (“Pacific Life May 2019 Letter”) (recommending that the Commission adopt a single ‘best interest’ standard of care for all financial professionals). See also Letter from R. Scott Henderson, Bank of America (Aug. 7, 2018) (“Bank of America Letter”); Letter from Christopher Jones, Chief Investment Officer, Financial Engines (Aug. 6, 2018) (“Financial Engines Letter”); State Attorneys General Letter; Letter from Jill I. Gross, Associate Dean, Academic Affairs, Elisabeth Haub School of Law, Pace University (Mar. 11, 2019) (“Gross Letter”). Relatedly, one commenter expressed concern that a court or arbitration panel would determine that Regulation Best

The views of commenters on the approach to an enhanced standard of conduct for brokerdealers varied widely. A number of commenters supported a broker-dealer specific standard of conduct.85 Several of these commenters supported the Commission’s approach as proposed, with certain modifications to the specific component obligations discussed below. 86 Some commenters urged the Commission to change the standard from what the commenters called “suitability-plus” to what the commenters called a “true best interest standard,” including the avoidance of certain conflicts,87 and urged the Commission to change the name of Regulation Best Interest unless it required firms to always be responsible for acting in the retail customer’s

Interest would control, rather than existing case law, which would apply a fiduciary duty in certain circumstances. See Gross Letter. See also AFL-CIO April 2019 Letter. 84 See, e.g., Ameriprise Letter; Cambridge Letter; CCMC Letters; Edward Jones Letter; NAIFA Letter; Morningstar Letter; NY Life Letter; Letter from Kevin T. Reynolds, Senior Vice President, Penn Mutual Life Insurance Company (Aug. 1, 2018) (“Penn Mutual Letter”); SIFMA August 2018 Letter; Vanguard Letter; Letter from Kent. A Mason, Davis & Harman LLP (Jul. 20, 2018) (“Davis Harman Letter”). 85 See, e.g., SIFMA August 2018 Letter; Cetera August 2018 Letter; Vanguard Letter; Edward Jones Letter; Ameriprise Letter; NY Life Letter; NAIFA Letter; CCMC Letters; Penn Mutual Letter; Cambridge Letter; PIABA Letter; Letter from Ronald J. Kruszewski, Chairman and Chief Executive Officer, Stifel Financial (Aug. 7, 2018) (“Stifel Letter”); Financial Engines Letter. 86 See, e.g., SIFMA August 2018 Letter; Vanguard Letter; Edward Jones Letter; Ameriprise Letter; NY Life Letter; NAIFA Letter; CCMC Letters; Penn Mutual Letter; Cambridge Letter; PIABA Letter. 87 See, e.g., CFA Institute Letter.

best interest (as opposed to at the time of the recommendation).
88 Other commenters advocated for the adoption of a broker-dealer standard modeled after FINRA suitability rules, 89 and some suggested that the Commission create a safe harbor from liability for compliance with Regulation Best Interest.90 By contrast, other commenters recommended that the Commission adopt a uniform standard of conduct for investment advisers and broker-dealers, in varying forms.91 Commenters expressed differing views on the form of such a uniform standard of conduct, including that the Commission should adopt: a fiduciary standard for broker-dealers similar to, or no less stringent than, the fiduciary duty under the Advisers Act;92 a uniform fiduciary standard as articulated in
Section 913(g) of the Dodd-Frank Act93 and/or consistent with the recommendations of the

88 See, e.g., Letter from Jean-Luc Bourdon, CPA/PFS, Chair, Personal Financial Planning Legislative and Regulatory Task Force, and Charles R. Kowal, Chair, Personal Financial Planning Executive Committee, AICPA (Aug. 7, 2018) (“AICPA Letter”); Betterment August 2018 Letter; NASAA August 2018 Letter. 89 See, e.g., National Society of Compliance Professionals Letter; Cetera August 2018 Letter. 90 See Cambridge Letter; BISA Letter; IPA Letter. 91 See, e.g., Betterment Letter; AARP August 2018 Letter; AFR Letter; Galvin Letter; State Attorneys General Letter. 92 See, e.g., Betterment Letter; Warren Letter; Fein Letter; Letter from Joseph M. Torsella, Pennsylvania State Treasurer, et al. (Aug. 7, 2018) (“State Treasurers Letter”); AARP August 2018 Letter. 93 See, e.g., FPC Letter; Letter from Maxine Waters, Ranking Member, Committee on Financial Services, U.S. House of Representatives, et al. (Sep. 12, 2018) (“Waters Letter”); Fein Letter.

staff’s Section 913 Study;94 or a uniform standard similar to the DOL standard as reflected in the BIC Exemption; 95 harmonized requirements and guidance for broker-dealers and investment advisers offering services to retail customers; 96 or a new uniform best interest standard, with common core elements.97 In this vein, a number of commenters suggested specific revisions to the text of the General Obligation to clarify what the standard requires with respect to broker-dealer conflicts of interest, including that the Commission change the proposed “without placing the financial or other interest [of the broker-dealer] ahead” language to a standard that requires a recommendation be made “without regard to” a broker-dealer’s interest98 and/or requires the broker-dealer to “place the customer’s interest first” or ahead of its own.99 These commenters stated that changing the proposed language to a “without regard to” and/or “place the customer’s interest first” phrasing would result in a stronger standard, whereas the proposed phrasing would allow a broker-dealer to act in its own interests as long as the broker-dealer does not put its

94 See, e.g., ACLI Letter; Schwab Letter.
95 See, e.g., Galvin Letter. See supra footnote 32.
96 See, e.g., AARP August 2018 Letter.
97 See, e.g., Pacific Life August 2018 Letter.
98 See, e.g., CFA August 2018 Letter; FPC Letter; PACE Letter; Better Markets August 2018 Letter. 99 See, e.g., Invesco Letter; Schwab Letter; Better Markets August 2018 Letter; CFA Institute Letter.

interests ahead of its customers’ interest.100 These commenters stated that broker-dealers must put aside their own interest when determining what is best for the retail customer, that brokerdealers must ensure that conflicts do not taint recommendations.101 Some commenters challenged the Commission’s concern that the “without regard to” language “could be inappropriately construed to require a broker-dealer to eliminate all of its conflicts,” arguing that their position is supported by the plain meaning of the language and the context of 913(g) (which explicitly recognizes conflicts in certain areas), and the interpretations by others (such as the DOL) who have used it.102 Highlighting what commenters viewed as inconsistencies in the Proposing Release’s interpretation of the proposed “without placing . . . ahead” phrasing, such as statements that the obligation would require broker-dealers to “put aside their interests” when making a recommendation versus others suggesting that a brokerdealer’s interests cannot “predominantly motivate” or be the “sole basis” for the recommendation, some commenters suggested we either adopt the “without regard to” phrasing or state that the proposed phrasing requires a broker-dealer to put aside its interests.103 Some

100 See, e.g., CFA August 2018 Letter; FPC Letter; Pace Letter.
101 See, e.g., CFA August 2018 Letter.
102 See, e.g., CFA August 2018 Letter; Waters Letter.
103 See, e.g., CFA August 2018 Letter. See also Waters Letter (stating that the proposal fails to adequately explain just what it would require of brokers that is different from the status quo, that the standard should clearly differ from the current “suitability” standard, and that any final rule must clearly explain the standard, what it requires and prohibits, and how it differs from the status quo).

commenters further stated that the “without regard to” phrasing, which is used in Section 913(g) of the Dodd-Frank Act, is the stronger standard of conduct that Congress intended, and challenged the Commission’s reliance on the authority provided in Section 913(f).104 In this vein, some commenters suggested that the Commission should adopt a uniform standard of conduct for broker-dealers and investment advisers that was authorized under Section 913(g), and recommended by the staff in the Section 913 Study.105 Other commenters, however, supported the proposal’s “without placing…ahead” formulation. 106 These commenters expressed concern that a “without regard to” standard would require “conflict free” recommendations, which would limit compensation structures and the offering of certain products. 107 Instead, commenters stated that the appropriate role of a best interest standard is to require disclosure and management of conflicts of interest.108 Others generally supported, or did not object to, the Commission’s decision not to proceed under its 913(g) authority in its current proposal.109

104 See, e.g., CFA August 2018 Letter; State Attorneys General Letter; Waters Letter.; FPC Letter; Better Markets August 2018 Letter. 105 See, e.g., Waters Letter; FPC Letter. 106 See, e.g., AALU Letter; Cetera August 2018 Letter; NAIFA Letter; Pickard Letter. 107 See, e.g., AALU Letter; Cetera August 2018 Letter; NAIFA Letter; Pickard Letter. 108 See, e.g., AALU Letter; Cetera August 2018 Letter. 109 See, e.g., Invesco Letter; IAC 2018 Recommendation (stating “we recognize that the Commission has chosen not to proceed under its 913(g) authority in its current proposal, and it is not our intent to derail that proposal by advocating that the Commission change

A common theme across many comments was the need for additional guidance on what “best interest” means, with some commenters recommending that the Commission codify its interpretation of “best interest” or provide a more specific definition of what it means to act in the “best interest.”110 Several commenters suggested that the “best interest” standard should require the “best” or most beneficial product available, 111 while others (including a majority of the IAC) requested that the Commission clarify that there is no single “best” recommendation and that the obligation is to adhere to a professional standard of conduct when making a recommendation.112 Some commenters suggested defining “best interest” as including a duty of

the legal basis for its rulemaking. Moreover, we believe the clarifications we have outlined above to the meaning of best interest, if implemented, have the potential to deliver immediate benefits to customers of broker-dealers and investment advisers alike. Should the Commission determine, however, that it cannot enforce the clarified best interest standard under the Advisers Act, a majority of the Committee believes the Commission should reconsider rulemaking under its 913(g) authority to close that regulatory gap.”). As noted above, Regulation Best Interest draws from key principles underlying fiduciary obligations, including those that apply to investment advisers under Advisers Act. Accordingly, as discussed below, the Commission has chosen to enhance existing obligations for broker-dealers when they make recommendations to a retail customer, while, in a separate interpretation, reaffirming and in some cases clarifying an investment adviser’s fiduciary duty. See Fiduciary Interpretation. 110 See, e.g., NASAA August 2018 Letter. 111 See, e.g., Financial Engines Letter; CFA August 2018 Letter. 112 See, e.g., Wells Fargo Letter; see also IAC 2018 Recommendation (“[T]he Commission should recognize there will often not be a single best option and that more than one of the available options may satisfy this standard.”).

loyalty and care.113 Several also suggested that the Commission incorporate best execution and fair pricing and compensation as factors for determining compliance with the standard.114 Several commenters recommended that the Commission adopt a definition of best interest that is consistent with the best interest obligation described by the DOL in the BIC Exemption’s Impartial Conduct Standards,115 and supported a standard which would require a broker-dealer to act “solely” in the interest of the retail customer when making a recommendation.116 Conversely, other commenters recommended that the “best interest” standard could be satisfied even if the recommendations are in part influenced by “selfpromotion.”117 Finally, in lieu of a prescribed definition of “best interest,” a number of commenters advocated for a facts-and-circumstances or “totality of the circumstances approach” for determining compliance with the “best interest” standard.118 A majority of the IAC recommended that the meaning of the best interest obligation should be clarified to require

113 See, e.g., TIAA Letter; Morningstar Letter.
114 See, e.g., CFA Institute Letter; Letter from Mark Heckert, Vice President, Pricing and Analytics, ICE Data Services, (Aug. 7, 2018) (“ICE Letter”); FPC Letter. 115 See, e.g., AARP August 2018 Letter; Wells Fargo Letter; Schwab Letter; NASAA August 2018 Letter. 116 See, e.g., Galvin Letter. 117 See, e.g., LPL August 2018 Letter. 118 See, e.g., AAJ Letter; CFA August 2018 Letter.

“broker-dealers, investment advisers, and their associated persons to recommend the investments, investment strategies, accounts or services, from among those they have reasonably available to recommend, that they reasonably believe represent the best available options for the investor.”119 After careful consideration of these comments, we continue to believe that our proposed approach for enhancing the standards of conduct that apply to broker-dealers’ recommendations to retail customers is the appropriate approach, and therefore we are adopting as proposed the structure and scope of Regulation Best Interest, including the phrasing of the General Obligation, and are not expressly defining “best interest” in the rule text.120 However, in consideration of these comments, we are providing our views on what the standard generally requires, what it is intended to achieve, and its alignment in many respects with fiduciary principles.

Commission’s Approach
After extensive consideration, and for the reasons discussed in the Proposing Release and further below, we are adopting a rule to enhance the existing broker-dealer conduct obligations

119 IAC 2018 Recommendation.
120 Another commenter stated that any modification to the proposed rules and guidance that would make them “more restrictive” should be reproposed for additional public comment. See ACLI Letter. Because we have provided notice and the changes we are making are based on comments we received, reproposal is not necessary.

when they make recommendations to a retail customer.121 At the same time, we seek to preserve retail investor access (in terms of choice and cost) to differing types of investment services and products. The Commission is adopting Regulation Best Interest pursuant to the express and broad grant of rulemaking authority in Section 913(f) of the Dodd-Frank Act.122 As some commenters noted, Section 913(g) expressly authorizes the Commission to adopt rules that would hold broker-dealers to the same standard of conduct as investment advisers. However, the availability of overlapping, yet distinct, rulemaking power under Section 913(g) does not negate the grant of authority under Section 913(f). The plain text of Section 913(f) authorizes the Commission to

121 See Proposing Release at 21575. In particular, we considered the recommendations made by our staff in 2011 and the recommendations of the IAC. See Staff of the U.S. Securities and Exchange Commission, Study on Investment Advisers and Broker-Dealers As Required by Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Jan. 2011) (“913 Study”), at 9-10, available at www.sec.gov/news/studies/2011/913studyfinal.pdf; Recommendation of the Investor Advisory Committee: Broker-Dealer Fiduciary Duty (Nov. 2013) (“IAC 2013 Recommendation”), available at https://www.sec.gov/spotlight/investor-advisorycommittee-2012/fiduciary-duty-recommendation-2013.pdf; IAC 2018 Recommendation. 122 Section 913(f) of the Dodd-Frank Act provides the Commission discretionary authority to “commence a rulemaking, as necessary or appropriate to the public interest and for the protection of retail customers (and such other customers as the Commission may by rule provide), to address the legal or regulatory standards of care for brokers, dealers. . . [and] persons associated with brokers or dealers. . . for providing personalized investment advice about securities to such retail customers.” In addition to Section 913(f), the Commission is promulgating Regulation Best Interest pursuant to other provisions of the Exchange Act, including Section 15(c)(6) and Section 17.

promulgate this rule addressing the legal and regulatory standards of care for broker-dealers, and their associated persons. The Commission is utilizing its authority under 913(f) in order to adopt an enhanced investor-protection standard for broker-dealers that maintains the availability of both the brokerdealer model and the investment adviser model. The Commission has chosen not to apply the existing fiduciary standard under the Advisers Act to broker-dealers in part because of concerns that such a shift would result in fewer broker-dealers offering transaction-based services to retail customers, which would in turn reduce choice and may raise costs for certain retail customers. Moreover, the Commission has chosen not to create a new uniform standard applicable to both broker-dealers and investment advisers which, among other things, would discard decades of regulatory and judicial precedent and experience with the fiduciary duty for investment advisers that has generally worked well for retail clients and our markets. We believe that adopting a “one size fits all” approach would not appropriately reflect the fact that broker-dealers and investment advisers play distinct roles in providing recommendations or advice and services to investors, and may ultimately harm retail investors. Instead, the Commission has chosen to enhance existing obligations for broker-dealers when they make recommendations to a retail

customer, while, in a separate interpretation, reaffirming and in some cases clarifying an investment adviser’s fiduciary duty.123

123 Although we are not adopting a uniform fiduciary standard of conduct, we note that our rules are designed to achieve many of the key goals advocated for by supporters of a uniform standard of conduct. For example, in advocating for a uniform standard of conduct former Commission Chair Elisse B. Walter (then a Commissioner) stated that (1) “[t]o appreciate fully what a fiduciary standard means, and what it really means to act in the best interest of an investor, it is absolutely necessary to drill down and determine what duties and obligations flow from a fiduciary standard,” (2) “a fiduciary standard is not a substitute for business practice rules…[r]ather, the two are complementary…and can be used by the Commission] to prohibit certain conflicted behavior or to require mitigation or management of the conflict,” (3) “what a fiduciary duty requires depends on the scope of the engagement,” and (4) “[m]ost important, whatever gloss and guidance the Commission provides, it should not deviate from the basic principle that financial professionals should always act in the best interests of investors, both large and small.” Commissioner Elisse B. Walter, Regulating Broker-Dealers and Investment Advisers:
Demarcation or Harmonization? (May 5, 2009), available at https://www.sec.gov/news/speech/2009/spch050509ebw.htm. In our Fiduciary Interpretation and in this release, we are providing our views on the duties and obligations that flow from the fiduciary duty and Regulation Best Interest. In this release, we discuss the specific obligations of broker-dealers under the Disclosure, Care and Conflicts of Interest Obligations, which include requirements to establish policies and procedures that comply with the Conflict of Interest Obligation, specifically to disclose and mitigate (i.e., reasonably reduce), or eliminate, certain conflicts. As discussed below, these specific obligations are tailored to address particular concerns that arise as a result of the broker-dealer model. For that reason, as well as the other reasons set forth above, the Commission does not believe that it is necessary to adopt a uniform standard in order to ensure that these specific obligations also apply to investment advisers, as the IAC suggests. See IAC 2018 Recommendation. In our Fiduciary Interpretation, we state that “the application of the investment adviser’s fiduciary duty will vary with the scope of the relationship,” and here we have noted that we are not expressly defining in the rule text the term “best interest,” and instead are providing in the rule and through interpretations what “best interest” means. Compliance with each of the specific component obligations will turn on an objective assessment of the facts and circumstances of how the specific components of Regulation Best Interest are satisfied at

Regulation Best Interest considers and incorporates (to the extent appropriate) obligations that apply to investment advice in other contexts, with the goal of fostering greater consistency and clarity in the level of protection provided to retail customers at the time that a recommendation is made. We are tailoring these principles to the structure and characteristics of the broker-dealer relationship with retail customers and building upon existing regulatory obligations. As a result, Regulation Best Interest protects investors who seek access to the services, products, and payment options offered by broker-dealers. Although we are not applying the existing fiduciary standard under the Advisers Act to broker-dealers, key elements of the standard of conduct that applies to broker-dealers under Regulation Best Interest will be substantially similar to key elements of the standard of conduct that applies to investment advisers pursuant to their fiduciary duty under the Advisers Act124 at the time that a recommendation is made. Regulation Best Interest’s regulatory structure is unique to broker-dealers—and is tailored to the broker-dealer business model—but regardless of

the time that the recommendation is made. Finally, regardless of whether a retail investor chooses a broker-dealer or an investment adviser (or both), the retail investor will be entitled to a recommendation (from a broker-dealer) or advice (from an investment adviser) that is in the best interest of the retail investor and that does not place the interests of the firm or the financial professional ahead of the interests of the retail investor. 124 Specifically, an investment adviser’s fiduciary duty under the Advisers Act comprises a duty of care and a duty of loyalty. This combination of care and loyalty obligations has been characterized as requiring the investment adviser to act in the “best interest” of its client at all times. See Fiduciary Interpretation.

whether a retail investor chooses a broker-dealer or an investment adviser (or both), the retail investor will be entitled to a recommendation (from a broker-dealer) or advice (from an investment adviser) that is in the best interest of the retail investor and that does not place the interests of the firm or the financial professional ahead of the interests of the retail investor. As discussed in the proposal, and in the discussion below, Regulation Best Interest, as adopted, incorporates Care and Conflict of Interest Obligations substantially similar to the fiduciary duties of care and loyalty under Section 206(1) and (2) of the Advisers Act, even if not in the same manner as the 913 Study recommendations or identical to the duties under the Advisers Act.125 We extensively considered the 913 Study as part of developing Regulation Best Interest, as discussed in the Proposing Release, and believe that the enhancements to the brokerdealer standard of conduct incorporate, and in many aspects (such as the concept of mitigation, and the detailed Care Obligation), build upon and go beyond the recommendations in the 913 Study. Although key elements are substantially similar, the Commission notes that the obligations of a broker-dealer under Regulation Best Interest and the obligations of an investment adviser pursuant to its fiduciary duty under the Advisers Act differ in certain respects, taking into account the scope of the services and relationships typically offered by broker-dealers and investment advisers. For example, an investment adviser’s duty of care

125 See Proposing Release at 21590.

encompasses the duty to provide advice and monitoring at a frequency that is in the best interest of the client, taking into account the scope of the agreed relationship. This difference reflects the generally ongoing nature of the advisory relationship, and the Commission’s view that, within the scope of the agreed adviser-client relationship, investment advisers’ fiduciary duty generally applies to the entire relationship. In contrast, the provision of recommendations in a brokerdealer relationship is generally transactional and episodic, and therefore the final rule requires that broker-dealers act in the best interest of their retail customers at the time a recommendation is made and imposes no duty to monitor a customer’s account following a recommendation. As noted above, Regulation Best Interest also generally imposes more specific obligations on broker-dealers under the Disclosure, Care and Conflict of Interest Obligations (each of which is discussed in detail below) than the principles-based requirements of investment advisers’ fiduciary duty under the Advisers Act. This approach is intended to tailor the application of principles that have developed in the context of a different business model over the course of almost 80 years. Moreover, this more specific and tailored approach drawing on key fiduciary principles (1) is consistent with the generally rules-based regulatory regime that applies to broker-dealers, (2) acknowledges that certain relevant obligations may already be addressed by existing broker-dealer requirements (e.g., broker-dealers are already subject to a duty of best execution), (3) allows us to impose requirements that we are believe are more appropriately tailored to address the specific conflicts raised by the transaction-based nature of the broker-dealer model, and (4) recognizes that it would be inappropriate to apply to certain generally applicable obligations of investment advisers (e.g., duty to monitor) in the context of a transaction-based relationship.

These specific obligations include express requirements relating to the Care Obligation, requiring that a broker-dealer exercise reasonable diligence, care, and skill to: (1) understand the risks, rewards and costs of a recommendation; (2) have a reasonable basis to believe that the recommendation is in the best interest of a particular retail customer, based on the retail customer’s investment profile, and that the recommendation does not place the broker-dealer’s interest ahead of the retail customer’s interest; and (3) have a reasonable basis to believe that a series of transactions is in the best interest of the retail customer and does not place the interest of the broker-dealer ahead of the retail customer’s interests. Regulation Best Interest imposes a duty of care that enhances existing suitability obligations (as discussed further below). It also includes a requirement under the Care Obligation to specifically address the risk that a brokerdealer’s transaction-based recommendations and compensation could result in a series of recommendations that are not in the best interest or a retail customer—a “churning” risk unique to the broker-dealer model of providing recommendations and resulting transaction-based compensation. Regulation Best Interest also includes a requirement under the Conflict of Interest Obligation for broker-dealers to establish, maintain, and enforce written policies and procedures reasonably designed to (1) mitigate conflicts of interest at the associated person level, (2) specifically address the conflicts of interest presented when broker-dealers place material limitations on the securities or products that may be recommended (i.e., only make recommendations of proprietary or other limited range of products), and (3) eliminate sales contests, bonuses, and non-cash compensation that are based on the sales of specific securities or specific types of securities within a limited period of time. The conflicts of interest associated with incentives at the associated person level and limitations on the securities or products that

may be recommended to retail customers have raised particular concerns in the context of the broker-dealer, transaction-based relationship. Accordingly, the Commission believes specific disclosure and additional mitigation requirements are appropriate to address those conflicts. Sales contests, sales quotas, bonuses and non-cash compensation that are based on the sales of specific securities within a limited period of time create high-pressure situations for associated persons to increase the sales of specific securities or specific types of securities within a limited period of time and thus compromise the best interests of their retail customers. The Commission does not believe such conflicts of interest can be reasonably mitigated and, accordingly, they must be eliminated. Phrasing of Standard We are adopting the phrasing “act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the [broker-dealer] ahead of the interest of the retail customer” as it was proposed. 126 In response to comments, we are clarifying our views on what this standard entails and how it compares to the “without regard to” language of Section 913. By replacing the “without regard to” language of Section 913(g) and the 913 Study with the “without placing the financial or other interest of the [broker-dealer] . . . ahead of the interest

126 See paragraph (a)(1) of Regulation Best Interest. As discussed in Section II.C.2, we are also adding the phrasing “does not place the financial or other interest of the broker, dealer, or such natural person. . . ahead of the retail customer” to certain provisions of the Care Obligation.

of the retail customer” phrasing, we did not intend to create a “lower” or “weaker” standard compared to the language of Section 913(g) and the 913 Study. Rather, we are adopting a standard that reflects that a broker-dealer should not put its interests ahead of the retail customer’s interest, and thereby aligns with (and in certain areas imposes more specific obligations than) the investment adviser fiduciary duty, at the time a broker-dealer makes a recommendation to a retail customer. As discussed in the Proposing Release, we do not intend for our standard to require a broker-dealer to provide conflict-free recommendations. For example, under Regulation Best Interest, a broker-dealer could recommend a more expensive or more remunerative security or investment strategy if the broker-dealer has a reasonable basis to believe there are other factors about the security or investment strategy that make it in the best interest of the retail customer, based on that retail customer’s investment profile.127 We also agree with commenters that we do not believe that is the intent behind the “without regard to” phrase, as included in Section 913 of the Dodd-Frank Act or recommended in the 913 Study, as is evident both from other provisions of Section 913 that acknowledge and permit the existence of financial interests under that standard, and how our staff articulated the recommended uniform fiduciary standard in the 913 Study. 128 Nevertheless, we are concerned

127 See Section II.C.2, Care Obligation.
128 See Proposing Release at 21590. As noted in the proposal, among other things, DoddFrank Act Section 913(g) expressly provides that the receipt of commission-based

that there is a risk that the “without regard to” language would be inappropriately construed to require a broker-dealer to eliminate all of its conflicts when making a recommendation (i.e., require recommendations that are conflict free), which we believe could ultimately harm retail investors by reducing their access to differing types of investment services and products and by increasing their costs. The potential for a range of different meanings to be given to the phrase “without regard to” was heightened by the DOL’s use of this same language for purposes of the Impartial Conduct Standards set forth in the BIC Exemption. We recognize, as noted by some commenters, that the DOL interpretation of this phrase does not require “conflict-free” recommendations. Nevertheless, because of the differences in the approach to the treatment of conflicts under ERISA and under the federal securities laws—ERISA starts by prohibiting conflicts and then through exemptions permits certain conflicts, whereas the federal securities laws generally start with disclosure and become more restrictive—we share commenters’

compensation, or other standard compensation, for the sale of securities shall not, in and of itself, violate any uniform fiduciary standard promulgated under that subsection’s authority as applied to a broker-dealer. Moreover, Section 913(g) does not itself require the imposition of the principal trade provisions of Advisers Act Section 206(3) on brokerdealers. In addition, Dodd-Frank Act Section 913 provides that offering only proprietary products by a broker-dealer shall not, in and of itself, violate such a uniform fiduciary standard, but may be subject to disclosure and consent requirements. See Exchange Act
Section 15(k)(1) and Advisers Act Section 211(g)(1). See also 913 Study at 113;
Proposing Release at 21590.

concerns that DOL’s use of the “without regard to” language could alter the way in which conflicts are viewed and cause a substantial portion of conduct that is currently permitted, and reasonably accepted and desired by retail customers, to be limited or eliminated. Based on market participant experience with the implementation of—and reaction to the subsequent overturning of—the DOL Fiduciary Rule, in particular the BIC Exemption, 129 we continue to believe that it is better to use language that provides similar investor protections, but does not raise these legal ambiguities. The “without placing the financial or other interest . . . ahead of the interest of the retail customer” phrasing recognizes that while a broker-dealer will inevitably have some financial interest in a recommendation—the nature and magnitude of which will vary—the broker-dealer’s interests cannot be placed ahead of the retail customer’s interest.130 Accordingly, we believe this phrasing establishes a standard that enhances investor protection by prohibiting a broker-dealer from placing its interests ahead of the retail customer’s interests, and preserves investor access (in terms of both choice and cost) to differing types of investment services and products.

129 See supra footnotes 33 and 34 (citing reduction in services and increase in costs following DOL). 130 In this vein, we believe that a broker-dealer’s “financial interest” is broad, and that a broker-dealer is unlikely to have an “other interest” that is not a “financial interest.” See, e.g., Proposing Release at 21618 (noting “…our interpretation of the types of material conflicts of interest arising from financial incentives is broad…”).

The phrasing also aligns with an investment adviser’s fiduciary obligation. As discussed in the Fiduciary Interpretation, an investment adviser’s fiduciary duty under the Advisers Act comprises a duty of care and a duty of loyalty. 131 The fiduciary duty requires that an adviser “adopt the principal’s goals, objectives, or ends.”132 This means the adviser must, at all times, serve the best interest of its clients and not subordinate its client’s interest to its own. In other words, the investment adviser cannot place its own interests ahead of the interests of its client.133 This combination of care and loyalty obligations has been characterized as requiring the investment adviser to act in the “best interest” of its client at all times.

131 See, e.g., Proxy Voting by Investment Advisers, Advisers Act Release No. 2106 (Jan. 31,
2003) (“Investment Advisers Release No. 2106”). See also Fiduciary Interpretation.
132 Arthur B. Laby, The Fiduciary Obligations as the Adoption of Ends, 56 Buffalo Law Review 99 (2008); see also Restatement (Third) of Agency, §2.02 Scope of Actual Authority (2006) (describing a fiduciary’s authority in terms of the fiduciary’s reasonable understanding of the principal’s manifestations and objectives). See Fiduciary Interpretation. 133 See Fiduciary Interpretation. 134 Id. See also Amendments to Form ADV, Advisers Act Release No. 3060 (Jul. 28, 2010) (adopting amendments to Form ADV and stating that “under the Advisers Act, an adviser is a fiduciary whose duty is to serve the best interests of its clients, which includes an obligation not to subrogate clients’ interests to its own,” citing Investment Advisers Act Release 2106). See SEC v. Tambone, 550 F.3d 106, 146 (1st Cir. 2008) (“Section 206 imposes a fiduciary duty on investment advisers to act at all times in the best interest of the fund…”); SEC v. Moran, 944 F. Supp. 286, 297 (S.D.N.Y 1996) (“Investment advisers are entrusted with the responsibility and duty to act in the best interest of their clients.”).

Language that would require a broker-dealer to put the retail customer’s interest “first” arguably raises many of the same concerns as the “without regard to” language. Accordingly, we are adopting a formulation in Regulation Best Interest that is consistent with how we describe the duty of loyalty for investment advisers in the Fiduciary Interpretation—that is, a requirement not to place the adviser’s interests ahead of the interests of its client. While we are not revising this phrasing of the standard, we appreciate concerns raised by commenters about clarifying whether this standard permits broker-dealers to allow their conflicts to taint their recommendations or to allow broker-dealers to make recommendations that are motivated by their own interests or to put their interests first. We discuss below what it means to “act in the best interests,” particularly in the context of satisfying the Care and Conflict of Interest Obligations. Specifically, we clarify that the obligations set forth in Regulation Best Interest are intended to require broker-dealers to take steps to reduce the effect of (and in some cases eliminate) conflicts that create an incentive to place a broker-dealer’s or an associated person’s interest ahead of the retail customer’s interest when making a recommendation, and to make recommendations in the best interest of the retail customer even where conflicts continue

135 See Fiduciary Interpretation at footnote 54 (stating that, in practice, referring to putting a client’s interest first is a plain English formulation commonly used by investment advisers to explain their duty of loyalty in a way that may be more understandable to retail clients).

to exist. We believe that this approach will result in a standard of conduct that is consistent with what a reasonable retail customer would expect.136 Finally, although our standard draws from key fiduciary principles, for various reasons, including to emphasize that Regulation Best Interest is tailored to the broker-dealer relationship and distinct from the investment adviser fiduciary duty, we are not referring to Regulation Best Interest as a “fiduciary” standard, and we emphasize that Regulation Best Interest is separate from any common law analysis of whether a broker-dealer has fiduciary duties. 137 As noted in

136 See, e.g., 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”). OIAD/RAND summarized the results of focus groups, indicating that in the context of discussing expectations for standards of conduct, “the groups typically expected that a financial professional who is acting in a client’s best interest” to, among other things, “disclose payments they receive that might influence their advice [and] avoid taking higher compensation for selling one product over a similar but less costly product.” Further, OIAD/RAND summarized focus group comments on professionals’ form of compensation, noting that “although many participants prefer that a professional be compensated by the client alone, some might not rule out using a professional who is receiving other compensation, for example if the compensation is openly disclosed and they are comfortable with the professional.” 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 proposals. This report was included in the comment file at https://www.sec.gov/comments/s7-07-18/s70718- 4513005-176009.pdf. See also, e.g., Washington, D.C. Roundtable at 49 (“So it seems to me that there is a tight connection between the obligation that you have, and our obligations down below here to the conflicts of interest, that it’s really important that advisers or brokers spell out what conflicts of interest they have, and what that means in real terms to the person before they make a choice, for example”). 137 In addition to the antifraud provisions of the federal securities laws, courts interpreting state common law have imposed fiduciary obligations on broker-dealers in certain

the proposal, fiduciary standards vary, for example, for investment advisers, banks acting as trustees or fiduciaries, and fiduciaries to ERISA plans. As we have learned through our consideration of the Relationship Summary Proposal, and from various investor studies, using the term “fiduciary” to describe the standard may not sufficiently convey meaning regarding the specific substance of the standard. 138 In addition, we appreciate commenters’ concerns that using the term in the context of a different relationship may introduce further legal or compliance ambiguity.139

circumstances. See Proposing Release at 21584. Generally, courts have found that broker-dealers that exercise discretion or control over customer assets, or have a relationship of trust and confidence with their customers, owe customers a fiduciary duty. Id. In developing proposed Regulation Best Interest, the Commission has drawn from principles that apply to investment advice under other regulatory regimes, including state common law fiduciary principles, among others. By doing so, we hope to establish greater consistency in the level of retail customer protections and to make it easier to comply with Regulation Best Interest where other legal regimes, such as state common law drawing upon comparable fiduciary principles, might also apply. 138 See, e.g., RAND 2018 (“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 …”). We have modified the standard of conduct disclosure required by Form CRS to eliminate technical words, such as “fiduciary,” and describe the standards of conduct of broker-dealers, investment advisers, or dualregistrants using similar terminology in a plain-English manner. In particular, Form CRS uses 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. See Relationship Summary Adopting Release. 139 See, e.g., Stifel Letter.

As articulated in the Proposing Release, we appreciate the desire for clarity about the requirements imposed by Regulation Best Interest, and we have sought to provide such clarity by specifying by rule the specific components with which a broker-dealer is required to comply to satisfy its best interest obligation. The changes we are making from the Proposing Release to this final Regulation Best Interest and the additional interpretations and guidance we are providing are intended to further clarify how a broker-dealer could comply with these requirements. As noted above and discussed in the Fiduciary Interpretation, an investment adviser’s fiduciary duty under the Advisers Act requires the adviser to act in the best interests of its clients. We have chosen to describe the standard by referring directly to what the standard requires at the time a recommendation is made.140 Furthermore, while key elements of the standard of conduct that applies to broker-dealers under Regulation Best Interest will be substantially similar to key elements of the standard of conduct that applies to investment advisers pursuant to their fiduciary duty under the Advisers Act at the time that a recommendation is made, we are concerned that using the term “fiduciary” to describe a broker-dealer’s obligations under Regulation Best Interest may create confusion by suggesting that the standards of conduct are identical in all respects, when there are key differences as noted above, including the scope of the of the duty

140 As discussed in the Relationship Summary Adopting Release, we are adopting a requirement in Form CRS for a description of a firm’s applicable standard of conduct using prescribed wording.

(e.g., the application of the adviser’s fiduciary duty to the entire relationship versus Regulation Best Interest’s recommendation-specific application, and the application of an adviser’s fiduciary duty to all clients as opposed to Regulation Best Interest’s application to retail customers). Similarly, while we are not harmonizing the phrasing of the best interest standard with the DOL’s definition of “best interest” as reflected in the BIC Exemption’s Impartial Conduct Standards, as suggested by some commenters,142 or otherwise adopting some or all conditions of the BIC Exemption, we gave careful consideration to the DOL Fiduciary Rule in developing Regulation Best Interest.143 Regulation Best Interest takes into account both market participant experience with the implementation of—and reaction to the subsequent overturning of the DOL Fiduciary Rule, in particular the BIC Exemption. As discussed in the Proposing Release, we believe Regulation Best Interest is consistent with many of the key components of the DOL’s Impartial Conduct Standards. Regulation Best Interest incorporates principles underlying the DOL Fiduciary Rule—such as the concept of conflict mitigation—that, based on our expertise in regulating the broker-dealer industry, we believe would further our goal of reducing the effect of

141 See Fiduciary Interpretation.
142 See AARP August 2018 Letter; Wells Fargo Letter; Schwab Letter; NASAA August 2018 Letter. 143 On March 15, 2018, the DOL Fiduciary Rule was vacated by the United States Court of Appeals for the Fifth Circuit. Chamber of Commerce v. U.S. Dep’t of Labor, 885 F.3d 360 (5th Cir. 2018).

conflicts on recommendations and would promote recommendations in the best interest of the retail customer even where conflicts continue to exist.
2. General Obligation to “Act in Best Interest”
We agree with commenters that further clarity should be provided on what it means to “act in the best interest” of a retail customer and particularly what it means to make a recommendation in a retail customer’s “best interest” under the Care Obligation. In the guidance that follows and in the detailed discussion of each of the Disclosure, Care, Conflict of Interest, and Compliance Obligations in Section II.C below, we provide further clarity on how a brokerdealer acts in a retail customer’s best interest when making a recommendation. First, in response to comments, we are clarifying the relationship between the General Obligation and the specific component obligations described in Section II.C. These specific component obligations expressly set forth what it means to “act in the best interest” of the retail customer in accordance with the General Obligation. As articulated in the proposal, and discussed in more detail in the relevant sections specifically addressing these obligations, these specific component obligations draw on principles underlying the fiduciary duties of care and loyalty interpreted under the Advisers Act and as recommended in the 913 Study. However, we believe that adopting specific regulatory obligations for broker-dealers appropriately reflects the structure and characteristics of broker-dealer relationships with retail customers and the extensive existing regulatory regime applicable to broker-dealers. Regulation Best Interest does not establish a “safe harbor.” The specific component obligations of Regulation Best Interest are mandatory, and failure to comply with any of the components would violate the General Obligation. By contrast, compliance with a safe harbor is optional, and failure to comply with the terms of the safe harbor does not necessarily violate the relevant legal requirement.

Second, while we are declining to expressly define “best interest” in the rule text as suggested by some commenters, we are providing interpretations and guidance regarding the application of the specific component obligations and in particular what it means to make a recommendation in the retail customer’s “best interest.” Consistent with the proposal, compliance with each of the specific component obligations of Regulation Best Interest, including the “best interest” requirement in the Care Obligation, will be applied in a principlesbased manner. This principles-based approach to determining what is in the “best interest” is similar to an investment adviser’s fiduciary duty, which has worked well for advisers’ retail clients and our markets. As proposed, whether a broker-dealer has acted in the retail customer’s best interest will turn on an objective assessment of the facts and circumstances of how the specific components of Regulation Best Interest are satisfied at the time that the recommendation is made (and not in hindsight). In particular, whether a broker-dealer’s recommendation satisfies the requirements of the Care Obligation is an objective evaluation that is not susceptible to a bright line test; rather it turns on the facts and circumstances of the particular recommendation and the particular retail customer, at the time the recommendation is made. This facts-andcircumstances approach recognizes that one size does not fit all, and what is in the best interest of one retail customer may not be in the best interest of another. We understand that markets evolve and we encourage broker-dealers to have an open dialogue with the Commission and Commission’s staff as questions arise. As a general matter, however, in response to comments, we are changing guidance in the Proposing Release stating that under Regulation Best Interest, a broker-dealer’s financial interests cannot be the “predominant motivating factor behind” a recommendation, and that a “broker-dealer would violate proposed Regulation Best Interest’s Care Obligation and Conflict

of Interest Obligations, if any recommendation was predominantly motivated by the brokerdealer’s self-interest.”144 Many commenters expressed concerns regarding and requested removal of the “predominantly motivated” language, stating that it contradicted statements that there was no scienter requirement under Regulation Best Interest by requiring a consideration of intent, creating ambiguity as to what extent a broker-dealer’s interests could influence its recommendations or requiring a weighing of the broker-dealer’s interests against the retail customer’s interests.145 Some commenters, however, indicated support for the “predominantly motivated language” in the context of agreeing with the Commission’s proposed “without placing the financial or other interest . . . ahead” phrasing of the best interest standard.146 In consideration of these comments, we are modifying these statements to remove this language and to clarify our intent. Specifically, Regulation Best Interest recognizes that while a broker-dealer will inevitably have some financial interest in a recommendation—the nature and magnitude of which will vary—the broker-dealer’s interests cannot be placed ahead of the retail customer’s interest. 147 Accordingly, Regulation Best Interest will not per se prohibit a broker-

144 See Proposing Release at 21588.
145 See CFA August 2018 Letter; Better Markets August 2018 Letter; Wells Fargo Letter. 146 See AXA Letter; FSI August 2018 Letter. 147 See id. See infra Section II.C.2.

dealer from making recommendations where conflicts of interest are present. 148 Instead, Regulation Best Interest includes specific requirements for broker-dealers to address their conflicts of interest. 149 These specific requirements are designed to promote recommendations that are in the best interest of the retail customer despite the existence of these conflicts of interest. In other words, recommendations involving conflicts of interest between the brokerdealer and the retail customer will be permissible under Regulation Best Interest only to the extent that the broker-dealer satisfies the specific requirements of Regulation Best Interest. Further, for the reasons discussed in the proposal, we confirm that Regulation Best Interest is not intended to limit or eliminate recommendations that encourage diversity in a retail customer’s portfolio through investment in a wide range of products, including, when

148 Such conflicts of interest may include: charging commissions or other transaction-based fees; receiving or providing differential compensation based on the product sold; receiving third-party compensation; recommending proprietary products, products of affiliates or a limited range of products; recommending a security underwritten by the broker-dealer or a broker-dealer affiliate, including initial public offerings (“IPOs”); recommending a transaction to be executed in a principal capacity; allocating trades and research, including allocating investment opportunities (e.g., IPO allocations or proprietary research or advice) among different types of customers and between retail customers and the broker-dealer’s own account; considering cost to the broker-dealer of effecting the transaction or strategy on behalf of the customer (for example, the effort or cost of buying or selling a complex or an illiquid security); or accepting a retail customer’s order that is contrary to the broker-dealer’s recommendations. While these practices will not be per se prohibited by Regulation Best Interest, we are also not saying that these practices are per se consistent with Regulation Best Interest or other obligations under the federal securities laws. See also Proposing Release at 21587. 149 Id at 21588.

appropriate, products that may involve higher risks or cost to the retail customer, as these products may be in the best interest of certain retail customers at certain times or in certain circumstances. 150 Regulation Best Interest will not necessarily obligate a broker-dealer to recommend the “least expensive” or the “least remunerative” security or investment strategy, provided the broker-dealer complies with the specific component obligations.151 In other words, Regulation Best Interest will allow a broker-dealer to recommend products that entail higher costs or risks for the retail customer, or that result in greater compensation to the broker-dealer, or that are more expensive, than other products, provided that the broker-dealer complies with the specific component obligations detailed below, 152 including the requirement to make these recommendations exercising reasonable diligence, care, and skill to have a reasonable basis to believe that the recommendation is in the retail customer’s best interest and does not place the broker-dealer’s interest ahead of the retail customer’s interest. Finally, some commenters sought additional clarity whether Regulation Best Interest would extend beyond a particular recommendation, impose a duty to monitor the retail customer’s account, or apply to unsolicited orders.153 We confirm that, consistent with the

150 Id.
151 See id.
152 See id.
153 See, e.g., SIFMA August 2018 Letter; Transamerica August 2018 Letter; see also generally CFA August 2018 Letter; Better Markets August 2018 Letter.

Proposing Release and as discussed further below, Regulation Best Interest would not: (1) extend beyond a particular recommendation154 or generally require a broker-dealer to have a continuous duty to a retail customer or impose a duty to monitor;155 (2) require the broker-dealer to refuse to accept a customer’s order that is contrary to the broker-dealer’s recommendation; or (3) apply to self-directed or otherwise unsolicited transactions by a retail customer, whether or not she also receives separate recommendations from the broker-dealer. B. Key Terms and Scope of Best Interest Obligation

Natural Person who is an Associated Person
In the Proposing Release, we stated that a “natural person who is an associated person” is a natural person who is an associated person as defined in Section 3(a)(18) of the Exchange Act:
“any partner, officer, or director or branch manager of such broker or dealer (or any person occupying a similar status or performing similar functions); any person directly or indirectly controlling, controlled by, or under common control with such broker or dealer; or any employee

154 However, paragraph (a)(2)(iii)(C) of Regulation Best Interest addresses a series of recommended transactions. See Section II.C.2.d. 155 However, as discussed below, it is our position that when a broker-dealer agrees with a retail customer to provide account monitoring services: (1) the broker-dealer would be required to disclose the material facts (including scope and frequency) of those services pursuant to the Disclosure Obligation, and (2) such agreed-upon account monitoring services involve an implicit recommendation to hold (i.e., an implicit recommendation not to buy, sell, or exchange assets pursuant to that securities account review) at the time agreed-upon monitoring occurs, which is a recommendation “of any securities transaction or investment strategy involving securities” covered by Regulation Best Interest.

of such broker or dealer, except that any person associated with a broker or dealer whose functions are solely clerical or ministerial shall not be included in the meaning of such term for purposes of Section 15(b) of this title (other than paragraph 6 thereof).”156 In limiting the term to only a “natural person who is an associated person,” we sought to exclude affiliated entities of the broker-dealer that are not themselves broker-dealers, as they are not the intended focus of Regulation Best Interest. We solicited comment on whether the application of the definition was appropriate, alternative definitions should be considered, or the scope should be broadened or narrowed. We received no comments and, for the reasons discussed in the Proposing Release, are using the term “natural person who is an associated person,” consistent with the definition in Section 3(a)(18) of the Exchange Act.
2. Recommendation of Any Securities Transaction or Investment Strategy
Involving Securities
We proposed to apply Regulation Best Interest to broker-dealer recommendations of any securities transaction or investment strategy involving securities to a retail customer. We believed that by applying Regulation Best Interest to a “recommendation,” as that term is currently interpreted under broker-dealer regulation, we would make clear when the obligation

156 Proposing Release at 21592-21593.
157 Id.
158 Id.

applied and would maintain efficiencies for broker-dealers that have already established infrastructures to comply with suitability obligations, which are recommendation-based. Moreover, we believed that focusing on each recommendation would appropriately capture and reflect the various types of recommendations that broker-dealers make to retail customers, whether on an episodic, periodic, or more frequent basis and would help ensure that retail customers receive the protections that Regulation Best Interest is intended to provide. We received numerous comments supporting our general proposed approach to what is a “recommendation,” while several commenters suggested modifications regarding the scope of a recommendation or sought additional clarity regarding particular scenarios.160 As we indicated in the Proposing Release, in our view, the determination of whether a broker-dealer has made a recommendation that triggers application of Regulation Best Interest should turn on the facts and circumstances of the particular situation and therefore, whether a recommendation has taken place is not susceptible to a bright line definition. Factors considered in determining whether a recommendation has taken place include whether the communication “reasonably could be viewed as a ‘call to action’” and “reasonably would influence an investor

159 Id.
160 See generally SIFMA August 2018 Letter; Financial Engines Letter; IPA Letter; Putnam Letter; Cambridge Letter (recommending the Commission adopt FINRA’s approach to determining whether a communication is a “recommendation”). But see NASAA August 2018 Letter; BlackRock Letter; FSI August 2018 Letter (recommending modifications or clarifications to “recommendation”).

to trade a particular security or group of securities.”161 The more individually tailored the communication to a specific customer or a targeted group of customers about a security or group of securities, the greater the likelihood that the communication may be viewed as a “recommendation.” We continue to believe this general framework regarding what is a recommendation is appropriate, and for the reasons discussed in the Proposing Release, are taking this approach.162 While certain commenters recommended formally defining the term “recommendation,” including what does not come within that term, 163 other commenters maintained there is no need to define “recommendation” and expressed support for harmonizing the term in accordance with existing broker-dealer guidance and case law.164 We agree with commenters that clarity is

161 See Proposing Release at 21592-21593; see also NASD Notice to Members 01-23, Online Suitability – Suitability Rules and Online Communications (Apr. 2001); Notice of Filing Proposed Rule Change to Adopt FINRA Rule 2090 (Know Your Customer) and FINRA Rule 2111 (Suitability) in the Consolidated FINRA Rulebook, Exchange Act Release No. 62718 (Aug. 13, 2010), 75 FR 51310 (Aug. 19, 2010), as amended, Exchange Act Release No. 67218A (Aug. 20, 2010), 75 FR 52562 (Aug. 26, 2010) (discussing what it means to make a “recommendation”). 162 See Proposing Release at 21592-21593. 163 See, e.g., Prudential Letter (recommending an express definition of “recommendation” that would codify guidance). 164 See, e.g., SIFMA August 2018 Letter (“Similarly, the SEC refers to the FINRA concept of ‘recommendation’ rather than prescribing a specific definition. We believe this is appropriate, and we believe that a carve-out for educational materials would be consistent with that approach.”); Edward Jones Letter (“We do not believe it is necessary for the SEC to define the phrase ‘at the time the recommendation is made,’ because its meaning is plain.”); Cambridge Letter (“FINRA Rule 2111 sets forth an explicit standard for what

important, and we continue to believe that the current principles-based approach underlying existing Commission precedent and guidance will provide effective clarity. Being more prescriptive could result in a definition that is over inclusive, under inclusive, or both.165 We believe that what constitutes a recommendation is highly fact-specific and not conducive to an express definition in the rule text. Furthermore, we believe that the existing framework has worked well, that broker-dealers generally are familiar with the existing framework, and therefore, that this approach should continue. Accordingly, we are taking the approach as set forth in the Proposing Release, which we believe provides a workable framework and clarity for broker-dealers regarding the contours of a recommendation. To provide further clarity, in response to comments, we describe below the types of communications that we generally view as falling outside of the scope of a recommendation. We are also generally confirming our interpretation in the Proposing Release of the phrase “any securities transaction or investment strategy involving securities.” However, in response to comments regarding the coverage of certain securities or investment strategies, we

constitutes a recommendation and recognizes ‘call to action’ as the hallmark. Cambridge believes this definition is fully understood and in use by the industry.” Cambridge also states that harmonizing the final rule with existing FINRA rules and guidance will provide clarity to firms, financial professionals, and investors). 165 See id.; Proposing Release at 21592-21593. Similarly, FINRA has stated that “defining the term ‘recommendation’ is unnecessary and would raise many complex issues in the absence of specific facts of a particular case.” Exchange Act Release No. 37588, 1996 SEC LEXIS 2285, at *29 (Aug. 20, 1996), 61 FR 44100, 44107 (Aug. 27, 1996).

are providing further clarity regarding our interpretation of this phrase, and in certain instances, refining our interpretation. For example, as discussed more fully below, we are confirming our interpretation that recommendations of “any securities transaction” (purchase, sale, or exchange) and any “investment strategy” involving securities (including an explicit hold recommendation) are recommendations “of any securities transaction or investment strategy involving securities.” In addition, we are generally confirming our interpretation that a broker-dealer may agree with a retail customer to take on additional obligations beyond those imposed by Regulation Best Interest, for example, by agreeing with a retail customer to provide monitoring of the retail customer’s investments on a periodic basis for purposes of recommending changes in investments.166 In response to comments, it is our position that when a broker-dealer agrees167

166 Proposing Release at 21594-21595. The Proposing Release referred to “ongoing” monitoring of the retail customer’s investments for purposes of recommending changes in investments. Id. In the discussion that follows and the Solely Incidental Interpretation, we are clarifying our views regarding broker-dealer account monitoring services, and the application of Regulation Best Interest to such services. As discussed in the Solely Incidental Interpretation, a broker-dealer that agrees to monitor a retail customer’s account on a periodic basis for purposes of providing buy, sell, or hold recommendations may still be considered to provide advice in connection with and reasonably related to effecting securities transactions. Broker-dealers may choose to adopt policies and procedures that, if followed, would help demonstrate that any agreedupon monitoring is in connection with and reasonably related to the broker-dealer’s primary business of effecting securities transactions. See Solely Incidental Interpretation. 167 An agreement to provide account monitoring services to a retail customer is not required to be in writing (although whether or not the broker-dealer is providing account monitoring services, and, if so, the scope and frequency of such monitoring services, must be disclosed in writing pursuant to the Disclosure Obligation). For example, a broker-dealer’s oral undertaking that the broker-dealer will monitor the retail customer’s

with a retail customer to monitor that customer’s account: (1) the broker-dealer is required to disclose the terms of such account monitoring services (including the scope and frequency of those services) pursuant to the Disclosure Obligation168 and (2) such agreed-upon monitoring involves an implicit recommendation to hold (i.e., recommendation not to buy, sell, or exchange assets pursuant to that securities account review) at the time the agreed-upon monitoring occurs, which is a recommendation “of any securities transaction or investment strategy involving securities” covered by Regulation Best Interest. 169 As discussed further below, in our view, a recommendation of “an investment strategy” includes implicit hold recommendations in this

account on a periodic basis would create an agreement to monitor the account on the terms specified orally. Whether an agreement with the retail customer has been established in the absence of a written agreement or express oral undertaking will depend on an objective inquiry of the particular facts and circumstances, including reasonable retail customer expectations arising from the broker-dealer’s course of conduct. In cases where a broker-dealer does not intend to create an implied agreement to monitor the retail customer’s account through course of conduct or otherwise, and to avoid ambiguity over whether an implied agreement has been formed, broker-dealers should take steps to ensure that all communications with the retail customer are consistent with its disclosures required under the Disclosure Obligation, which in this case would require the brokerdealer to clearly disclose that the broker-dealer does not monitor the retail customer’s account. 168 To avoid ambiguity over whether or when an implicit hold recommendation has been made, this disclosure should identify with specificity when the agreed upon monitoring will occur. See also FINRA Regulatory Notice 12-25 at Q14. 169 See IAC 2018 Recommendation; NAIFA Letter; AFL-CIO April 2019 Letter; see also FINRA Regulatory Notice 12-25, Suitability – Additional Guidance on FINRA’s New Suitability Rule (May 2012) at Q3 and accompanying footnotes.

context, where the broker-dealer has agreed to monitor a retail customer’s account. 170 We are interpreting the phrase “any security transaction or investment strategy” to include instances where there is an agreement to monitor because in this context there is an implicit recommendation to hold at the time the agreed-upon monitoring occurs when the broker-dealer does not provide an express recommendation to buy, sell, or hold.

170 See FINRA Rule 2111.03; FINRA Regulatory Notice 12-25. The Commission recognizes that its position with respect to Regulation Best Interest differs from that provided in FINRA guidance regarding whether implicit hold recommendations are subject to the suitability rule. This interpretation applies in the context of the protections of Regulation Best Interest, and does not change the scope of the application of the FINRA suitability rule. Further, while for purposes of Regulation Best Interest implicit hold recommendations are generally recommendations of “any securities transaction or investment strategy regarding securities” where a broker-dealer agrees to provide account monitoring services, we are not otherwise addressing the treatment of implicit hold recommendations in other contexts. In other words, except where a broker-dealer agrees to provide account monitoring services as described, consistent with existing FINRA guidance, Regulation Best Interest will only apply to explicit hold recommendations. See FINRA Regulatory Notice 12-25 at Q3 and accompanying footnotes. 171 Our interpretation is generally consistent with commenters’ views regarding the application of Regulation Best Interest to implicit hold recommendations in the context of agreed-upon account monitoring services. See IAC 2018 Recommendation (“we believe the best interest standard should be applied to the broker-dealer’s monitoring of the customer account, where brokers provide ongoing services to the account. In essence, this would apply the best interest standard to the implicit “no recommendation” recommendation that a broker makes when reviewing the account and recommending no change.”); NAIFA Letter (asserting broker-dealers should be free to agree to, and define the nature of, any ongoing relationship via contract, such as including monitoring services). See also AFL-CIO April 2019 Letter (“adopt a principles-based obligation to monitor the account, where the nature and extent of the monitoring follows the contours of the relationship”). See also supra footnote 166 (encouraging broker-dealers to adopt policies and procedures that, if followed, would help demonstrate that any agreed-upon monitoring is in connection with and reasonably related to the broker-dealer’s primary

We recognize that a broker-dealer may voluntarily, and without any agreement with the customer, review the holdings in a retail customer’s account for the purposes of determining whether to provide a recommendation to the customer. We do not consider this voluntary review to be “account monitoring,” nor would it in itself create an implied agreement with the retail customer to monitor the customer’s account. Any explicit recommendation made to the retail customer as a result of any such voluntary review would be subject to Regulation Best Interest. Finally, in response to comments received, we have modified the rule text to provide that an “investment strategy involving securities” includes “account recommendations.” We interpret “account recommendations” to include recommendations of securities account types generally, as well as recommendations to roll over or transfer assets from one type of account to another (e.g., workplace retirement plan to an IRA). As discussed in more detail below, we believe that recommendations of securities account types are consistent with the types of recommendations that have been treated as investment strategies, 172 because the type of securities account

business of effecting securities transactions in accordance with the Solely Incidental Interpretation). 172 Although FINRA has stated that a recommendation concerning the type of workplace retirement plan account in which a customer should hold his retirement investments typically involves a recommended securities transaction, and thus is subject to suitability requirements, FINRA did not address whether such a recommendation would be an investment strategy in the absence of such a recommended securities transaction. FINRA Regulatory Notice 13-45, Rollovers to Individual Retirement Accounts – FINRA Reminds Firms of Their Responsibilities Concerning IRA Rollovers (Dec. 2013). Taking this approach is consistent with Commission precedent finding a recommendation of a margin strategy to be unsuitable under the NASD suitability rule, in light of the

recommended is an investment strategy that has the potential to greatly affect retail customers’ costs and investment returns. 173 For example, different types of securities accounts can offer different features, products, or services, some of which may—or may not—be in the best interest of certain retail customers.174 Our interpretation is consistent with a majority of the IAC and other commenters that stated that such important recommendations relating to securities are “investment strategies involving securities” and thus within the scope of Regulation Best Interest.175 We note that, although we are specifically identifying “account recommendations” as

associated transactions costs and the impact the strategy could have on customer returns. See F.J. Kaufman & Co., 50 S.E.C. 164 (1989) (Commission Opinion) (stating that a broker-dealer recommending the purchase of securities using a margin strategy “at a minimum . . . had an obligation to understand that, in light of the applicable transaction costs, the two components of his recommended strategy, when combined, always would have produced returns inferior to those that could have been obtained from one of those components alone.”). 173 See SEC Office of Investor Education and Advocacy, Updated Investor Bulletin: How Fees and Expenses Affect Your Investment Portfolio (Sep. 2016). 174 In addition to brokerage versus investment advisory accounts, there are also many options or account types within brokerage accounts. For example, brokerage accounts can include: education accounts (e.g., 529 Plans and tax-free Coverdell accounts); retirement accounts (e.g., IRA, Roth IRA, or SEP-IRA accounts); and specialty accounts (e.g., cash or margin accounts, and accounts with access to Forex or options trading). Different brokerage accounts can also offer different levels of services, such as access to online trading, or can offer different products, for example, in higher dollar amount accounts (e.g., access to products with break-points). 175 See, e.g., IAC 2018 Recommendation (“Decisions about which type of account to open have the potential to greatly affect their costs. Moreover, both rollover and account type recommendations are recommendations of an ‘investment strategy involving securities’ that can have substantial potential long-term impacts on investors. Both types of recommendations inherently involve potential conflicts of interest, making it critical that

an investment strategy involving securities in the rule text, an account recommendation is just one example of an investment strategy. a. Recommendation We interpret whether a “recommendation” has been made to a retail customer that triggers the best interest obligation consistent with precedent under the anti-fraud provisions of the federal securities laws as applied to broker-dealers, and with how the term has been applied under the rules of self-regulatory organizations (“SROs”). 176 Several commenters supported this approach, and specifically agreed with following the existing facts and circumstances approach as understood under federal securities laws and SRO rules. Commenters sought additional clarity regarding the scope of a recommendation and in particular whether certain activities or communications would constitute recommendations, and requested that the Commission incorporate or specifically identify exceptions or exclusions such as the exceptions recognized in FINRA Rule 2111.03 (Suitability) or acknowledged by the

advisers and brokers put their clients’ interests ahead of their own in making such recommendations.”); Capital Group Letter (“Choosing between a brokerage and an advisory account is an incredibly impactful decision for investors. It is very important that these recommendations be made in the best interest of the retail [customer].”). 176 See Proposing Release at 21592-21595. In this regard, Regulation Best Interest does not extend beyond a particular recommendation, for example, by imposing a general brokerdealer duty to monitor a customer’s account or by applying the duty to unsolicited orders. 177 See, e.g., AXA Letter; SIFMA August 2018 Letter; IPA Letter; Putnam Letter; FSI August 2018 Letter; Cetera August 2018 Letter.

DOL.
178 Some commenters also sought an explicit carve out or confirmation that certain communications, such as general education materials, general retirement planning materials, or

178 See, e.g., Prudential Letter; Transamerica August 2018 Letter; SPARK Letter; see also FINRA Rule 2111.03 (excluding the following communications from the coverage of Rule 2111 as long as they do not include (standing alone or in combination with other communications) a recommendation of a particular security or securities: (a) General financial and investment information, including: (i) basic investment concepts, such as risk and return, diversification, dollar cost averaging, compounded return, and tax deferred investment, (ii) historic differences in the return of asset classes (e.g., equities, bonds, or cash) based on standard market indices, (iii) effects of inflation, (iv) estimates of future retirement income needs, and (v) assessment of a customer's investment profile; (b) Descriptive information about an employer-sponsored retirement or benefit plan, participation in the plan, the benefits of plan participation, and the investment options available under the plan; (c) Asset allocation models that are: (i) based on generally accepted investment theory, (ii) accompanied by disclosures of all material facts and assumptions that may affect a reasonable investor's assessment of the asset allocation model or any report generated by such model, and (iii) in compliance with Rule 2214 (Requirements for the Use of Investment Analysis Tools) if the asset allocation model is an "investment analysis tool" covered by Rule 2214; and (d) Interactive investment materials that incorporate the above). The DOL took a similar approach, excluding from the term “recommendation,” among other things, general communications and investment education (including plan information, general financial, investment and retirement information, asset allocation models and interactive investment materials). See DOL Interpretative Bulletin 96-1; Participant Investment Education, 29 CFR 2509.96-1, 61 FR 29588 (Jun. 11, 1996) (IB 96-1). See also DOL, Definition of the Term “Fiduciary”; Conflict of Interest Rule – Retirement Investment Advice, 81 FR 20945, 20975 (Apr. 8, 2016) (noting that the now vacated DOL Fiduciary Rule would have carved out investment education from the definition of investment advice, incorporating much of IB 96-1).

general retirement communications, including “pure distribution recommendations,” are not “recommendations” subject to Regulation Best Interest.179 The treatment of certain communications as “education” rather than “recommendations” is well understood by broker-dealers. We generally view the following types of communications as not being recommendations of any securities transaction or investment strategy involving securities as long as they do not include, standing alone or in combination with other communications, a recommendation of a particular security or securities or particular investment strategy involving securities180:

General financial and investment information, including:
o basic investment concepts, such as risk and return, diversification, dollar cost averaging, compounded return, and tax deferred investment,

179 See SPARK Letter; NAGDCA Letter. Similarly, communications regarding participation in a plan and communications to make or increase plan contributions, without more, would generally not come within “recommendation.” 180 This concept also applies to investment strategies. See FINRA Regulatory Notice 11-25, Know Your Customer and Suitability – New Implementation Date for and Additional Guidance on the Consolidated FINRA Rules Governing Know-Your-Customer and Suitability Obligations (May 2011) at FAQ 9 (“It is important to note, however, that the suitability rule would not apply to a firm's explanation of a strategy falling outside the safe-harbor provision if a reasonable person would not view the communication as a recommendation. Accordingly, the suitability rule would cover a firm’s recommendation that a customer purchase securities using margin, whereas the rule generally would not cover a firm's brochure that simply explains the risks and benefits of margin without suggesting that the customer take action.”).

o historic differences in the return of asset classes (e.g., equities, bonds, or cash) based on standard market indices, o effects of inflation, o estimates of future retirement income needs, and o assessment of a customer's investment profile;

Descriptive information about an employer-sponsored retirement or benefit plan,
participation in the plan, the benefits of plan participation, and the investment options available under the plan;181
Asset allocation models that are:
o based on generally accepted investment theory, o accompanied by disclosures of all material facts and assumptions that may affect a reasonable investor's assessment of the asset allocation model or any report generated by such model, and o in compliance with FINRA Rule 2214 (Requirements for the Use of Investment Analysis Tools) if the asset allocation model is an “investment analysis tool” covered by FINRA Rule 2214;182 and

181 While this descriptive information would be treated as “education” rather than a “recommendation,” we caution broker-dealers to ensure that communications by their associated persons intended as “education” do not cross the line into “recommendations.” See FINRA Regulatory Notice 13-45.

Interactive investment materials that incorporate the above.
Thus, for example, a general conversation about retirement planning, such as providing a company’s retirement plan options to a retail customer, would not, by itself, rise to the level of a recommendation. Similarly, where a broker-dealer informs a retail customer that he or she needs to take a required minimum distribution under the Internal Revenue Code, we would not interpret such communication, by itself, to rise to the level of a recommendation. Such a communication would be considered investment education or descriptive information, provided it does not involve, for example, a recommendation regarding specific securities to be sold or a recommendation regarding specific securities to be purchased with the proceeds of any sale. We agree with commenters that Regulation Best Interest should not stifle investment education as a means to encourage financial wellness, or otherwise restrict broker-dealers from

182 In this regard, as an allocation recommendation becomes narrower or more specific, the recommendation gets closer to becoming a recommendation of particular securities and, thus, subject to the suitability rule. See FINRA Regulatory Notice 12-25 at FAQ 8. 183 See, e.g., SPARK Letter (asking for confirmation that “pure ‘distribution recommendations’ involving retirement accounts, such as those required under Internal Revenue Code section 401(a)(9), are not a ‘recommendation of any securities transaction or investment strategy involving securities.’”). However, informing a retail customer about a required minimum distribution may become a recommendation where a brokerdealer includes (standing alone or in combination with other communications) a recommendation of, or regarding, a particular security or securities or an investment strategy involving securities. See FINRA Rule 2111 (Suitability) FAQ.

disseminating information about, for example, retirement plans, and the approach we are taking to what is or is not considered a “recommendation” achieves this goal. b. Interpretation of Any Securities Transaction or Investment Strategy Involving Securities As proposed, Regulation Best Interest would apply to recommendations of “any securities transaction” (purchase, sale, and exchange) and any “investment strategy” involving securities (including explicit recommendations to hold a security or regarding the manner in which it is to be purchased or sold). In addition, the Proposing Release stated that securities transactions or investment strategies involving securities might also include recommendations to roll over or transfer assets from one type of account to another, such as recommendations to roll over or transfer assets from a retirement plan. 185 Finally, although we did not propose to cover account type recommendations generally, we noted that evaluating the appropriateness of the type of account is an issue that relates to both broker-dealers and investment advisers, and requested comment on whether and how we should address this type of recommendation. In response to the Proposing Release, several commenters supported the Commission’s approach; however, several commenters also requested modifications or clarifications regarding

184 See SPARK Letter (suggesting expressly excluding beneficial conversations about retirement savings and “ensuring that Regulation Best Interest does not discourage broker-dealers in any way from having these important conversations with retirement investors”); see also Transamerica August 2018 Letter (suggesting the exclusion of various conversations designed to facilitate retirement savings). 185 See Proposing Release at 21595.

products or strategies covered under Regulation Best Interest. For example, a majority of the IAC and numerous commenters highlighted the conflicts of interest associated with account type recommendations, and urged the Commission to apply Regulation Best Interest to account type recommendations generally, and to IRA rollovers.186 Relatedly, several commenters sought clarity regarding whether and when a rollover or account type recommendation would be a “recommendation” under Regulation Best Interest.187 After careful consideration of comments and feedback, the Commission has modified the rule text to state that an “investment strategy involving securities” includes “account recommendations.” We interpret “account recommendations” to include recommendations by broker-dealers of securities account types generally, 188 as well as recommendations to roll over

186 See, e.g., IAC 2018 Recommendation (supporting the “expan[sion] of the best interest obligation to cover rollover recommendations and recommendations by dual registrant firms regarding account types”); see also NASAA August 2018 Letter; SPARK Letter; Financial Engines Letter; Cetera August 2018 Letter; AFL-CIO April 2019 Letter. But see SIFMA August 2018 Letter (viewing recommendations of an account type as not involving a recommendation of a securities transaction or investment strategy involving securities). 187 See, e.g., NAGDCA Letter; FPC Letter. 188 In the discussion of the Care Obligation in Section II.C.2, we are also setting forth additional positions regarding the application of the Care Obligation to account type recommendations, as well as recommendations to roll over or transfer assets from one account to another. See also Fiduciary Interpretation (explaining that “[a]dvice about account type includes advice about whether to open or invest through a certain type of account (e.g., a commission-based brokerage account or a fee-based advisory account) and advice about whether to roll over assets from one account (e.g., a retirement account) into a new or existing account that the adviser or an affiliate of the adviser manages”).

or transfer assets from one type of account to another (e.g., workplace retirement plan account to an IRA). 189 In addition, the Commission is stating its view that “any securities transaction or investment strategy involving securities” not only includes explicit hold recommendations, but also includes implicit hold recommendations that are the result of agreed-upon account monitoring between the broker-dealer and retail customer.190 Account Recommendations The Proposing Release indicated that securities transactions or investment strategies involving securities could include recommendations to roll over or transfer assets from one type of account to another, such as recommendations to roll over or transfer assets in a workplace retirement plan account to an IRA, and requested comment on whether and how to address account type recommendations. Several commenters suggested expanding Regulation Best Interest to explicitly cover rollover recommendations and recommendations by firms regarding account types. For example, a majority of the IAC explained that rollover recommendations “are frequently provided at a critical juncture in an investor’s life—retirement—and are often irrevocable decisions,” and

189 A majority of the IAC and numerous commenters expressed the importance of account rollovers and the need for rollovers to be covered under Regulation Best Interest. See, e.g., IAC 2018 Recommendation; Financial Engines Letter. 190 Several commenters stated that broker-dealers should be able to contract with retail customers to provide additional services, such as account monitoring, and that such agreed upon services should be subject to Regulation Best Interest. See, e.g., NAIFA Letter; IAA August 2018 Letter; AFL-CIO April 2019 Letter.

further noted that “[d]ecisions about which type of account to open have the potential to greatly affect [retail customers’] costs” and that both rollovers and account type recommendations can “have substantial potential long-term impacts on investors.”191 Another commenter noted that “[r]etirees have no practical ability to recoup lost spending power by returning to work and setting aside additional retirement savings, so they are particularly vulnerable to the adverse consequences of poor advice and high expenses.”192 Finally, a majority of the IAC and several commenters noted that broker-dealers and investment advisers alike have a strong economic incentive to recommend investors roll over plan assets into an IRA or otherwise transfer assets to open an account with the broker-dealer or investment adviser.193 After consideration of comments received, including concerns expressed about the conflicts associated with recommendations of account types, IRA rollovers and retirement advice more broadly, it is our view that Regulation Best Interest should apply broadly to recommendations of securities transactions and investment strategies involving securities. Accordingly, the Commission is including in the rule text account recommendations as recommendations that will be covered by Regulation Best. “Account recommendations” include

191 IAC 2018 Recommendation. See also Letter from Brian H. Graff, Executive Director and CEO, Craig P. Hoffman, General Counsel, Doug Fisher, Director of Retirement Policy, American Retirement Association (“ARA”) (Dec. 13, 2018) (“ARA December 2018 Letter”); Transamerica August 2018 Letter. 192 Fiduciary Benchmarks Letter. 193 See, e.g., IAC 2018 Recommendation; NASAA August 2018 Letter; Fiduciary Benchmarks Letter.

recommendations of securities account types generally (e.g., to open an IRA or other brokerage account), as well as recommendations to roll over or transfer assets from one type of account to another (e.g., a workplace retirement plan account to an IRA). Although account recommendations, including recommendations of a securities account type generally, as well as recommendations to roll over assets from a workplace retirement plan account to an IRA or to open an IRA held at the broker-dealer, will almost always involve a “securities transaction” (such as a securities purchase, sale, or exchange), and thus would generally be subject to Regulation Best Interest, we are modifying the rule text to provide that such recommendations are “investment strategies involving securities” for purposes of Regulation Best Interest, regardless of whether they are tied to a specific securities transaction.194 Existing broker-dealer regulation and guidance stresses that the term “investment strategy” is to be interpreted broadly, and would include, among others, recommendations generally to use a bond ladder, day trading, “liquefied home equity,” or margin strategy involving securities, irrespective of whether the recommendations mention particular securities.195 This approach appropriately recognizes that customers may rely on firms’ and

194 A recommendation that a retail customer roll over or transfer assets to an IRA held at the broker-dealer, or open an IRA or another securities account with a broker-dealer, presumes that the recommendation would involve transactions in securities, even if the rollover or account recommendation does not result in transactions or transaction-based compensation. 195 See FINRA Rule 2111.03; FINRA Regulatory Notice 12-25 at Q7.

associated persons’ investment expertise and knowledge, and therefore the broker-dealer should be responsible for such recommendations, regardless of whether those recommendations result in transactions or generate transaction-based compensation.196 Account recommendations, including recommendations of securities account types generally (e.g., to open an IRA or other brokerage account), and recommendations to roll over or transfer assets into an IRA or another securities account, are consistent with the types of recommendations that have been treated as investment strategies under existing suitability rules.197 Specifically, like other investment strategies, account recommendations are recommendations of an approach or method (i.e., a “strategy”) for how a retail customer should engage in transactions in securities, involve conflicts of interest, and can have long-term effects on investors’ costs and returns from their investments. 198 In addition, we believe retail customers rely on broker-dealers’ and associated persons’ investment expertise and knowledge with respect to such recommendations. As a result, such recommendations must be made consistent with the retail customer’s objectives and needs (i.e., investment profile), irrespective of whether those recommendations are tied to a specific securities transaction. Consistent with a

196 See FINRA Regulatory Notice 11-02, Know Your Customer and Suitability – SEC Approves Consolidated FINRA Rules Governing Know-Your-Customer and Suitability Obligations (Jan. 2011). 197 See supra footnotes 172 and 173. 198 See Capital Group Letter; see also IAC 2018 Recommendation; NASAA August 2018 Letter.

majority of the IAC’s and other commenters’ suggestions, we are modifying the rule text to state that the term “investment strategy involving securities” includes “account recommendations,” which we interpret to include recommendations of securities account types generally, as well as recommendations to roll over or transfer assets.199 Thus, such account recommendations will be subject to Regulation Best Interest even if there is not a recommendation of a securities transaction. Although we proposed only covering account type recommendations that are tied to securities transactions, and not account type recommendations generally, we agree with commenters and a majority of the IAC that consistent with other investment strategies involving securities, securities account type recommendations should be covered under Regulation Best Interest regardless of whether those recommendations result in transactions or generate transaction-based compensation. 200 In addition, as discussed in the Fiduciary Interpretation, investment advisers’ fiduciary duty applies to advice to clients about account types, which satisfies the concerns about parity set forth in the Proposing Release and protects retail customers of broker-dealers and retail clients of investment advisers alike.201

199 See, e.g., IAC 2018 Recommendation; Capital Group Letter (“Choosing between a brokerage and an advisory account is an incredibly impactful decision for investors. It is very important that these recommendations be made in the best interest of the retail [customer].”). 200 See, e.g., IAC 2018 Recommendation; NASAA August 2018 Letter. 201 See Fiduciary Interpretation.

Where a financial professional who is dually registered (i.e., an associated person of a broker-dealer and a supervised person of an investment adviser (regardless of whether the professional works for a dual-registrant, affiliated firm, or unaffiliated firm)) is making an account recommendation to a retail customer, 202 whether Regulation Best Interest or the Advisers Act will apply will depend on the capacity in which the financial professional making the recommendation is acting. 203 As discussed further in the Care Obligation, if the individual is acting as a broker-dealer or associated person thereof, he or she must comply with Regulation Best Interest and will need to take into consideration all types of accounts offered by the

202 As discussed in more detail below in Section II.B.3.b, Regulation Best Interest applies to a retail customer who receives a recommendation and uses the recommendation. Among other things, we interpret a retail customer to use a recommendation when: (1) the retail customer opens a brokerage account with the broker-dealer, regardless of whether the broker-dealer receives compensation; (2) the retail customer has an existing account with the broker-dealer and receives a recommendation from the broker-dealer, regardless of whether the broker-dealer receives or will receive compensation, directly or indirectly, as a result of that recommendation; or (3) the broker-dealer receives or will receive compensation, directly or indirectly as a result of that recommendation, even if that retail customer does not have an account at the firm. 203 See Section II.B.3.d, below for discussion of factors the Commission will consider in determining capacity. See also Fiduciary Interpretation at footnotes 42-44 and accompanying text. As discussed in the Fiduciary Interpretation, while advice to prospective clients about these matters is subject to the antifraud provisions under section 206 of the Advisers Act, the adviser must also satisfy its fiduciary duty with respect to any such advice (e.g., regarding account type) once a prospective client becomes a client. Thus, at the point in time at which the prospective client becomes a client of the investment adviser (e.g., at account opening), the fiduciary duty applies. Id.

financial professional (i.e., both brokerage and advisory accounts) when making the recommendation of an account that is in the retail customer’s best interest. In the case of an account recommendation by a financial professional who is only registered as an associated person of broker-dealer (regardless of whether that broker-dealer entity is a dual-registrant or affiliated with an investment adviser), Regulation Best Interest will apply to the recommendation. Further, the associated person can only recommend a brokerage account that the broker-dealer offers when the associated person has a reasonable basis to believe that the recommended brokerage account is in the best interest of the retail customer and the broker-dealer otherwise complies with Regulation Best Interest. Regulation Best Interest would apply to account recommendations by the dual-registrant firm, and consistent with the Conflict of Interest Obligation, the firm would need to, among other things, establish, maintain and enforce policies and procedures to identify, disclose, and mitigate, any incentives for an associated person of the broker-dealer to place the interest of the firm or the associated person ahead of the interests of the retail customer. In the discussion of the Care Obligation below, we discuss how a broker-dealer and associated persons of a broker-dealer can make recommendations of securities account types, including recommendations to open an IRA or to roll over assets into an IRA, in the best interest of the retail customer. Hold Recommendations

The Proposing Release stated that Regulation Best Interest would apply to any securities transaction or investment strategy involving securities, including explicit recommendations to hold a security or regarding the manner in which it is to be purchased or sold to retail customers.204 The Proposing Release also recognized that broker-dealers may agree with a retail customer by contract to take on additional obligations beyond those imposed by Regulation Best Interest, for example, by agreeing with a retail customer to provide periodic or ongoing services, such as ongoing monitoring of the retail customer’s investments for purposes of recommending changes in investments.205 To the extent that a broker-dealer takes on such additional obligations, the Proposing Release indicated that Regulation Best Interest would apply to any recommendations about securities or investment strategies involving securities made to retail customers resulting from such services. Several commenters agreed that broker-dealers should be able to contract with retail customers for additional services and be able to expand the relationship on their own terms, while other commenters recommended that a duty to monitor apply to broker-dealers depending

204 Proposing Release at 21593-21595.
205 Id. We also asked whether broker-dealers who provide ongoing monitoring should be considered investment advisers. Id. at 21592.

on the facts and circumstances.206 Other commenters suggested that the Commission not impose a duty to monitor brokerage accounts. We are confirming that, consistent with existing broker-dealer regulation, Regulation Best Interest will apply to explicit recommendations to hold a security or securities.208 We are also confirming that Regulation Best Interest does not impose a duty to monitor a retail customer’s account. We agree, however, with commenters that Regulation Best Interest should apply to any recommendations that result from the account monitoring services that a brokerdealer agrees to provide.209 We believe that any monitoring service agreed to by the brokerdealer, the scope and frequency of which would be required to be disclosed pursuant to the Disclosure Obligation, would be covered by Regulation Best Interest, as these activities will

206 See, e.g., NAIFA Letter (“Additionally, while the best interest standard applies to each recommendation and may not be waived or modified by contract as it applies to those recommendations, it should not be interpreted to create obligations with respect to other, expanded services (e.g., ongoing research and monitoring services, regular in-person meetings, etc.). Again, however, advisors and consumers may agree to expand the relationship in these ways on their own terms.”); see also CFA August 2018 Letter; Better Markets August 2018 Letter (recommending the Commission establish a duty to monitor depending on the facts and circumstances); AFL-CIO April 2019 Letter. We note that additional commenters maintained that if broker-dealers agree with retail customers to provide ongoing monitoring for purposes of recommending changes in investments, they should be considered investment advisers. See NASAA August 2018 Letter; FPC Letter. We have addressed these comments in the context of the Solely Incidental Interpretation. See Solely Incidental Interpretation. 207 See IAA August 2018 Letter. 208 See FINRA Regulatory Notice 12-25. 209 See NAIFA Letter; IAA August 2018 Letter.

result in a recommendation to purchase, sell, or hold a security, or the manner in which to purchase, sell, or hold a security, at each time the agreed-upon monitoring occurs.210 Thus, by agreeing to perform account monitoring services, the broker-dealer is taking on an obligation to review and make recommendations with respect to that account (e.g., to buy, sell or hold) on that specified, periodic basis.211 For example, if a broker-dealer agrees to monitor the retail customer’s account on a quarterly basis, the quarterly review and each resulting recommendation to purchase, sell, or hold, will be a recommendation subject to Regulation Best Interest. This is the case even in instances where the broker-dealer does not communicate any recommendation to the retail customer. We believe that such an “implicit” recommendation to hold in this context should be covered under Regulation Best Interest in addition to “explicit” recommendations to hold.212

210 In agreeing to provide any account monitoring services, broker-dealers need to consider whether the monitoring services fit within the broker-dealer exclusion from the Advisers Act. See Solely Incidental Interpretation. 211 The broker-dealer would also be required to disclose the existence, scope, and frequency of such account monitoring services pursuant to the Disclosure Obligation. To avoid ambiguity over whether or when an implicit hold recommendation has been made, this disclosure should identify with specificity when the agreed upon monitoring will occur. 212 See FINRA Rule 2111.03 (noting “[t]he phrase ‘investment strategy involving a security or securities’ used in this Rule is to be interpreted broadly and would include, among other things, an explicit recommendation to hold a security or securities.”); see also NASAA August 2018 Letter.

This position differs from FINRA guidance, which generally states that the FINRA suitability rule does not cover an implicit recommendation to hold.213 We believe that “implicit” hold recommendations in this context, where the broker-dealer agrees to provide specified account monitoring services, are similar to explicit hold recommendations that are considered “investment strategies” because they would constitute the type of recommendations that retail customers would be expected to rely upon and would be a “call to action” in the sense of a recommendation that the customer stay the course.214 We believe that, in this context, silence is

213 FINRA Regulatory Notice 11-25 at Q7 (“The rule, for instance, would not apply where an associated person remains silent regarding, or refrains from recommending the sale of, securities held in an account. That is true regardless of whether the associated person previously recommended the purchase of the securities, the customer purchased them without a recommendation, or the customer transferred them into the account from another firm where the same or a different associated person had handled the account.”). See also id. at footnote 21 (“To the extent that a customer account at a broker-dealer can be discretionary under applicable federal securities laws, the suitability rule generally would not apply where a firm refrains from selling a security. The rule states that it applies to explicit recommendations to hold. Unless the facts indicate that an associated person’s failure to sell securities in a discretionary account was intended as or tantamount to an explicit recommendation to hold, FINRA would not view the associated person’s inaction or silence in such circumstances as a recommendation to hold the securities for purposes of the suitability rule.”). 214 See FINRA Regulatory Notice 11-25 at Q7 (“The rule would apply, for example, when an associated person meets with a customer during a quarterly or annual investment review and explicitly advises the customer not to sell any securities in or make any changes to the account or portfolio.”). While the FINRA guidance goes on to state that the rule generally would not cover an implicit recommendation to hold, it does not address the particular scenario in which a broker-dealer agrees to monitor an account (such as a quarterly review) and discloses the terms of that monitoring, and then during that review is silent on whether the customer should make any changes. Id.; see also FINRA Regulatory Notice 12-25 at Q3 and accompanying footnotes.

tantamount to an explicit recommendation to hold, and should be viewed as a recommendation to hold the securities for purposes of Regulation Best Interest.215 Our interpretation that the term “investment strategy involving securities” includes implicit recommendations to hold that result from an agreement to monitor, at the time the agreed-upon monitoring occurs, is generally consistent with the treatment of similar broker-dealer communications as “investment strategies,” and applies the Regulation Best Interest protections to retail customers relying on a brokerdealer’s agreement to monitor the customer’s account. Although for purposes of Regulation Best Interest, implicit hold recommendations will be considered a recommendation of “any securities transaction or investment strategy regarding securities” where a broker-dealer has agreed to provide account monitoring services, we are not otherwise changing the treatment of implicit hold recommendations in other contexts. In other words, unless the broker-dealer has agreed to provide account monitoring services as described, Regulation Best Interest would only apply to explicit—and not to implicit—hold

215 See FINRA Regulatory Notice 11-25 at footnote 21.
216 Our interpretation is generally consistent with a majority of the IAC’s and other commenters’ views regarding application of Regulation Best Interest to implicit hold recommendations in the context of agreed-upon account monitoring services. See IAC 2018 Recommendation (“We believe the best interest standard should be applied to the broker-dealer’s monitoring of the customer account, where brokers provide ongoing services to the account. In essence, this would apply the best interest standard to the implicit “no recommendation” recommendation that a broker makes when reviewing the account and recommends no change.”); NAIFA Letter (asserting broker-dealers should be free to agree to, and define the nature of, any ongoing relationship via contract, such as including monitoring services); AFL-CIO April 2019 Letter.

recommendations regarding security positions in an account.
217 This is consistent with the fact that Regulation Best Interest would not impose a duty to monitor customer accounts.218 Finally, although certain commenters stated that account monitoring services should only be performed by investment advisers,219 we reiterate that Regulation Best Interest does not change the scope of account monitoring that broker-dealers may agree to provide, nor does it change the scope of activities that would come within the “solely incidental” prong of the broker-dealer exclusion to the definition of “investment adviser” in the Advisers Act. We recognize that a broker-dealer may voluntarily, and without any agreement with the customer, review the holdings in a retail customer’s account for the purpose of determining whether to provide a recommendation to the customer. We view this voluntary review—and any subsequent recommendation to the customer—as in connection with and reasonably related to the broker-dealer’s primary business of effecting securities transactions.220 Recommendations Involving Retirement Accounts

217 FINRA Notice to Members 11-25 at Q7.
218 Our approach does not require broker-dealers to undertake account monitoring, unless they choose to do so. See Solely Incidental Interpretation. 219 See, e.g., NASAA August 2018 Letter; FPC Letter. 220 See Solely Incidental Interpretation. Absent an agreement with the customer (which would be required to be disclosed pursuant to the Disclosure Obligation), we do not consider this voluntary review to be “account monitoring” nor would it in itself create an obligation under Regulation Best Interest, provided of course that any recommendation made to the customer as a result of any such voluntary review would be subject to Regulation Best Interest.

Furthermore, based on comments, our position is that recommendations to retail customers regarding retirement accounts would also be subject to Regulation Best Interest where they involve securities transactions or investment strategies involving securities. We agree with commenters that recommendations to retail customers to take distributions from proceeds of specific securities or to take in-service loans from an employer-sponsored plan are recommendations of a securities transaction, as they would involve a recommendation to sell a security.221 However, while such recommendations to take plan distributions are “recommendations” and thereby subject to Regulation Best Interest, we reiterate that general communications by broker-dealers relating to distributions in the context of a required minimum distribution or education regarding a plan’s options would not, by themselves, constitute recommendations that would be subject to Regulation Best Interest.222

221 See supra footnotes 185-189 and accompanying text. See, e.g., NASAA August 2018 Letter; Fiduciary Benchmarks Letter; IAC 2018 Recommendation. 222 For example, where a broker-dealer informs a retail customer that based on age and other relevant factors, he or she needs to take a required minimum distribution, but does not otherwise recommend specifics, such as what securities to sell, or where to place the proceeds, the communication would generally not be a “recommendation” subject to Regulation Best Interest. As with other communications subject to broker-dealer regulation, an inquiry of whether a “recommendation” was made would depend on the facts and circumstances relating to the communication, as discussed more fully above. See supra Section II.B.2.a.

Retail Customer
We proposed to define retail customer as: “a person, or the legal representative of such person, who: (1) 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 (2) uses the recommendation primarily for personal, family or household purposes.”223 The definition was generally intended to track the definition of “retail customer” under Section 913(a) of the Dodd-Frank Act with some differences, as described in the Proposing Release. In proposing the definition, we intended to exclude recommendations related to commercial or business purposes but for the definition to remain sufficiently broad to capture recommendations related to the various reasons retail customers may invest, such as saving for retirement, education expenses and other savings purposes. As such, the proposed definition applied to any persons who receive a recommendation from a broker or dealer or a natural person who is an associated person of a broker or dealer, provided that the recommendation is primarily for personal, family or household purposes. In the case of dual-registrants, the proposed

223 As we stated in the Proposing Release, we believe that broker-dealers would generally be required to obtain sufficient facts about a customer to determine an account’s primary purpose for purposes of Regulation Best Interest. See Proposing Release at 21595. 224 See Proposing Release at Section II.C.4. Section 913(a) defines “retail customer” as a natural person, or the legal representative of such natural person who: (1) receives personalized investment advice about securities from a broker or dealer or investment adviser; and (2) uses such advice primarily for personal, family, or household purposes.

definition was intended to apply only to recommendations made by broker-dealers in their brokerage capacity, based on a facts and circumstances analysis and consistent with existing guidance. 225 The proposed definition differed from the definition of “retail investor” in the Relationship Summary Proposal as the Relationship Summary was intended for a broader range of investors. The Commission requested comment on the scope and definition of retail customer and received a range of comments requesting: modification of the definition to focus on natural persons; clarification of the “personal, family or household purposes” qualification; harmonization with the definition in Form CRS; and further guidance surrounding the treatment of dual-registrants. In consideration of the comments received, the Commission is modifying the definition of “retail customer” to mean 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. The revised definition shifts the focus to natural persons, as opposed to any persons, but otherwise it is adopted largely as proposed. However, as discussed below, the Commission is

225 Id.
226 Id.

providing additional interpretations, guidance and clarification regarding: the interpretation of the “personal, family, or household purposes” qualifier; the interaction of this definition with the definition of “retail investor” in Form CRS; what it means for a retail customer to “use” the recommendation; and the status of dual-registrants. Furthermore, we are providing guidance on who would be considered to be the legal representative of a natural person for purposes of this definition. a. Focus on Natural Persons and Legal Representatives of Natural Persons The Commission proposed to extend the definition of “retail customer” in Regulation Best Interest beyond natural persons to any persons to cover non-natural persons (e.g., trusts that represent the assets of a natural person), which the Commission stated it believed would benefit from the protections of Regulation Best Interest. Commenters generally suggested that the definition of retail customer be modified to focus on natural persons.227 To that end, a number of commenters suggested eliminating the “personal, family or household purposes” qualifier from the definition under Dodd-Frank Section
913.228 Many commenters suggested excluding institutional investors and professional advisers

227 See, e.g., Cetera August 2018 Letter; Invesco Letter.
228 See FPC Letter; SIFMA August 2018 Letter; BlackRock Letter. Contra ACLI Letter (supporting the provision in Section 913 and positing that Regulation Best Interest appropriately implements this foundational threshold).

or fiduciaries, including retirement plan representatives229 and family offices, 230 while a few stated that non-professional plan fiduciaries should have the same protections as retail customers.231 Many commenters suggested harmonizing the definition with FINRA’s definition, 232 in particular, by excluding: (1) institutional accounts that would be exempted from certain suitability protections under FINRA Rule 2111 (Suitability)233 or (2) institutional investors as defined in Rule 2210 (Communications with the Public), 234 which is broader235 and would include, among others, certain workplace retirement plans. Conversely, a few

229 See, e.g., SIFMA August 2018 Letter; Vanguard Letter; Prudential Letter; ICI Letter; Fidelity Letter. 230 See, e.g., TIAA Letter; SIFMA August 2018 Letter; Letter from Stuart J. Kaswell, Executive Vice President and Managing Director, Managed Funds Association, and Jiri Krol, Deputy CEO, Global Head of Government Affairs, Alternative Investment Management Association (Aug. 7, 2018) (“Managed Funds Association Letter”). 231 ARA August 2018 Letter; CFA August 2018 Letter. 232 See, e.g., UBS Letter; Bank of America Letter; Raymond James Letter; TIAA Letter; Letter from Joseph Giovanniello, Ladenburg Thalmann Financial Services Inc. (Jul. 30,
2018) (“Ladenburg Letter”).
233 FINRA Rule 2111(b). Institutional accounts include banks, savings and loan associations, insurance companies, registered investment companies, state and federal registered investment advisers, and other persons with total assets of at least $50 million. 234 FINRA Rule 2210(a)(4). Institutional investors include, in addition to persons with institutional accounts, government entities and their subdivisions, employee benefit plans, qualified plans as defined in Exchange Act Section 3(a)(12)(C), broker-dealers and registered representatives, and persons acting solely on behalf of such institutional investors. 235 See, e.g., SIFMA August 2018 Letter; TIAA Letter; IPA Letter.

commenters believed that Regulation Best Interest should apply to both retail and institutional customers.236 In response to comments, we are modifying the definition to focus on natural persons and their legal representatives, and are clarifying that we interpret “legal representatives” to mean non-professional legal representatives of a natural person, as we discuss below. We believe this change and clarification provides more certainty that institutions and certain professional fiduciaries are not covered for purposes of Regulation Best Interest. It would also retain, however, coverage of certain legal entities (i.e., trusts that represent the assets of a natural person) specifically identified in the Proposing Release as “retail customers” within the scope of Regulation Best Interest, but would not exclude certain high-net-worth natural persons, as was suggested by some commenters237 to match the current FINRA exclusion of such natural persons from customer-specific suitability requirements. While the Commission recognizes commenters’ concerns regarding compliance costs and burdens if the definition of retail customer does not align with FINRA’s exclusion of certain

236 NASAA August 2018 Letter, Better Markets August 2018 Letter; FPC Letter. But see Managed Funds Association Letter (suggesting that sophisticated investors should not be treated as retail customers). 237 See, e.g., Morgan Stanley Letter; FSI August 2018 Letter. 238 See FINRA Rule 4512(c), which includes within the definition of “institutional account” any person (whether a natural person, corporation, partnership, trust or otherwise) with total assets of at least $50 million. Currently, under FINRA rules, broker-dealers are exempt from the customer-specific suitability obligations with respect to these “institutional accounts” if certain conditions are met. FINRA Rule 2111(b).

institutional accounts and institutional investors, we have decided not to align our definition with FINRA’s exclusion because we believe conflicted recommendations can also result in harm to high net-worth individuals.239 We believe the benefits of Regulation Best Interest justify compliance costs as these individuals could benefit from the protections included in Regulation Best Interest regardless of their net worth, which may not necessarily correlate to a particular level of financial sophistication. In addition, we view a “legal representative” of a natural person to only cover nonprofessional legal representatives (e.g., a non-professional trustee that represents the assets of a

239 The Commission has brought numerous enforcement actions against financial professionals engaged in schemes to defraud certain high net-worth individuals, in particular, professional athletes. See, e.g. SEC v. Charles A. Banks, IV, Civil Action No. 16-CV-3399-TWT (N.D. Ga. Nov. 2, 2018) (former investment adviser who fraudulently induced a former professional athlete to invest $7.5 million in a sports team and apparel merchandise company based on a series of misrepresentations); SEC v. Ash Narayan, The Ticket Reserve Inc. a/k/a Forward Market Media, Inc., Richard M. Harmon, and John A. Kaptrosky, Civil Action No. 16-CV-1417-M (N.D. Tex. May 24, 2016) (investment adviser who misappropriated millions of dollars from accounts he managed for professional athletes and invested them in online sports and entertainment ticket business on whose board he served). In addition, reports indicate deficiencies in financial literary among the general population of retail investors. See Federal Research Division, Library of Congress, Financial Literacy Among Retail Investors in the United States (Dec. 30, 2011) at 25, available at https://www.sec.gov/news/studies/2012/917-financial-literacy-studypart2.pdf (“Library of Congress Report”). 240 See Primerica Letter (noting challenges in using wealth and education as proxies for investment sophistication). In addition, the definition of “retail customer” under Section 913(a) of the Dodd-Frank Act did not make a distinction based on net worth.

natural person and similar representatives such as executors, conservators, and persons holding a power of attorney for a natural person), 241 thereby excluding certain institutions from Regulation Best Interest’s coverage. In capturing non-professional legal representatives within the definition of retail customer, we are providing the protections of Regulation Best Interest to nonprofessional persons who are acting on behalf of natural persons but who are not regulated financial services industry professionals retained by natural persons to exercise independent professional judgment, 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 regulated representatives of such advisers, broker-dealers, corporate fiduciaries and insurance companies. 242 Our definition is intended to capture natural persons and their legal representatives who rely directly on the broker-dealer for the recommendation. Accordingly, such non-professional legal representatives would not include regulated financial industry professionals. We believe this responds to commenters who stated that it should not be necessary to provide the protections of Regulation Best Interest to regulated professionals.243 Importantly, however, this will not relieve firms or financial professionals

241 A non-professional legal representative is covered pursuant to this rule even if another person is a trustee or managing agent of the trust. 242 See also Relationship Summary Adopting Release. 243 See, e.g., Bank of America Letter; Invesco Letter; Letter from Bob Grohowski, Senior Legal Counsel, and Jon Siegel, Senior Legal Counsel, T. Rowe Price (Aug. 10, 2018) (“T. Rowe Letter”); Oppenheimer Letter; ICI Letter.

retained to represent the assets of natural persons from their own obligations to retail customers. We retained the “personal, family, or household purposes” qualifier, 245 but are providing additional guidance and clarification on our interpretation of this phrase to address comments received. In particular, we interpret “personal, family or household purposes” to mean that any recommendation to a natural person for his or her account would be subject to Regulation Best Interest, other than recommendations to natural persons seeking these services for commercial or business purposes. Accordingly, under this interpretation, “personal, family or household purposes” would not include, for example, an employee seeking services for an employer or an individual who is seeking services for a small business or on behalf of another non-natural person entity such as a charitable trust.246 As discussed above247 and pursuant to the Care

244 See also Relationship Summary Adopting Release.
245 Regulation Best Interest relies in part on the statutory authority provided in Section 913 of the Dodd-Frank Act which includes the statutory definition of “retail customer.” See
Section 913(a) of the Dodd-Frank Act.
246 As discussed below, to the extent a plan representative who decides service arrangements for a workplace retirement plan is a sole proprietor or other self-employed individual who will participate in the plan, the plan representative will be a retail customer to the extent that the sole proprietor or self-employed individual receives recommendations directly from a broker-dealer primarily for personal, family or household purposes. 247 See supra footnote 223 and accompanying text.

Obligation,248 we believe broker-dealers are able to obtain sufficient facts to determine the purpose for which a recommendation will be used. We also confirm that “personal, family or household purposes” would cover retirement accounts, as retirement savings is a personal, household or family purpose. Accordingly, the definition of retail customer will include a natural person receiving recommendations249 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.250 For

248 Pursuant to the Care Obligation, a broker-dealer is required to ascertain the customer’s investment profile which considers, among other things, financial situation and needs and investment objectives, in evaluating a recommendation and whether it is in a retail customer’s best interest. 249 See Section II.C.2 (describing what constitutes a “recommendation” for purposes of Regulation Best Interest). 250 Such IRAs include, for example, individual retirement accounts and individual retirement annuities described by Internal Revenue Code section 408(a) and (b), “simplified employee pensions” (SEPs) described by Code section 408(k), and simple retirement accounts described by Code section 408(p) (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) plans or other plan that meet 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 taxfavored savings arrangements such as an Archer Medical Savings Account described by Code section 220(d), a Health Savings Accounts described by 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.

example, plan participants receiving recommendations about whether to take a distribution from a 401(k) plan or other workplace retirement plan and how to invest that distribution would be covered as retail customers. Similarly, a plan participant receiving recommendations for the participant’s individual account held in a 401(k) plan or other workplace retirement plan would be a retail customer for purposes of Regulation Best Interest.251 The Commission acknowledges concerns from some commenters that workplace retirement plans and their representatives (e.g., plan sponsors, trustees, other fiduciaries) and service providers should be included in the definition of retail customer.252 However, we understand that plan representatives of workplace retirement plans typically are not receiving recommendations for their own account for personal, family or household purposes when they engage a broker-dealer to provide services to a retirement plan established, maintained, and operated by an employer to provide pension or retirement savings benefits to employees; and further, as a legal representative of a plan participant, must comply with DOL rules. 253 As such,

251 For example, we understand that, although not common, some 401(k) plans and other individual account plans provide participants total discretion to choose a broker-dealer to provide services for their individual plan account. See, e.g., 29 C.F.R. § 2550. 404c-1(f), Example 9. 252 See, e.g., ARA December 2018 Letter; FPC Letter. But see Empower Letter (“It would be helpful if the SEC could confirm that the definition of ‘retail customer’ under RBI does not include advice to managers of retirement plans or to their fiduciaries or representatives.”). 253 It is our understanding that the investment responsibilities of plan representatives typically include, among other things, selecting and monitoring a menu of plan

the Commission does not believe that workplace retirement plans or their representatives and

investment options and designating and monitoring “default” investments for investing account balances of participants who do not make their own investment elections, and that plan representatives typically make these investment selections for a workforce with diverse investment profiles. See ARA December 2018 Letter (describing obligations of plan fiduciaries selecting an investment menu and qualified default investment alternatives); Empower Letter (describing plan fiduciary obligations to select investment menus). We also understand that plan representatives may receive brokerage and advice services for plans together with or complimentary with, other services supporting the plan’s establishment, maintenance and operation, such as plan design, recordkeeping and other administrative services. See, e.g., Groom Letter (describing business models of firms offering brokerage and advice services together with other services); SPARK Letter (same). In this context, a plan representative would not be receiving recommendations from a broker-dealer for his or her own account and considerations material to the plan representative’s investment decisions differ from a situation in which a retail customer receives a recommendation from a broker-dealer for his or her own account. Further, we note that DOL has rules currently in place (not affected by the Fifth Circuit’s decision vacating the DOL Fiduciary Rule) that address how plan representatives operate participant-directed plans and select investment menus for such plans, see 29 CFR 2550.404c-1, what actions, including disclosures, plan representatives must take to be able to raise a defense or claim for investment losses by a participant or beneficiaries, see 29 CFR 2550.404c-5, and also generally require broker-dealers making investment alternatives available for a participant-directed plan to disclose in writing (among other things) all direct and indirect compensation received in connection with providing plan services. See 29 CFR 2550.408b-2(c). See also Form 5500, Schedule C, requiring afterthe-fact reporting by certain plans of information regarding direct and indirect compensation received by, among others, broker-dealers and investment advisers, in connection with services rendered or their position with the plan. Accordingly, we agree with those commenters who recommended that plan representatives should not be included in the definition of retail customer. See Empower Letter; Groom Letter; Letter from Nora M. Everett, President, Retirement and Income Solutions, Principal Financial Group (Aug. 7, 2018) (“Principal Letter”); SPARK Letter; T. Rowe Price Letter; Transamerica August 2018 Letter.

service providers generally fall within the definition of retail customer for purposes of Regulation Best Interest because the workplace retirement plan is not a natural person, and therefore the workplace retirement plan representatives are not a non-professional representative of a natural person that is receiving a recommendation directly from a broker-dealer for “personal, family, or household purposes.”254 We note, however, that some plan representatives may participate under their employer’s workplace plan, for example, in the case of a workplace IRA or other workplace retirement plan that 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. To the extent that a plan representative who decides service arrangements for a workplace retirement plan is a sole proprietor or other self-employed individual who will participate in the plan, the plan representative would be a retail customer for purposes of Regulation Best Interest to the extent the sole proprietor or self-employed individual receives recommendations directly from a brokerdealer primarily for personal, family or household purposes.

254 Although workplace retirement plans are not generally covered by the definition of retail customer in by Regulation Best Interest, based on preliminary discussions with DOL staff, we understand that the DOL is considering regulatory options in light of the Fifth Circuit’s decision vacating the DOL Fiduciary Rule, including the types of protections available to such workplace retirement plans and their representatives. Department of Labor Regulatory Agenda, Fiduciary Rule and Prohibited Transaction Exemptions, Fall 2018, available at https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=201810&RIN=1210- AB82.

b. Retail Customer Use of the Recommendation
In the Proposing Release, the Commission did not specifically address whether recommendations subject to Regulation Best Interest needed to be for compensation, but did state that the proposed definition of retail customer would only apply to a person who “received a recommendation…from a broker or dealer or a natural person who is an associated person of a broker or dealer, and used the recommendation primarily for personal, family, or household purposes.” We stated that this approach was appropriate because it builds upon the guidance provided for FINRA’s suitability rule. 255 In response, a few commenters recommended that the Commission limit the application of Regulation Best Interest to recommendations made to retail customers for compensation.256 Regulation Best Interest applies to a retail customer that both receives a recommendation of any securities transaction or investment strategy involving securities by a broker-dealer and that uses that recommendation primarily for personal, family, or household purposes, and not simply those recommendations for which a broker-dealer receives compensation.257 In response to commenters, we interpret that a retail customer “uses” a recommendation of a securities transaction or investment strategy involving securities when, as a result of the recommendation:
(1) the retail customer opens a brokerage account with the broker-dealer, regardless of whether

255 See Proposing Release at 21596, footnote 160.
256 See Morgan Stanley Letter; CCMC Letters.
257 See paragraph (b)(1) of Regulation Best Interest.

the broker-dealer receives compensation,
258 (2) the retail customer has an existing account with the broker-dealer and receives a recommendation from the broker-dealer, regardless of whether the broker-dealer receives or will receive compensation, directly or indirectly, as a result of that recommendation, or (3) the broker-dealer receives or will receive compensation, directly or indirectly as a result of that recommendation, even if that retail customer does not have an account at the firm. When a retail customer opens or has an existing account with a broker-dealer the retail customer has a relationship with the broker-dealer and is therefore in a position to “use” (i.e., accept or reject) the broker-dealer’s recommendation. In this context, tying “use” solely to a broker-dealer’s receipt of compensation would inappropriately result in Regulation Best Interest

258 As discussed in Section II.B.2.b below, account recommendations, including recommendations of a securities account type generally, and recommendations to open an IRA or to roll over or transfer assets into an IRA, are covered by Regulation Best Interest regardless of whether those recommendations result in transactions or generate transaction-based compensation. 259 See Proposing Release at 21596, footnote 160 and accompanying text. See also FINRA Regulatory Notice 12-55, Suitability – Guidance on FINRA’s Suitability Rule (Dec.
2012) at Q6(b) (“The suitability rule would apply when a broker-dealer or registered
representative makes a recommendation to a potential investor who then becomes a customer. Where, for example, a registered representative makes a recommendation to purchase a security to a potential investor, the suitability rule would apply to the recommendation if that individual executes the transaction through the broker-dealer with which the registered representative is associated or the broker-dealer receives or will receive, directly or indirectly, compensation as a result of the recommended transaction.”); NASD Notice to Members 04-72, Transfers of Mutual Funds and Variable Annuities – Impermissible Use of Negative Response Letters for the Transfer of Mutual Funds and Variable Annuities (Changes in Broker-Dealer of Record) (Oct. 2004).

not applying to the broker-dealer’s recommendations to hold securities positions or to maintain an investment strategy (such as account type), recommendations to open an account, or recommendations that may ultimately be rejected by the retail customer. Whether the recommendation complies with Regulation Best Interest will be evaluated based on the circumstances that existed at the time the recommendation was made to the retail customer. Accordingly, broker-dealers should carefully consider the extent to which associated persons can make recommendations to prospective retail customers (i.e., that have received, but not yet “used” the recommendation as noted above) in compliance with Regulation Best Interest, including having gathered sufficient information that would enable them to comply with Regulation Best Interest at the time the recommendation is made, should the prospective retail customer use the recommendation.
c. Conformity with Form CRS
The proposed definition of “retail customer” differed from the definition of “retail investor” proposed in the Relationship Summary Proposal, which was a prospective or existing client or customer who is a natural person (an individual), regardless of the individual’s net worth, including a trust or other similar entity that represents natural persons.261 The proposed definition was different from the definition of “retail investor” because the Relationship

260 See FINRA Regulatory Notice 12-55 at Q6(b).
261 See Relationship Summary Proposal.

Summary was intended for an earlier state of the relationship between an investor and a financial professional, was intended to be required regardless of whether the investor would receive investment advice primarily for personal, family, or household purposes, and was designed to be delivered by investment advisers as well as broker-dealers. 262 Many commenters recommended that we use the same definition to facilitate compliance for firms and avoid investor confusion.263 The Commission agrees with commenters that using a similar definition would provide consistency in the protections, and ease the compliance burden, of the package of rulemakings. Therefore, the definitions in Form CRS and Regulation Best Interest have been revised to generally conform to each other, consistent with our respective goals in each of these rulemakings. 264 As discussed above, the definition of “retail customer” for purposes of Regulation Best Interest has been revised to apply only to natural persons, not all persons, in line with the definition of “retail investor” for purposes of Form CRS. In addition, the definition in Form CRS as adopted now includes the “personal, family or household purposes” qualifier.

262 See Relationship Summary Proposal, Section II, footnote 29.
263 See, e.g., Invesco Letter; BlackRock Letter; ICI Letter; Committee of Annuity Insurers Letter; Bank of America Letter; CFA August 2018 Letter; Cetera August 2018 Letter; Fidelity Letter; Morgan Stanley Letter; Oppenheimer Letter; Raymond James Letter; SIFMA August 2018 Letter; TIAA Letter; Transamerica August 2018 Letter. 264 See Relationship Summary Adopting Release.

While the definitions have generally been harmonized across the package of rulemakings,265 they differ 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.266 For the reasons discussed in the Proposing Release and in response to commenters who requested clarification on whether Regulation Best Interest applies to prospective customers, 267 we would like to clarify that the definition of “retail customer” does not apply to prospective customers who do not receive and use recommendations from a broker-dealer, 268 as discussed above. This distinction reflects differences between the point in time the Relationship Summary is delivered to an investor and when the obligations of broker-dealers pursuant to Regulation Best Interest attach. d. Treatment of Dual-Registrants In the Proposing Release, the Commission stated that Regulation Best Interest applies only in the context of a brokerage relationship with a brokerage customer, and specifically, when

265 Id.
266 Id.
267 See, e.g., SIFMA August 2018 Letter; Prudential Letter; Money Management Institute Letter. 268 See Section II.B.3.b.

a broker-dealer is making a recommendation in the capacity of a broker-dealer. In particular, for dual-registrants (for purposes of this section, a broker-dealer that is dually registered as an investment adviser with the Commission), the obligations associated with Regulation Best Interest were intended to apply only when they are acting in the capacity as a broker-dealer.269 The Commission recognized the issues surrounding the determination of whether a dualregistrant is acting in the capacity of a broker-dealer or an investment adviser, and asserted that such a determination requires a facts and circumstances analysis, with no one factor being determinative.270 Many commenters requested that the Commission clarify the treatment of dual-registrants and what is expected when offering products in both types of accounts.271 Some commenters asserted that dually registered financial professionals should be held to a fiduciary standard.272

269 Although this discussion focuses on the treatment of broker-dealers that are dually registered with the Commission as investment advisers, a broker-dealer should perform the same analysis when it is engaged in other financial services (such as, as a bank, a commodity trading advisor or a future commission merchant). 270 Proposing Release at 21596. 271 See, e.g., SIFMA August 2018 Letter; CCMC Letters; NASAA August 2018 Letter. 272 See PIABA Letter; AICPA Letter.

A few commenters requested clarification on how Regulation Best Interest applies to particular scenarios, some of which involved dual-registrants.273 In response, the Commission is reaffirming the guidance provided in the proposal and providing further clarification on when and how Regulation Best Interest would apply to dualregistrants. As stated in the proposal, Regulation Best Interest would not apply to investment advice provided to a retail customer by a dual-registrant when acting in the capacity of an investment adviser, even if the retail customer has a brokerage relationship with the dualregistrant or the dual-registrant executes the transaction in its brokerage capacity.274 Similarly, as proposed, we are confirming that a dual-registrant is an investment adviser solely with respect to those accounts for which a dual-registrant provides investment advice or receives compensation that subjects it to the Advisers Act.275

273 See SIFMA August 2018 Letter; Letter from Michael Pieciak, NASAA President, Commissioner Vermont Department of Financial Regulation, NASAA (Feb. 19, 2019) (“NASAA February 2019 Letter”). 274 This analysis would apply even if the dual-registrant receives transaction-based compensation for executing the transaction because the dual-registrant did not provide a recommendation in its capacity as a broker-dealer. While Regulation Best Interest would not apply in this situation, other provisions of the federal securities laws and SRO rules would apply to the actions taken or services provided by the broker-dealer. 275 See Proposing Release at 21596; see also Certain Broker-Dealers Deemed Not To Be Investment Advisers, Exchange Act Release No. 51523 (Apr. 12, 2005) at 8 (“Release 51523”); Interpretive Rule Under the Advisers Act Affecting Broker-Dealers, Advisers Act Release No. 2652 (Sep. 24, 2007). See also Fiduciary Interpretation.

While we acknowledge that some commenters believe all dual-registrants should be held to a fiduciary standard, for the reasons discussed in Section II.A, the Commission believes that Regulation Best Interest enhances the obligations that apply when a broker-dealer makes a recommendation to a retail customer by drawing from key principles underlying the fiduciary obligation that applies to investment advisers under the Advisers Act, while being tailored to the broker-dealer model. As stated in the proposal, determining the capacity in which a dual-registrant is making a recommendation is a facts and circumstances test, with no one factor being determinative, but the Commission considers, among other factors, the type of account, how the account is described, the type of compensation and the extent to which the dual-registrant made clear to the customer or client the capacity in which it was acting.277 In addition and in response to a commenter’s presentation278 of particular scenarios in its comment letter, 279 we would like to confirm or correct the commenter’s understanding of Regulation Best Interest in practice to provide further guidance to firms as it relates to their

276 See Section I.
277 Proposing Release at 21596.
278 See SIFMA August 2018 Letter. For purposes of the presented scenarios, SIFMA has assumed that the customer is a “retail customer.” 279 Id.

examples of dual-registrants.
280 For example, in the commenter’s explanation of a scenario related to a recommendation to open a fee-based account, we agree that Regulation Best Interest would not apply when a dually registered financial professional of a dually registered brokerdealer and investment adviser, who is acting in the capacity of an investment adviser, recommends a fee-based account. We note, however, that the dually registered financial professional would need to comply with the Advisers Act as well as the requirements with respect to Form CRS for the firm. 281 In response to another scenario in which a financial professional who is dually registered provides a holistic review of the overall performance of a family’s accounts, which are both brokerage and advisory, whether Regulation Best Interest applies depends on a facts and circumstances analysis. Regulation Best Interest would apply if the financial professional in her brokerage capacity (disclosed pursuant to the Disclosure

280 For purposes of this section, we have only addressed the scenarios applicable to dualregistrants and have not confirmed or rejected the commenter’s analysis of the other scenarios. 281 See Fiduciary Interpretation at Section II.B.1. In providing advice about account type, the adviser should consider both types of accounts (i.e., brokerage and advisory accounts) when determining whether the advice is in the client’s best interest. See also NASAA February 2019 Letter (stating that Regulation Best Interest would not apply but instead that the fiduciary duty under the Advisers Act would apply).

Obligation), provides a recommendation of a securities transaction or investment strategy involving securities to the family in the course of the holistic review.
C. Component Obligations
As proposed Regulation Best Interest’s obligation to “act in the best interest of the retail customer . . . without placing the financial or other interest of the [broker-dealer] ahead of the retail customer” would have been satisfied by complying with four specified obligations: a Disclosure Obligation, a Care Obligation, and two Conflict of Interest Obligations. 283 Failure to comply with any of these proposed requirements would have violated Regulation Best Interest.284 As discussed above, we have determined to retain the overall structure and scope of the proposed rule, but are modifying and clarifying the component obligations that a broker-dealer must satisfy in order to meet the General Obligation. As adopted, the General Obligation is satisfied only if the broker-dealer complies with four specified component obligations: (1) the Disclosure Obligation; (2) the Care Obligation; (3) the Conflict of Interest Obligation; and (4) the Compliance Obligation. Each of these component obligations is discussed below. Whether a broker-dealer has acted in the retail customer’s best interest under the General Obligation will

282 But see NASAA February 2019 Letter (stating that “a full fiduciary duty” should be imposed on the financial adviser as to all accounts in this case as the family has probably entrusted their entire financial well-being to one financial professional). 283 Proposing Release at 21598. 284 Id.

turn on an objective assessment of the facts and circumstances of how these specific components of Regulation Best Interest are satisfied at the time that the recommendation is made (and not in hindsight). The specific component obligations of Regulation Best Interest are mandatory, and failure to comply with any of the components would violate Regulation Best Interest.

Disclosure Obligation
We proposed a Disclosure Obligation that would require a broker-dealer “to, prior to or at the time of [a] recommendation, reasonably disclose to the retail customer, in writing, the material facts relating to the scope and terms of the relationship with the retail customer and all material conflicts of interest associated with the recommendation.” The Proposing Release states that, for purposes of the Disclosure Obligation, we would consider the following to be examples of material facts relating to the scope and terms of the relationship with the retail customer: (1) that the broker-dealer was acting in a broker-dealer capacity with respect to the recommendation; (2) fees and charges that would apply to the retail customer’s transactions, holdings, and accounts; and (3) type and scope of services provided by the broker-dealer, including, for example, monitoring the performance of the retail customer’s account. As stated in the Proposing Release, we understand that broker-dealers typically provide information about their services and accounts, which may include disclosures concerning the broker-dealer’s capacity, fees, services, and conflicts, on their firm websites and in their account

opening agreements.285 Furthermore, while broker-dealers are subject to a number of specific disclosure obligations when they effect certain customer transactions, and are subject to the antifraud provisions of the federal securities laws, broker-dealers are not currently subject to an explicit and broad disclosure requirement under the Exchange Act regarding the scope and terms of the broker-dealer relationship. 286 To promote broker-dealer recommendations that are in the best interest of retail customers, we determined it was necessary to impose a more explicit and broader disclosure obligation on broker-dealers than that which currently exists under the federal securities laws and SRO rules.287 We solicited comment on the Disclosure Obligation and commenters addressed several aspects of this proposed obligation, including the interpretation of each required element, as discussed in the relevant sections below. 288 In consideration of these comments, we are revising the Disclosure Obligation to require a broker-dealer, prior to or at the time of the recommendation, to provide to the retail customer, in writing, full and fair disclosure289 of all material facts related to the scope and terms of the relationship with the retail customer and all

285 Proposing Release at 21599.
286 Proposing Release at 21599-21600.
287 Proposing Release at 21600.
288 See, e.g., Better Markets August 2018 Letter; CCMC Letters; LPL August 2018 Letter; Schwab Letter; Morgan Stanley Letter; CFA August 2018 Letter; IPA Letter; NASAA Letter; SIFMA August 2018 Letter. 289 See Section II.C.1.c, Disclosure Obligation, Full and Fair Disclosure.

material facts relating to conflicts of interest that are associated with the recommendation.290 We are explicitly requiring in the rule text the disclosure of examples in the Proposing Release of the “material facts relating to the scope and terms of the relationship with the retail customer:” (1) that the broker, dealer or such natural person is acting as a broker, dealer or an associated person of a broker-dealer with respect to the recommendation; (2) the material fees and costs that apply to the retail customer’s transactions, holdings, and accounts; and (3) the type and scope of services provided to the retail customer, including: any material limitations on the securities or investment strategies involving securities that may be recommended to the retail customer. The Disclosure Obligation requires the disclosure of all material facts related to the scope and terms of the relationship with the retail customer. The material facts identified in Regulation Best Interest are the minimum of what must be disclosed. Similar to what was proposed, brokerdealers will need to disclose in writing prior to or at the time of a recommendation any material facts that relate to the “scope and terms of the relationship.” As to what constitutes a “material” fact related to the “scope and terms of the relationship,” the standard for materiality for purposes of the Disclosure Obligation is consistent with the one the Supreme Court articulated in Basic v. Levinson. 291 Specifically, a fact is material if there is “a substantial likelihood that a reasonable

290 As discussed in more detail below, aspects of the Disclosure Obligation may be satisfied by other regulatory requirements. 291 Basic, Inc. v. Levinson, 485 U.S. 224 (1988).

shareholder would consider it important.” In the context of Regulation Best Interest, the standard is the retail customer, as defined in the rule. In response to comments, we are also refining and clarifying the treatment of conflicts of interest under Regulation Best Interest by: (1) generally consistent with the fiduciary duty under the Advisers Act, adopting for purposes of Regulation Best Interest, the definition of “conflict of interest” associated with a recommendation as “an interest that might incline a broker, dealer, or a natural person who is an associated person of a broker or dealer—consciously or unconsciously—to make a recommendation that is not disinterested”; 292 and (2) revising the Disclosure Obligation to require disclosure of “material facts” relating to such conflicts of interest that are associated with the recommendation. Under this approach, all conflicts of interest as so defined will be covered by Regulation Best Interest (and thus, will be subject to the Conflict of Interest Obligation described below). However, only “material facts” regarding these conflicts of interest are required to be disclosed under the Disclosure Obligation.293 As discussed above, we are adopting a new set of disclosure requirements designed to reduce retail investor confusion in the marketplace for brokerage and advisory services and to

292 This is the same as the definition of “material conflict of interest” discussed in the Proposing Release but eliminates “material” and “a reasonable person would expect” for the reasons discussed below. 293 The Conflict of Interest Obligation requires, among other things, that a broker-dealer establish written policies and procedures reasonably designed to identify and disclose all conflicts of interest associated with a recommendation. Such disclosure is required to be provided in accordance with the Disclosure Obligation. See Section II.C.3.d.

assist retail investors with the process of deciding whether to engage a particular firm or financial professional and whether to establish an investment advisory or brokerage relationship. 294 Specifically, we are requiring broker-dealers and investment advisers to deliver to retail investors a Relationship Summary.295 The Relationship Summary will provide 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. 296 The Relationship Summary has a distinct purpose: it is intended to summarize information about a particular broker-dealer or investment adviser in a format that allows for comparability among the enumerated items, encourages investors to ask questions, and highlights additional sources of information. As a general matter, the Relationship Summary reflects an initial layer of disclosure, with the Disclosure Obligation reflecting more specific and additional, detailed layers of disclosure.297 We believe the Relationship Summary and the Disclosure Obligation, while separate obligations

294 See Relationship Summary Adopting Release.
295 See Relationship Summary Adopting Release.
296 See Relationship Summary Adopting Release at Section I. 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.” 297 Nevertheless, as discussed below where relevant, in some instances disclosures made pursuant to Form CRS may be sufficient to satisfy some aspects of the Disclosure Obligation.

with significant individual value, will complement each other and, consistent with our layered approach to disclosure, are designed to build upon each other to provide different levels of key information and may be required to be delivered at different times. In addition, we believe the Relationship Summary and Disclosure Obligation will improve the quality and consistency of disclosures and thus: (1) reduce the information asymmetry that may exist between a retail customer and their broker-dealer, and (2) facilitate customer comparisons of different brokerdealers which we expect will, in turn, increase competition among broker-dealers, including with respect to fees and costs.298 As discussed below, we have identified those items of information that we consider to be “material facts” under the Disclosure Obligation. Though there are disclosures in the Relationship Summary that could satisfy the Disclosure Obligation, in most instances the Relationship Summary will not be sufficient.299 Moreover, as discussed below, we believe the Disclosure Obligation can be satisfied to varying degrees with existing documents provided to retail customers, such as account opening documents, with a standalone document, or by some combination. However, we encourage broker-dealers, in deciding whether to rely on such an existing disclosure document or whether to include or repeat information from existing

298 See infra footnote 1192 and accompanying text.
299 For example, as noted below, a standalone broker-dealer will be able to satisfy the Disclosure Obligation’s requirement to disclose the broker-dealer’s capacity by delivering the Relationship Summary to the retail customer.

disclosures, to consider the usefulness and ease of understanding for retail customers of any existing disclosure document. Oral Disclosure or Disclosure After a Recommendation As discussed in more detail below, a number of commenters highlighted practical difficulties associated with delivering disclosure either in writing, or prior to or at the time of a recommendation in some instances. Although Regulation Best Interest requires that the Disclosure Obligation be made “in writing,” we recognize the challenges associated with providing written disclosure in each instance that disclosure may be required. For example, a broker-dealer may need to supplement, clarify or update written disclosure it has previously made before or at the time it provides a customer with a recommendation. As we stated in the Proposing Release, we recognized that broker-dealers may provide recommendations by telephone and may need to offer clarifying disclosure orally in some instances subject to certain conditions, such as a dual-registrant informing a retail customer of the capacity in which the dual-registrant is acting in conjunction with a recommendation. We stated that a broker-dealer could orally clarify the capacity in which it is acting at the time of the recommendation if it had previously provided written disclosure to the retail customer beforehand disclosing its capacity as well as the method it planned to use to clarify its capacity at the time of the recommendation Similarly, although Regulation Best Interest requires a broker-dealer to disclose, prior to or at the time of a recommendation, all material facts relating to the scope and terms of the relationship with the retail customer and relating to conflicts of interest that are associated with the recommendation, we recognize that in some instances a broker-dealer may not have all the material facts at the time of the recommendation, or that such disclosure is provided to the retail customer pursuant to an existing regulatory obligation, such as the delivery of a product

prospectus or a trade confirmation, after the execution of the trade.300 In the Proposing Release we stated that in circumstances where a broker-dealer determines to provide an initial, more general disclosure (such as a relationship guide) followed by specific information in a subsequent disclosure that is provided after the recommendation (e.g., a trade confirmation) the initial disclosure should address when and how a broker-dealer would provide more specific information regarding the material fact or conflict in a subsequent disclosure (e.g., after the trade in the trade confirmation). We noted also that whether there is sufficient disclosure in both the initial disclosure and any subsequent disclosure would depend on the facts and circumstances. We continue to believe that some flexibility with respect to the provision by brokerdealers of written and oral disclosure, as well as with respect to the timing that disclosure is made, is appropriate in certain circumstances, such as when a broker-dealer updates its written disclosures orally in order to reflect facts not reasonably known at the time the written disclosure is provided. In such circumstances, a broker-dealer may satisfy its Disclosure Obligation by making supplemental oral disclosure not later than the time of the recommendation, provided that the broker-dealer maintains a record of the fact that oral disclosure was provided to the retail customer.301 In addition, in the limited instances where existing regulations permit disclosure after the recommendation is made (e.g., trade confirmation, prospectus delivery), a broker dealer

300 See infra footnote 525.
301 See Section II.D, Record-Making and Recordkeeping.

may satisfy its Disclosure Obligation regarding the information contained in the applicable disclosure document by providing such document to the retail customer after the recommendation is made. Before supplementing, clarifying or updating written disclosures in the limited circumstances described above, broker-dealers must provide an initial disclosure in writing that identifies the material fact and describes the process through which such fact may be supplemented, clarified or updated. For example, with regard to product-level fees, a broker-dealer could provide an initial standardized disclosure of product-level fees generally (e.g., reasonable dollar or percentage ranges), noting that further specifics for particular products appear in the product prospectus, which will be delivered after a transaction in accordance with the delivery method the retail customer has selected, such as by mail or electronically.302 Similarly, with regard to the disclosure of a broker-dealer’s capacity, a dual-registrant could disclose that recommendations will be made in a broker-dealer capacity unless otherwise expressly stated at the time of the recommendation, and that any such statement will be made orally. Or, a broker-dealer could disclose that its associated persons may have conflicts of interest beyond than those disclosed by

302 While using a percentage or dollar range to describe a fee can be appropriate, that range should be designed to reasonably reflect the actual fees to be charged. For example, if the firm offers in almost all instances funds with up-front sales charges of between 5% and 5.5%, but the disclosure states that mutual fund up-front sales charges may “range from 0.0% to 5.5%,” then the broker-dealer would need to evaluate whether the disclosure should be revised to more accurately describe the sales charge. See discussion in Section II.C.1.a, Disclosure Obligation, Material Facts Regarding Scope and Terms of the Relationship, Fees and Costs, Particularly of Fees and Costs Disclosed.

the broker-dealer, and that associated persons will disclose, where appropriate, any additional material conflicts of interest not later than the time of a recommendation, and that any such disclosure will be made orally. We believe it is in the public interest and consistent with the protection of investors to permit such flexibility in the delivery of information pursuant to the Disclosure Obligation. Providing retail customers written summary information about material facts relating to a recommendation and indicating that additional information will be forthcoming, the point at which the additional information will be delivered, and the method by which it will be conveyed, highlights for retail customers a useful summary of information while allowing for the practical realities of the process by which securities recommendations are made and transactions are executed and leaving longstanding existing disclosure regimes, particularly those relating to product issuer disclosure, undisturbed. Other Liabilities Under the Federal Securities Laws Further, the requirements under Regulation Best Interest that particular information be disclosed is not determinative of a broker-dealer or associated person’s other potential liabilities under the general antifraud provisions of the federal securities laws for failure to disclose material information to a customer at the time of a recommendation. 303 In addition, we remind

303 Broker-dealers are liable under the antifraud provisions for failure to disclose material information to their customers when they have a duty to make such disclosure. See Basic
v. Levinson, 485 U.S. 224, 239 footnote 17 (1988) (“Silence, absent a duty to disclose, is

broker-dealers that even full and fair disclosure of the information required by the Disclosure Obligation is not sufficient, standing alone, to satisfy the Care Obligation, and that even sufficient disclosure cannot cure a violation of the Care Obligation. Disclosures by Natural Persons Associated with a Broker-Dealer The Disclosure Obligation applies to a broker, dealer, or natural person who is an associated person of a broker or dealer.304 As stated in the Proposing Release, we are requiring

not misleading under Rule 10b-5.”); Chiarella v. U.S., 445 U.S. 222, 228 (1980) (explaining that a failure to disclose material information is only fraudulent if there is a duty to make such disclosure arising out of “a fiduciary or other similar relation of trust and confidence”); SEC v. Monarch Funding Corp., 192 F.3d 295, 308 (2d Cir. 1999) (explaining that defendant is liable under Section 10(b) and Rule 10b-5 for material omissions “as to which he had a duty to speak”). Generally, under the antifraud provisions, a broker-dealer’s duty to disclose material information to its customer is based upon the scope of the relationship with the customer, which is fact intensive. See, e.g., Conway v. Icahn & Co., Inc., 16 F.3d 504, 510 (2d Cir. 1994) (“A broker, as agent, has a duty to use reasonable efforts to give its principal information relevant to the affairs that have been entrusted to it.”). For example, where a broker-dealer processes its customers’ orders, but does not recommend securities or solicit customers, then the material information that the broker-dealer is required to disclose is generally narrow, encompassing only the information related to the consummation of the transaction. See, e.g., Press v. Chemical Inv. Servs. Corp., 166 F.3d 529, 536 (2d Cir. 1999). However, courts have found that a broker-dealer’s duty to disclose material information under the antifraud provisions is broader when the broker-dealer is making a recommendation to its customer. See, e.g., Hanly, 415 F.2d 589, 597 (2d Cir. 1969). When recommending a security, broker-dealers generally are liable under the antifraud provisions if they do not give “honest and complete information” or disclose any material adverse facts or material conflicts of interest, including any economic self-interest. See, e.g., De Kwiatkowski v. Bear, Stearns & Co., 306 F.3d 1293, 130 (2d Cir. 2002); Chasins v. Smith, Barney & Co., 438 F.2d 1167, 1172 (2d Cir. 1970). See Proposing Release at 21599 footnote 176. 304 Rule 15l-1(a)(2)(i).

not only the broker-dealer entity, but also individuals who are associated persons of a brokerdealer (e.g., registered representatives) to comply with specified components of Regulation Best Interest when making recommendations to retail customers. 305 One commenter requested guidance on how an associated person should comply with the Disclosure Obligation.306 In response, we believe that a natural person who is an associated person of a broker-dealer may in many instances rely on the disclosures provided by the broker-dealer with which he or she is associated to satisfy the Disclosure Obligation. However, when an associated person knows or should have known that the broker-dealer’s disclosure is insufficient to describe “all material facts,” the associated person must supplement that disclosure. For example, if an associated person of a broker-dealer that offers a full range of securities products is licensed solely as a Series 6 Registered Representative,307 and can sell only mutual funds, variable annuities and other enumerated products, that limitation on the scope of services provided by the particular

305 Proposing Release at 21592.
306 See NASAA August 2018 Letter (recommending that the Commission provide specific instructions on how associated persons should disclose capacity in which they are acting). 307 A candidate who passes the Series 6 exam is qualified for the solicitation, purchase and/or sale of the following securities products: Mutual funds (closed-end funds on the initial offering only), Variable annuities, Variable life insurance, Unit investment trusts (UITs), Municipal fund securities (e.g., 529 savings plans, local government investment pools (LGIPs)). FINRA, Series 6 - Investment Company and Variable Contracts Products Representative Exam, Permitted Activities, available at:
http://www.finra.org/industry/series6#permitted-activities.

associated person must be sufficiently clear in the broker-dealer’s disclosures; otherwise additional clarifying disclosure by the associated person would be necessary. a. Material Facts Regarding Scope and Terms of the Relationship As discussed above, the proposed Disclosure Obligation would require a broker-dealer to, among other things, “prior to or at the time of such recommendation, reasonably disclose to the retail customer, in writing, the material facts relating to the scope and terms of the relationship with the retail customer.” We proposed to consider the following to be examples of material facts relating to the scope and terms of the relationship with the retail customer: (i) that the broker-dealer was acting in a broker-dealer capacity with respect to the recommendation; (ii) fees and charges that would apply to the retail customer’s transactions, holdings, and accounts; and (iii) the type and scope of services provided by the broker-dealer, including, for example, monitoring the performance of the retail customer’s account. Commenters requested that we clarify which facts a broker-dealer would be required to disclose about the scope and terms of the relationship it has with a customer under Regulation Best Interest. 308 In particular, several commenters recommended that the Commission clarify how a dual-registrant should disclose its capacity regarding its recommendations. 309 Other commenters recommended that the Commission define the scope of fees a broker-dealer must

308 See, e.g., SIFMA August 2018 Letter; Edward Jones Letter; NASAA August 2018 Letter; AARP August 2018 Letter; PIABA Letter; Prudential Letter. 309 See, e.g., SIFMA August 2018 Letter; Edward Jones Letter.

disclose310 and the form that disclosure should take.
311 In addition, some commenters requested clarity on the types of services that a broker-dealer would be required to disclose, including limitations on securities offered312 and account monitoring services.313 As discussed below, in response to comments, we have revised the Disclosure Obligation to require disclosure of “all material facts relating to the scope and terms of the relationship with the retail customer, including: (i) that the broker, dealer or such natural person is acting as a broker, dealer or an associated person of a broker-dealer with respect to the recommendation; (ii) the material fees and costs that apply to the retail customer’s transactions, holdings, and accounts; and (iii) the type and scope of services provided to the retail customer, including any

310 See, e.g., Bank of America Letter (recommending that the Commission apply a “materiality” threshold to determine which fees should be disclosed). 311 See, e.g., SIFMA August 2018 Letter (stating that a broker-dealer’s disclosure of a range of customer costs per product should be sufficient); CFA August 2018 Letter (stating a broker-dealer’s disclosure of percentages or ranges of cost information would do little to enlighten investors about the true costs of brokers’ advice services). 312 See, e.g., NY Life Letter (stating that an insurer may appropriately focus its career agents on the distribution of variable insurance products that the insurer manufactures, so long as limitations on the universe of available products are disclosed to consumers and supervisory procedures are in place to ensure that a variable insurance product is in the client’s best interest); CFA Institute Letter (stating that the Disclosure Obligation should complement the information presented in Form CRS and provide greater specificity about, among other things, the type and scope of services offered by the broker-dealer). 313 See, e.g., IAA August 2018 Letter (recommending that the Commission clarify that Regulation Best Interest would apply to all advisory activities that broker-dealers agree to provide (e.g., ongoing monitoring for purposes of recommending changes in investments)).

material limitations on the securities or investment strategies involving securities that may be recommended to the retail customer.”314 In addition, we are clarifying the scope of the obligation. As we did in the Proposing Release, we emphasize that although we have explicitly identified the capacity in which the broker-dealer is acting, material fees and costs, and the type and scope of services, as what would at a minimum be required to be disclosed as “material facts relating to the scope and terms of the relationship with the retail customer,” the Disclosure Obligation requires broker-dealers and associated persons to disclose “all material facts relating to the scope of the terms of the relationship,” (emphasis added) and broker-dealers and such associated persons thus will need to consider, based on the facts and circumstances, whether there are other material facts relating to the scope and terms of the relationship with the retail customer that need to be disclosed. This analysis generally should include consideration of whether information in the Relationship Summary constitutes a “material fact” that could appropriately be expanded upon in satisfying the Disclosure Obligation. It would be possible, but would be unlikely for most broker-dealers, for the abbreviated format of the Relationship Summary to sufficiently disclose “all material facts” regarding the scope and terms of the relationship such that no further information would be required to satisfy the Disclosure Obligation.

314 Rule 15l-1(a)(2)(i)(A).

Capacity In Which the Broker-Dealer is Acting
In the Proposing Release, the Commission identified that the capacity in which a brokerdealer is acting is a material fact relating to the scope and terms of a customer relationship subject to the Disclosure Obligation.315 In so identifying this critical element of information, we hoped to promote greater awareness among retail customers of the capacity in which their financial professional or firm acts with respect to recommendations. Several commenters requested additional guidance on how dual-registrants and their associated persons could comply with the proposed Disclosure Obligation in this respect. Some commenters stated that repeated disclosures of capacity would distract customers from more important disclosures related to a recommendation and could lead to confusion.317 While we received comments expressing concerns that our proposed approach might lead to investor

315 Proposing Release at 21601.
316 See, e.g., NASAA August 2018 Letter (requesting that the Commission provide guidance to associated persons of dual-registrants explaining how they should disclose the capacity in which they are acting and whether they are providing a recommendation or advice); Better Markets August 2018 Letter; CFA August 2018 Letter; Fidelity Letter; IPA Letter; SIFMA August 2018 Letter; Edward Jones Letter; CCMC Letters. 317 See, e.g., Edward Jones Letter (recommending that the Commission not require repeated capacity disclosures to customers because it would be redundant and potentially confuse customers); SIFMA August 2018 Letter (stating that disclosure of capacity should not be required at the time of the recommendation as it would cause unnecessary delay and distract customers from more important disclosures regarding account features and recommendations); Better Markets August 2018 Letter (stating that one-time written disclosure about a dual-registrant’s advisory capacity, followed by future oral disclosures when they change roles when making recommendations would be confusing).

confusion,318 many of these commenters were seeking clarity regarding this requirement and not its elimination.319 In response to commenters, we are revising Regulation Best Interest to explicitly require disclosure of capacity, which the Proposing Release addressed in guidance. Therefore, Rule 15l1(a)(2)(i)(A) requires that the broker, dealer, or natural person who is an associated person of a broker or dealer, prior to or at the time of the recommendation, provide the retail customer, in writing, full and fair disclosure of all material facts relating to the scope and terms of the relationship with the retail customer, including that the broker-dealer or such natural person is acting as a broker-dealer or an associated person of a broker-dealer with respect to the recommendation. This disclosure is designed to improve awareness among retail customers of the capacity in which their financial professional or broker-dealer acts when it makes recommendations so that the retail customer can more easily identify and understand their relationship, a goal shared

318 See, e.g., Better Markets August 2018 Letter; CFA August 2018 Letter (stating that flexibility in disclosure will result in disclosures that do not effectively convey key information especially for dual-registrants as customers will not understand the capacity the dual-registrant is acting in at the particular time or its significance). 319 See, e.g., SIFMA August 2018 Letter (requesting that the Commission clarify the application of the Disclosure Obligation to dually registered firms and personnel, including what, and how frequently, disclosure is required to put customer on notice of their capacity); Edward Jones Letter; IPA Letter; CCMC Letters.

with the Relationship Summary.
320 Form CRS requires a firm to state the name of the brokerdealer or investment adviser and whether the firm is registered with the Commission as a brokerdealer, investment adviser, or both. 321 A standalone broker-dealer (i.e., a broker-dealer not also registered as an investment adviser) will generally be able to satisfy the Disclosure Obligation’s 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 registered or, who are not dually registered but 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. Although some commenters expressed concerns about potential investor confusion caused by “additional” disclosure regarding a dual-registrant’s capacity, we believe that the Disclosure Obligation will not duplicate or confuse, but instead will provide clarifying detail on capacity to supplement the information contained in the Relationship Summary. Accordingly, we are clarifying that dually registered associated persons and associated persons who are not dually registered but only offer broker-dealer services through a firm that is dually registered as an investment adviser with the Commission or with a state, must disclose whether they are acting (or, in the case of the latter,

320 See Relationship Summary Proposal at 21420.
321 See Relationship Summary Adopting Release at Section II.C.

that they are only acting) as an associated person of a broker-dealer to satisfy the Disclosure Obligation. 322 An associated person of a dual-registrant who does not offer investment advisory services must disclose that fact as a material limitation in order to satisfy the Disclosure Obligation. Furthermore, as discussed in greater detail below, we would presume the use of the terms “adviser” and “advisor” by (1) a broker-dealer that is not also registered as an investment adviser or (2) a financial professional that is not also a supervised person of an investment adviser to be a violation of the Disclosure Obligation under Regulation Best Interest. Disclosure of capacity may, in part, be made orally under the circumstances outlined in Section II.C.1, Oral Disclosure or Disclosure After a Recommendation. For example, a broker-dealer may disclose that: “All recommendations will be made in a broker-dealer capacity unless otherwise expressly stated at the time of the recommendation; any such statement will be made orally.” In this case, no further oral or written disclosure would be required until a recommendation is made in a capacity other than as a broker-dealer. Similarly, a broker-dealer may disclose that: “All recommendations regarding your brokerage account will be made in a broker-dealer capacity, and all recommendations regarding your advisory account will be in an advisory capacity. When

322 Financial professionals with registrations to offer services as a representative of a brokerdealer 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. Financial professionals who are not dually registered may offer one type of service through a firm that is dually registered. See Relationship Summary Adopting Release at Section II.B.4.

we make a recommendation to you, we will expressly tell you orally which account we are discussing”). In this instance, no further disclosure of capacity is necessary. Capacity in the Context of Names, Titles, and Marketing Practices The Relationship Summary Proposal included a proposed rule that would have restricted broker-dealers and their associated persons (unless they were registered as, or supervised persons of, an investment adviser), when communicating with a retail investor, from using the term “adviser” or “advisor” as part of a name or title (“Titling Restrictions”).323 After further consideration of our policy goals and the comments we received, and in light of the disclosure requirements under Regulation Best Interest, we do not believe that adopting a separate rule restricting these terms is necessary, because we presume that the use of the term “adviser” and “advisor” in a name or title by (1) a broker-dealer that is not also registered as an investment adviser or (2) an associated person that is not also a supervised person of an investment adviser, to be a violation of the capacity disclosure requirement under the Disclosure Obligation as discussed further below.324

323 See Relationship Summary Proposal, supra footnote 12, at 21461–63. We also requested comment on whether we should explicitly restrict other terms, including “wealth manager” and “financial consultant.” Additionally, we requested comment on whether we should restrict terms that are synonymous with “adviser” or “advisor.” 324 We recognize that, in adopting the fee-based brokerage rule in 2005, we declined to place any limitations on how a broker-dealer may hold itself out or the titles it may employ. Certain Broker-Dealers Deemed Not to Be Investment Advisers, Advisers Act Release No. 2376 (Apr. 12, 2005). However, as we noted in the Relationship Summary Proposal, comments we received in response to Chairman Clayton’s request for comment and our

We received several comments on the proposed Titling Restrictions, which we have also considered when determining to presume use of such names and titles to be a violation of the capacity disclosure.325 Some commenters supported a restriction on the terms “adviser” and “advisor,” noting, for example, that these particular terms are often associated with the statutory term “investment adviser,”326 or that investors “typically associate” these terms with registered

experience prompted us to revisit our approach from 2005. In addition, given that the new disclosure requirements under Regulation Best Interest and Form CRS will and should necessitate a reassessment of a broker-dealer’s names, titles, and communications with its customers, we believe it is necessary to re-evaluate the appropriateness of these practices in light of these new obligations. See also generally Relationship Summary Proposal, supra footnote 12, at 21459–61 (citing commenters and studies by the Siegel and Gale Consulting Group and the RAND Corporation that document investor confusion in the marketplace, all of which were conducted subsequent to the 2005 fee-based brokerage rule); Public Comments from Retail Investors and Other Interested Parties on Standards of Conduct for Investment Advisers and Broker-Dealers, Chairman Jay Clayton (Jun. 1, 2017), available at https://www.sec.gov/news/publicstatement/statement-chairman-clayton-2017-05-31. We also proposed rules (the “Affirmative Disclosures”) 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. As we discuss in a concurrent rulemaking, we are not adopting the Affirmative Disclosures. See Relationship Summary Adopting Release, supra footnote 12, at Section III. 325 See, e.g., CFA August 2018 Letter; IAA August 2018 Letter; LPL August 2018 Letter; Letter from Dennis M. Kelleher, President and CEO, et al., Better Markets (Aug. 7, 2018) (“Better Markets CRS Letter”). 326 See Letter from Lexie Pankratz, Owner, Trailhead Consulting, LLC (Aug. 7, 2018) (“Trailhead Letter”).

investment advisers.327 A few commenters generally noted that the title “financial advisor” prevents investors from understanding whether they are engaging a financial professional who provides advisory services or who sells brokerage services. 328 Moreover, other commenters generally stated that names and titles containing “adviser” or “advisor” create investor confusion and/or could mislead investors about the differences between broker-dealers and investment advisers including the applicable standard of care329 and the services to be provided.330 Other commenters did not support the proposed Titling Restrictions, believing that the terms “adviser” and “advisor” are more generically used and understood, and refer to financial professionals who provide advice and financial services more generally.331 Several of these

327 See, e.g., Letter from Kurt N. Schacht, Managing Director, et al., CFA Institute (Aug. 7,
2018) (“CFA Institute CRS Letter”); Pickard Letter.
328 See, e.g., Letter from Gerald Lopatin (Jul. 30, 2018) (“Lopatin Letter”); Letter from Paula Hogan (Aug. 6, 2018) (“Hogan Letter”); Letter from Arlene Moss (Jul. 31, 2018) (“Moss Letter”); Letter from Daniel Wrenne (Jul. 31, 2018) (“Wrenne Letter”). 329 See, e.g., FSI August 2018 Letter; Schwab Letter; CFA Institute CRS Letter; Betterment Letter. 330 See, e.g., NASAA August 2018 Letter (stating that “[t]his rule change will help forestall retail investors’ confusion about the different roles and duties owed by brokerdealers/agents and investment advisers/investment adviser Representatives”); CFA Institute CRS Letter (stating that “[i]nvestor confusion about the roles and duties of different financial services providers who use “adviser/advisor” in their titles has become problematic from both an investor protection and trust standpoint. Use of the proposed CRS, alone, will not allay the substantial investor confusion in the marketplace about the differences between broker-dealers and investment advisers.”) 331 See LPL August 2018 Letter (stating that “restricting use of ‘advisor’ and ‘adviser’ is contrary to the plain English meaning the average investor associates with those terms …

commenters stated that the restriction adds little additional investor protection when taken together with Regulation Best Interest and Form CRS (i.e., it is duplicative).332 Additionally, some commenters stated that Form CRS alone provides similar investor protections that alleviate the need for the restriction.333 Along similar lines, one commenter stated that certain fraud-based securities laws and FINRA rules provide the same protections that the proposed restriction seeks to add, making it unnecessary.334 We also received several comments on the following alternative approaches to the Titling Restrictions on which we sought comment: (i) a broker-dealer that used the terms “adviser” or “advisor” as part of a name or title would not be considered to provide investment advice solely incidental to the conduct of its business as a broker-dealer, and (ii) a broker-dealer would not be providing investment advice solely incidental to its brokerage business if it “held itself out” as an

regardless of the legal contours of the service relationship.”); NAIFA Letter (stating that “[m]any financial professionals are recognized as and/or refer to themselves as ‘advisors/advisers’ or ‘financial advisors/advisers.’ These words are (aptly) used by professionals who offer advice on any number of financial topics.”); Letter from Investments & Wealth Institute (“IWI”) (Aug. 6, 2018) (“IWI August 2018 Letter”) (stating that an outright ban on the use of the terms “adviser” and “advisor” by brokerdealers would raise First Amendment concerns). 332 See, e.g., Letter from Robert D. Oros, Chief Executive Officer, HD Vest Financial Services (Aug. 7, 2018) (“HD Vest Letter”); LPL August 2018 Letter; SIFMA August 2018 Letter. But see Pickard Letter (supporting the restriction and our proposed alternative holding out approach by noting that “[w]e do not think that Reg BI or Form CRS as currently proposed is sufficient.”) 333 See, e.g., LPL August 2018 Letter; Morgan Stanley Letter; Raymond James Letter. 334 See Cambridge Letter.

investment adviser to retail investors.335 This second alternative approach would have resulted in a restriction generally broader in scope than the Titling Restrictions, as it would also have encompassed communications and sales practices in addition to the use of names and titles. In response to these alternatives, several commenters stated that the Titling Restrictions were too narrow in meeting the Commission’s intended objective of mitigating the risk that investors could be misled by the use of certain names and titles because the Titling Restrictions did not address other confusing names or titles,336 and, more specifically, because the Titling

335 See Relationship Summary Proposal, supra footnote 12, at 21463–64. We are not adopting the proposed alternative approach that would have restricted a broker-dealer from availing itself of the solely incidental exclusion if it “held itself out” as an investment adviser. Use of the terms “adviser” or “advisor,” however, could support a conclusion depending on other facts and circumstances, that the primary business of the firm is advisory in nature, in which case the advice provided by the broker-dealer would not be solely incidental to the conduct of its brokerage business. See Solely Incidental Interpretation, supra footnote 12, at Section II.B (providing the Commission’s interpretation of the solely incidental prong of the broker-dealer exclusion from the Advisers Act). 336 See e.g., Letter from Barbara Roper, Director of Investor Protection, and Micah Hauptman, Financial Services Counsel, (Dec. 7, 2018) (“CFA December 2018 Letter”); State Treasurers Letter; Waters Letter (noting that the Titling Restrictions are too narrow of a fix for investor confusion because they fail “to address the numerous other titles professionals use…. As a result, most retail investors cannot easily distinguish between financial advisers who are mere salespeople and those that are investment advisers that must provide advice that is in the best interests of the investor.”). See also NAIFA Letter (noting that restricting these terms for broker-dealers and their financial professionals only “and not for numerous other professionals using those words and delivering advice on a wide variety of financial topics creates more consumer confusion and does not enhance consumers’ understanding of the specific obligations and standards that apply to their advisor(s).”)

Restrictions did not address the broker-dealers who “hold themselves out” as investment advisers.337 Several of these commenters instead advocated for precluding reliance on the solely incidental prong by any broker-dealer that holds itself out as an investment adviser.338 Some commenters stated that certain marketing practices indicate that advice is the main function of the broker-dealer’s service.339 Additionally, one commenter stated that “the potential for

Additionally, several of the commenters who supported the restriction recommended modifications such as broadening the restriction to include other terms, including “wealth manager” and “financial consultant.” See, e.g., Financial Engines Letter; Comment Letter of Altruist Financial Advisors LLC (Aug. 7, 2018) (“Altruist Letter”); Letter from David John Marotta (April 22, 2018) (“Marotta Letter”); Galvin Letter; Letter from Pamela Banks, Senior Policy Counsel, Consumers Union (Oct. 19, 2018) (“Consumers Union Letter”). 337 See, e.g., CFA August 2018 Letter; FPC Letter; IAA August 2018 Letter; Letter from Michael Kitces (Aug. 2, 2018) (“Kitces Letter”); LPL August 2018 Letter; MarketCounsel Letter; Waters Letter. 338 See, e.g., IAA August 2018 Letter (noting that “[w]hile names or titles are contributing factors to investor confusion and the potential for investors to be misled, we believe that other factors should be considered as well. In particular, previous studies noted the confusion arising from ‘we do it all’ advertisements and ‘marketing efforts which depicted an ongoing relationship between the broker-dealer and the investor.’”); Betterment Letter; CFA August 2018 Letter; LPL August 2018 Letter. 339 See CFA August 2018 Letter (citing to Micah Hauptman and Barbara Roper, Financial Advisor or Investment Salesperson? Brokers and Insurers Want to Have it Both Ways, January 18, 2017). See also Better Markets CRS Letter (stating that titles present a professional as not “only an expert in financial matters but also someone who will offer advice and recommendations”); Letter from Michael Palumbo (Aug. 7, 2018) (“Palumbo Letter”); Kitces Letter.

investor confusion is at its greatest when dealing with broker-dealers and dual-registrants that routinely market their services as advisory in nature….”340 Use of Terms “Adviser” or “Advisor” Financial firms and their professionals, including broker-dealers and investment advisers, seek to acquire new customers and to retain existing customers by marketing their services, including through the use of particular terms in names and titles. Firms often spend time and money to market, brand, and create intellectual property by using these terms in an effort to shape investor expectations.341 A name or title is generally used, and is designed to have significance, on its own without any additional context as to what it means. Given that the titles “adviser” and “advisor” are closely related to the statutory term “investment adviser,” their use by broker-dealers can have the effect of erroneously conveying to investors that they are regulated as investment advisers, and have the business model, including the services and fee

340 See CFA August 2018 Letter. See also CFA Institute CRS Letter (stating that the proposal should address “those who may not expressly refer to themselves as ‘adviser/[advis]or’ but through their actions convey that meaning to investors….”). 341 See, e.g., Letter from Barbara Roper, Director of Investor Protection, and Micah Hauptman, Financial Services Counsel, CFA (Sep. 14, 2017) (“CFA September 2017 Letter”) (“[O]ur study documents how everything from the titles brokers use to the way they describe their services is designed to send the message that they are in the business of ‘providing expert investment advice, comprehensive financial planning, and retirement planning that is based on their clients’ needs and goals and that is designed to serve their best interests.’”)

structures, of an investment adviser.342 Such potential effect undermines the objective of the capacity disclosure requirement under Regulation Best Interest to enable a retail customer to more easily identify and understand their relationship. As discussed above, the Disclosure Obligation requires broker-dealers to make full and fair disclosure of all material facts relating to the scope and terms of the relationship with a retail customer, including the capacity in which they are acting with respect to a recommendation. The capacity disclosure requirement is designed to improve awareness among retail customers of the capacity in which their firm and/or financial professional acts when it makes recommendations so that a retail customer can more easily identify and understand their relationship.343 We believe that in most cases broker-dealers and their financial professionals cannot comply with the capacity disclosure requirement by disclosing that they are a broker-dealer while calling themselves an “adviser” or “advisor.” Under the Disclosure Obligation, a broker-dealer, or an associated person, must, prior to or at the time of the recommendation, disclose that the brokerdealer or that associated person is acting as a broker or dealer with respect to the

342 See Relationship Summary Proposal, supra footnote 12, at 21461.
343 Similarly, Form CRS is 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 or financial professional and whether to establish, or to continue to maintain, an investment advisory or brokerage relationship. A broker-dealer firm or financial professional’s use of “adviser” or “advisor” in its name or title would inhibit a customer’s full understanding of the contours of his or her relationship with the firm and financial professional, undermining Form CRS.

recommendation.344 When a broker-dealer or an associated person uses the name or title “adviser” or “advisor” there are few circumstances345 in which that broker-dealer or associated person would not violate the capacity disclosure requirement because the name or title directly conflicts with the information that the firm or professional would be acting in a broker-dealer capacity.346 Therefore, use of the titles “adviser” and “advisor” by broker-dealers and their financial professionals would undermine the objectives of the capacity disclosure requirement by potentially confusing a retail customer as to type of firm and/or professional they are engaging, particularly since “investment adviser” is defined by statute separately from “broker” or “dealer.” As a result,347 we presume that the use of the terms “adviser” and “advisor” in a name or title by (i) a broker-dealer that is not also registered as an investment adviser or (ii) an associated

344 See Rule 15l-1(a)(2)(i)(A)(i).
345 See infra footnotes 349-351 and accompanying text.
346 In the Relationship Summary Proposal, we stated that our proposed restriction on the terms “adviser” and “advisor” would not have applied to broker-dealers when communicating with institutions. See Relationship Summary Proposal, supra footnote 12, at 21462. Given that Regulation Best Interest and the Relationship Summary apply only to retail customers and retail investors, respectively, our presumption would only apply to the use of “adviser” and “advisor” in such contexts. Therefore, we do not believe that further clarification of communications by non-retail focused broker-dealers is necessary. 347 Specifically, in the Proposing Release we stated that a standalone broker-dealer would satisfy the capacity disclosure by complying with the proposed Relationship Summary and Affirmative Disclosure requirements. We provided this proposed guidance in the context of concurrently proposing the Titling Restrictions. For the reasons discussed herein, we believe a presumption against the use of these titles by standalone brokerdealers is more appropriate than a restriction.

person that is not also a supervised person of an investment adviser to be a violation of the capacity disclosure requirement under Regulation Best Interest.348 Although using these names or titles creates a presumption of a violation of the Disclosure Obligation in Regulation Best Interest, we are not expressly prohibiting the use of these names and titles by broker-dealers because we recognize that some broker-dealers use them to reflect a business of providing advice other than investment advice to retail clients. A clear example is a broker-dealer (or associated person) that acts on behalf of a municipal advisor349 or commodity trading adviser,350 or as an advisor to a special entity,351 as these are distinct advisory roles specifically defined by federal statute that do not entail providing investment advisory services. We also recognize that a broker-dealer may provide advice in other capacities outside

348 If a financial professional is a registered representative of a broker-dealer that is a dualregistrant but the professional is not also a supervised person of an investment adviser, this professional would similarly be presumptively in violation of the capacity disclosure requirement if the financial professional uses the title “adviser” or “advisor.” However, this financial professional may continue to use either the dual-registrant’s materials or may use the firm’s name in the financial professional’s communications even if the firm’s name includes the title “adviser” or “advisor” because such firm is dually registered as an investment adviser and broker-dealer and is not presumptively violating the capacity disclosure requirement under Regulation Best Interest. Moreover, we believe it would be consistent for dual-registrants and dually registered financial professionals to use these terms as they would be accurately describing their registration status as an investment adviser. 349 15 U.S.C. 78o-4(e)(4). 350 15 U.S.C. 80b-2(a)(29). 351 15 U.S.C. 78o-8(h)(2)(A).

the context of investment advice to a retail customer that would present a similarly compelling claim to the use of these terms. In these circumstances, firms and their financial professionals may in their discretion use the terms “adviser” or “advisor.”352 In most instances, however, when a broker-dealer uses these terms in its name or title in the context of providing investment advice to a retail customer, they will generally violate the capacity disclosure requirement under Regulation Best Interest. Marketing Communications As discussed above, several commenters on the Titling Restrictions raised concerns that restricting the use of names and titles would be insufficient to address what they viewed as the larger issue of broker-dealer marketing communications where a broker-dealer and/or its financial professional appears to be holding itself out as an investment adviser. Marketing

352 Some commenters raised concerns that the proposed restriction would not permit financial professionals to indicate that they maintain particular certifications that include in the name or title “adviser” or “advisor.” See, e.g., IWI August 2018 Letter; Letter from IWI (Oct. 9, 2018) (“IWI October 2018 Letter”). Cf. Letter from John Robinson (Aug. 6, 2018) (“Robinson Letter”) (suggesting that the Commission limit the use of the term “financial planner” to investment adviser representatives); FPC Letter (suggesting that the Commission clarify which certifications or professional designations may be used for financial planners). We recognize that these designations are intended to convey adherence to particular standards that financial professionals have met. However, these designations are not rooted in any statutory construct (as are the titles “commodity trading advisor” and “municipal advisor”) and given that the terms “adviser” and “advisor” are still associated with the statutory term “investment adviser,” even if used in a designation, a broker-dealer or associated person that uses these designations would similarly be in presumptive violation of the capacity disclosure requirement in Regulation Best Interest.

communications provide additional context to investors and are designed to persuade potential customers to obtain and pay for the firm’s services and products.353 They communicate to customers what services firms understand themselves to be providing—including, for brokerdealers, recommendations in connection with and reasonably related to effecting securities transactions. The way in which a broker-dealer markets itself may have regulatory consequences. As noted above, Form CRS requires, among other items, broker-dealers (and investment advisers) to state clearly key facts about their relationship, including their registration status and the services they provide. 354 Broker-dealers (and investment advisers) will also be required through Form CRS to provide information to assist retail investors in deciding whether to engage in an

353 Affiliated firms may market advisory and brokerage services in a single set of communications. A dually registered firm also may seek to market the primary services provided by its advisory and brokerage business lines in a single set of communications. We believe this combined approach to providing customers with information about investment services enhances customer choice, and we understand that many such firms market in this way in an effort to provide a comprehensive picture of the firm’s services. See also Instructions to Form CRS, General Instruction 5. (Encouraging dual-registrants to prepare one relationship summary discussing both its brokerage and investment advisory services, but stating that they may prepare two separate relationship summaries for brokerage services and investment advisory services. Whether the firm prepares one relationship summary or two, the firm must present the brokerage and investment advisory information with equal prominence and in a manner that clearly distinguishes and facilitates comparison of the two types of services.). 354 See Relationship Summary Adopting Release, supra footnote 12.

investment advisory or brokerage relationship.355 Additionally and as discussed above, we are adopting the capacity disclosure requirement under Regulation Best Interest, which requires broker-dealers and their financial professionals to affirmatively disclose the capacity (e.g., brokerage) in which they are acting with respect to their recommendations.356 These obligations are designed to improve awareness among retail customers of the capacity in which their firm or financial professional acts when it makes recommendations so that the retail customer can more easily identify and understand their relationship. As noted above, we are not adopting the Commission’s proposed alternative holding out approach that would have addressed broker-dealer marketing communications through the lens of the solely incidental exclusion.357 However, under our interpretation of the solely incidental prong of the broker-dealer exclusion from the definition of investment adviser, a broker-dealer’s investment advisory services do not fall within that prong if the broker-dealer’s primary business is giving investment advice or if its investment advisory services are not offered in connection with and are not reasonably related to the broker-dealer’s business of effecting securities transactions.358 By more clearly delineating when a broker-dealer’s performance of advisory

355 Id.
356 See Rule 15l-1(a)(2)(i)(A)(i).
357 See supra footnote 335 and accompanying text.
358 See Solely Incidental Interpretation, supra footnote 12, Section II.B (providing the Commission’s interpretation of the solely incidental prong of the broker-dealer exclusion from the Advisers Act.)

activities renders it an investment adviser, this interpretation provides guidance that may be informative to broker-dealers when designing marketing communications that accurately reflect their activities. Broker-dealers, dual-registrants, and affiliated broker-dealers of investment advisers that market their services together should consider whether modifications are needed in their marketing communications in light of these new obligations. As we noted in the Relationship Summary Proposal, broker-dealers can, and do, provide investment advice so long as such advice comports with the broker-dealer exclusion under Advisers Act section 202(a)(11)(C). While broker-dealers and their financial professionals may state that they provide “advice” in their marketing communications, those and other statements should not be made in a manner that contradicts the disclosures made pursuant to Regulation Best Interest and Form CRS, and should be reviewed in light of the Solely Incidental Interpretation.359 We believe that the combination of new disclosure obligations and requirements and firms’ implementation of these new obligations will appropriately address commenters’ concerns regarding broker-dealers that hold themselves out as investment advisers, particularly those who can change capacities when serving retail investors in a dual capacity.360

359 See Relationship Summary Proposal, supra footnote 12, at 21461.
360 See, e.g., IAA August 2018 Letter; FPC Letter; Better Markets CRS Letter.

In addition to these new obligations, FINRA Rule 2210 (regarding its members’ communications with the public) is designed to ensure that broker-dealer communications with the public are fair, balanced, and not misleading.361 This rule includes general standards, such as a requirement to not make any false or misleading statements, and specific content standards, such as requirements on how to disclose the broker-dealer’s name in marketing communications.362 Accordingly, we anticipate that FINRA will be reviewing the application of these rules in light of these new disclosure obligations. The Commission staff also will evaluate broker-dealer marketing communications to consider whether additional measures may be necessary. Fees and Costs In the Proposing Release, we stated that fees and charges applicable to the retail customer’s transactions, holdings, and accounts would also be examples of “material facts relating to the terms and scope of the relationship”363 As such, these fees and charges would generally have needed to be disclosed in writing prior to, or at the time of, the recommendation.

361 See FINRA Rule 2210.
Additionally, broker-dealers and their financial professionals should keep in mind the applicability of the antifraud provisions of the federal securities laws, including section 17(a) of the Securities Act, and Exchange Act Section 10(b) and Rule 10b-5 thereunder, to their marketing practices. 362 See, e.g., FINRA Rule 2210(d)(1) and (d)(3). 363 See Proposing Release at 21601.

While we did not propose to mandate the form, specific content, or method for delivering fee disclosure, we stated that we would generally expect that, to meet the Disclosure Obligation, broker-dealers would build upon the proposed Relationship Summary by disclosing, among other things, additional detail regarding the types of fees and charges described in the proposed Relationship Summary.364 We received a number of comments on the proposed Disclosure Obligation relating to fees and charges. As discussed in more detail in the relevant sections below, these comments generally sought clarity on the scope of fees and charges to be disclosed, including the particularity of the fees and charges to be disclosed (i.e., whether standardized or individualized disclosure would be required). In consideration of the comments received, and in light of the obligations being imposed by the Relationship Summary, we are revising Regulation Best Interest to explicitly require the disclosure of fees and costs, and are providing additional clarifying guidance. In addition, we are revising the Regulation Best Interest rule text to refer to “fees and costs” instead of “fees and charges,” consistent with the approach taken in the Relationship Summary. Specifically, we are revising the Disclosure Obligation to require disclosure of “all material facts relating to the scope and terms of the relationship with the retail

364 See Proposing Release at 21600.

customer, including […] the material fees and costs that apply to the retail customer’s transactions, holdings and accounts.”365 We are also providing additional guidance addressing the scope of fees and costs to be disclosed. Namely, the Disclosure Obligation requires disclosure of material fees and costs relating to the retail customer’s transactions, holdings and accounts. This obligation would not require individualized disclosure for each retail customer. Rather, the use of standardized numerical and other non-individualized disclosure (e.g., reasonable dollar or percentages ranges) is permissible, as discussed below. Scope of Fees and Costs to Be Disclosed Several commenters asked for clarification about whether all fees and charges must be disclosed, or only those that are “material.”367 In response, we are revising Regulation Best Interest to make explicit that a material fact regarding the scope and terms of the relationship includes material fees and costs that apply to the retail customer’s transactions, holdings and accounts. As noted above, the standard for materiality for purposes of the Disclosure Obligation is consistent with the one the Supreme Court articulated in Basic v. Levinson; fees and costs are

365 Rule 15l-1(a)(2)(i)(A)(ii).
366 See Section II.C.1.a, Disclosure Obligation, Fees and Costs, Particularity of Fees and Costs Disclosed; Individualized Disclosure. 367 See, e.g., Bank of America Letter (recommending that the Commission: (i) provide greater specificity regarding the fees to be disclosed under Regulation Best Interest, and (ii) apply a “materiality” threshold to those fees).

material and must be disclosed, if there is “a substantial likelihood that a reasonable shareholder would consider it important.”368 As noted above, in the context of this Regulation Best Interest, the standard of materiality is based on the retail customer, as defined in the rule. We would generally expect that, to satisfy the Disclosure Obligation, broker-dealers would build upon the material fees and costs identified in the Relationship Summary, providing additional detail as appropriate. These descriptions could include, for example, an explanation of how and when the fees are deducted from the customer’s account (e.g., such as on a pertransaction basis or quarterly). Although the fees and costs identified in the Relationship Summary may provide a useful starting point for the identification of the material fees and costs that may be disclosed pursuant to the Disclosure Obligation, there may be other categories of fees and costs that are material under the facts and circumstances of a broker-dealer’s business model that must be disclosed pursuant to the Disclosure Obligation. Particularity of Fees and Costs Disclosed; Individualized Disclosure Several commenters recommended that the Commission not require that broker-dealers provide individualized fee disclosures to retail customers. Specifically, they recommended that the Commission clarify that broker-dealers could meet the Disclosure Obligation if they provide a range of fees and costs or use standardized and hypothetical amounts rather than requiring

368 Basic, Inc. v. Levinson, 485 U.S. 224, 224 (1988).

disclosure of actual dollar amounts based on proposed amounts to be invested (i.e., individualized fees).369 These commenters cited concerns about cost and practicality associated with generating individualized disclosures.370 With regard to product-level fees in particular, several commenters expressed concern that broker-dealers could not easily calculate individualized fees and charges associated with the securities about which they provide recommendations and that doing so might lead to inadvertently providing inconsistent or inaccurate fee estimates to their retail customers. 371 In this vein, several commenters recommended that broker-dealers should be able to satisfy the Disclosure Obligation regarding product-level fees by providing retail customers with or referring them to an issuer’s offering

369 See, e.g., Vanguard Letter (recommending that the Disclosure Obligation could be satisfied by relaying the types and ranges of costs associated with a recommendation, or by using standardized and hypothetical investments, rather than requiring computation of actual dollar amounts based on proposed amounts to be invested); Capital Group Letter (stating that customized mutual fund fee and expense disclosures for investors at the time of the recommendation would be impractical); SIFMA August 2018 (recommending the Commission permit disclosure of a range of customer costs per product); NASAA August 2018 Letter (suggesting that the Commission mandate its Model Fee Table along with disclosure of other fees paid for services and any other third party remuneration). 370 See, e.g., TIAA Letter (stating that broker-dealers would need to expend significant resources to build new systems and new compliance programs in order to provide individualized fee disclosure); ICI Letter (recommending that the Commission confirm that the Disclosure Obligation would not require a broker-dealer to separately calculate fund fees and expenses); Capital Group Letter (stating that individualized disclosures raise significant operational burdens and compliance issues in exchange for, at best, inconsistent utility). 371 See, e.g., TIAA Letter (stating that calculating individualized fee information for any retail customer would be difficult and might lead to inadvertently providing inconsistent or inaccurate fee estimate); Capital Group Letter.

materials, such as a prospectus.
372 Other commenters, on the other hand, stated that the Commission should not allow the use of percentages or ranges because such a presentation does not adequately inform investors of the fees and charges they will incur. As adopted, the Disclosure Obligation does not mandate individualized fee disclosure particular to each retail customer. Instead, broker-dealers may disclose “material facts” about material fees and costs in terms of more standardized numerical and narrative disclosures, such as standardized or hypothetical amounts, dollar or percentage ranges, and explanatory text where appropriate. The disclosure should accurately convey why a fee is being imposed and when the fee is to be charged. Further, as discussed below,374 a broker-dealer will need to supplement this standardized disclosure with more particularized information if the broker-dealer concludes that

372 See TIAA Letter (stating that broker-dealers should not be obligated to provide fund-level fee disclosure outside of a fund prospectus or to provide individualized fee disclosure to retail customers); ICI Letter (stating that when making a recommendation of a fund, a broker-dealer should be permitted to direct customers to the fund’s prospectus as the source of information about fund fees and expenses); Oppenheimer Letter (stating that the fund, not the broker-dealer, is in a better position to provide these disclosures, in a manner that is accurate, consistent and complete). 373 See, e.g., CFA August 2018 Letter (stating that the Commission should not allow for percentages or ranges because it would do little to inform investors); PIABA Letter (stating that broker-dealers should disclose the specific charges that their customers will incur as a result of the particular recommendation); UMiami Letter (stating that customers should be provided with clear and concise information that fully and fairly discloses the specific charges the customer will incur as a result of a particular recommendation). 374 See Section II.C.1.c, Disclosure Obligation, Full and Fair Disclosure, Layered Disclosure.

such information is necessary to fully and fairly disclose the material facts associated with the fee or charge. For example, a broker-dealer might initially disclose a range of product fees, and later supplement that information with more particularized information by delivering the product prospectus. Consistent with this approach, and also in response to comments, we are further clarifying that a broker-dealer recommending a securities transaction or an investment strategy involving securities can meet the Disclosure Obligation regarding fees and costs assessed at the product level by describing those fees and costs in initial, standardized terms and providing subsequent particularized disclosure as necessary. To the extent that such subsequent information regarding product-level fees and costs appears in a currently mandated disclosure document, such as a trade confirmation or a prospectus, delivery of that information in accordance with existing regulatory obligations will be deemed to satisfy the Disclosure Obligation, even if delivery occurs after the recommendation is made, under the circumstances outlined in Section II.C.1. Although it is not required by Regulation Best Interest, broker-dealers may refer the customer to any issuer disclosure of the security being recommended, such as a prospectus, private placement memorandum, or offering circular, where more particular information may be found.

375 See supra footnote 302.

We acknowledge that the desire for greater fee transparency was a consistent theme of our investor engagement and we believe that the Disclosure Obligation, in conjunction with the Relationship Summary, significantly advances that goal. Individualized fee disclosure may be helpful to some retail customers, but it can also be costly, prone to errors, and cause delays in trade execution. In addition, in some cases the precise amount of the fee may be based on the dollar value of the transaction, and would not be known prior to or at the time of the recommendation, meaning that it could only be expressed in more general terms, such as a percentage value or range, as an initial matter. We believe that adopting the Disclosure Obligation that allows for the use of standardized disclosure furthers our goal of informing investors about fees and costs by the time of a recommendation in a workable manner. Nothing in Regulation Best Interest prevents a broker-dealer from providing such individualized disclosure to its customers should it wish to do so, and we encourage firms to assist retail customers in understanding the specific fees and costs that apply, and to provide more individualized disclosure where appropriate, or in response to a retail customer’s request. As a best practice, firms may also consider reviewing with their retail customers the effect of fees and costs on the retail customer’s account(s) on a periodic basis. 376 The costs, errors, delays, and other practical obstacles to individualized fee disclosure are likely to fall over time. We will

376 Although we encourage firms to have this conversation with their retail customers, we are not suggesting that engaging in such a best practice would, by itself, create any implied or explicit obligation to monitor such fees and costs.

continue to consider whether to require more personalized fee disclosure, particularly as technology evolves to address operational and technological costs. With regard to the disclosure of product-level fees in particular, while we support the goal of bringing greater transparency to all fees incurred, we are seeking to supplement, not supplant, the existing regulatory regime currently applicable to product-level fees with the adoption of Regulation Best Interest. We acknowledge that if a broker-dealer highlights such fees with particularity, it may raise a customer’s awareness of them, and we encourage as a best practice that broker-dealers do so.377 We acknowledge also that the nature and extent of productlevel disclosures may vary. However, we do not believe that requiring broker-dealers to deliver product disclosures earlier than is currently required, to generate fee disclosure not currently required of issuers, or to recalculate or highlight specific product-level fees already disclosed in an issuer’s offering materials will meaningfully improve fee disclosure and it may, in fact, be unduly burdensome and raise the possibility of errors if broker-dealers were to be obligated to project or calculate product fees based on product issuer information. Accordingly, we believe that allowing broker-dealers to meet the Disclosure Obligation with regard to product-level fees by describing those fees in standardized terms with further detailed, particularized information related to the recommendation provided either prior to or at the time of the recommendation or

377 With regard to product-level fees, in particular, broker-dealers may wish to highlight certain categories of fees such as distribution fees, platform fees, shareholder servicing fees and sub-transfer agency fees, in order to enhance retail customers’ understanding of these fees to the extent applicable to the customer’s transactions, holdings, and accounts.

afterwards under the circumstances outlined in Section II.C.1, Oral Disclosure or Disclosure After a Recommendation, strikes an appropriate balance between costs to firms and benefits to retail customers.378 We believe this approach is bolstered by the existence of complementary obligations protective of retail customers that are imposed by Regulation Best Interest. For example, to the extent fees and costs incurred related to these products create conflicts of interest associated with a recommendation, we believe they are appropriately highlighted and addressed in the context of the conflicts and incentives they create to make a recommendation, and must be addressed as
part of the obligation to disclose material facts about conflicts of interest associated with a
recommendation, as discussed below.379
Moreover, under the Care Obligation, a broker-dealer recommending a securities transaction or investment strategy involving securities to a retail customer must consider costs associated with that recommendation when determining whether it is in the best interest of that retail customer. As a result, disclosure of product-level fees and costs to satisfy the Disclosure Obligation will be supplemented by other aspects of Regulation Best Interest.

378 See Section II.C.1, Disclosure Obligation, Oral Disclosure or Disclosure After a Recommendation. 379 See Section II.C.1.b, Disclosure Obligation, Material Facts Regarding Conflicts of Interest.

While the Disclosure Obligation provides broker-dealers with flexibility in describing the material fees and costs that apply, the disclosure should accurately convey why the fee or charge is being imposed and when the fee or charge is to be assessed. For example, describing a commission or markup as a fee for “handling services” could inappropriately disguise the fee’s true nature. Furthermore, while using a percentage or dollar range to describe a fee can be appropriate, that range should be designed to reasonably reflect the actual fee to be charged. For example, a statement that a charge may be “between 5 and 100 basis points” would not be accurate if the fee is in almost all instances between 85 and 100 basis points. However, in this case, a broker-dealer could accurately describe the fee, for example, as “generally being between 85 and 100 basis points, sometimes lower, but never above.” In some cases, actual dollar values based on a hypothetical transaction may facilitate customer understanding. A material fact about fees and costs could also include informing a retail customer of a fee’s triggering event, such as a fee imposed because an account minimum falls below a threshold and whether fees are negotiable or waivable. Type and Scope of Services Provided In the Proposing Release, we provided guidance that the type and scope of services a broker-dealer provides its retail customers would also be an example of what typically would be “material facts relating to the terms and scope of the relationship,” that would require disclosure

pursuant to the Disclosure Obligation.380 Specifically, we stated that broker-dealers should build upon their disclosure in the Relationship Summary, and provide additional information regarding the types of services that will be provided as part of the relationship with the retail customer and the scope of those services.381 In particular, we noted that under proposed Form CRS broker-dealers would provide high-level disclosures concerning services offered to retail investors, including, for example, recommendations of securities, assistance with developing or executing an investment strategy, monitoring the performance of the retail investor’s account, regular communications, and limitations on selections of products.382 We recognized that a broker-dealer that offers different account types, or offers varying additional services to the retail customer may not be able, within the content and space constraints of the Relationship Summary, to provide “all material facts relating to the scope and terms of the relationship” with the retail customer. 383 Thus, we stated that pursuant to the proposed Disclosure Obligation, we would have generally expected brokerdealers to disclose these types of material facts concerning the actual services offered as part of the relationship with the retail customer separately from the Relationship Summary.

380 See Proposing Release at 21602.
381 Id.
382 See Relationship Summary Proposing Release at 31426.
383 See Section II.C.1.a, Disclosure Obligation, Standard of Conduct.

Commenters generally agreed that it was important for broker-dealers to disclose to their customers material facts about the type and scope of services they provide to their customers.384 However, commenters sought clarity regarding the application of this proposed guidance, and raised questions about whether firms would be specifically required to disclose certain services (e.g., monitoring account performance and providing financial education) pursuant to Regulation Best Interest,385 as discussed below, and the level of disclosure required under Regulation Best Interest. Consistent with our approach in the Proposing Release, we continue to believe that the type and scope of services a broker-dealer provides to its retail customers are “material facts relating to the scope and terms of the relationship.” Accordingly, we are revising the rule text to explicitly require the disclosure of 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,” as part of the “material facts relating to the

384 See, e.g., Pacific Life August 2018 Letter; Cetera August 2018 Letter. 385 See, e.g., Betterment Letter (recommending that the Commission ensure that dualregistrants communicate which of their services are advisory in nature); Northwestern Mutual Letter. 386 See, e.g., Cetera August 2018 Letter (stating that a best interest standard should include a requirement to deliver a summary description of the relationship between the firm and customer, including the scope of services); Committee of Annuity Insurers Letter (recommending the Commission clarify that a broker-dealer could satisfy the Disclosure Obligation by disclosing the products and services available to its retail customers and does not need to disclose information particularized to a recommendation).

scope and terms of the relationship” that must be disclosed pursuant to the Disclosure Obligation.387 We are interpreting the Disclosure Obligation to only require disclosure of material facts relating to the type of services provided (e.g., the fact that the broker-dealer monitors securities transactions and investment strategies) and the scope of services (e.g., information about the frequency and duration of the services). In response to comments, we are also specifically addressing the disclosure of information regarding whether or not the broker-dealer provides account monitoring services and whether the broker-dealer has account minimums or similar requirements. In addition, in response to comments, we are clarifying that pursuant to the Disclosure Obligation, broker-dealers need to disclose only material information relating to the “type and scope of services provided.” As discussed in the context of the disclosure of fees and costs above, the standard for materiality of the type and scope of services to be disclosed is consistent with the standard articulated in Basic v. Levinson: information related to the type and scope of services provided is material, and must be disclosed, if there is “a substantial likelihood that a reasonable shareholder would consider it important.”388 As noted above, in the context of Regulation Best Interest, this standard would apply in the context of retail customers, as defined.

387 Rule 15l-1(a)(2)(i)(A)(iii).
388 Basic, Inc. v. Levinson, 485 U.S. 224, 224 (1988).

We believe the information included in the Relationship Summary may provide a useful starting point for the identification of the type and scope of services that must be disclosed pursuant to the Disclosure Obligation. For example, in the Relationship Summary a brokerdealer must describe its principal brokerage services offered, including buying and selling securities, and whether or not it offers recommendations to retail investors.389 Additionally, in the Relationship Summary, if applicable, the broker-dealer must address whether or not the firm offers monitoring of investments. We believe that broker-dealers will generally need to build upon the disclosures made in the Relationship Summary as appropriate, and to provide additional information regarding the types of services that will be provided as part of the relationship with the retail customer and the scope of those services (e.g., the frequency and duration of the services), as necessary, in order to meet the Disclosure Obligation’s requirement to disclose “all material facts” regarding the type and scope of services provided. Broker-dealers may be able to satisfy this aspect of the Disclosure Obligation by relying on their existing disclosures about the type and scope of their services, typically reflected in their account opening agreement or other account opening related documentation, so long as the disclosure as a whole addresses the material facts relating to the type and scope of services offered to the retail customer.

389 See Form CRS, Item 2.B. (Description of Services).

Disclosure of Material Limitations on Securities and Investment Strategies In the Proposing Release, we included any limitations on the products and services offered as an example of a material fact relating to the terms and scope of the relationship that would need to be disclosed pursuant to the Disclosure Obligation. We agree with commenters who advocated for helping investors to understand whether a broker-dealer limits its product offerings, and to what extent, before entering into a relationship with a broker-dealer. 390 We continue to believe that broker-dealers that place material limitations on the securities or investment strategies involving securities that may be recommended to retail customers—such as recommending only proprietary products or a specific asset class—need to describe the material facts relating to those limitations. Therefore, in response to comments, we are revising Regulation Best Interest to explicitly require that, as part of the disclosure of the type and scope of services provided to the retail

390 See CFA Institute Letter (stating that if a broker-dealer only offers proprietary products, it should clearly call attention to the higher product cost and the potential cost to the investor of such a limited offering); SIFMA August 2018 Letter (stating that a firm should be able to limit its offerings to a particular subset of its customers to proprietary product or revenue sharing products as long as: (1) the broker-dealer discloses that it is limiting its recommendation to a specific set of securities and (2) the specific set of securities contains appropriate securities to meet the customer’s needs); SPARK Letter (recommending that the Commission permit broker-dealers that only offers proprietary products or a limited menu of investments to satisfy the conflict mitigation requirements by: (1) disclosing any material limitations on the investment products being offered and (2) reasonably concluding that the limitations will not violate the Care Obligation). 391 See Form CRS, Item 2.B.(iii).

customer, a broker-dealer must include “any material limitations on the securities or investment strategies involving securities that may be recommended to the retail customer.”392 For purposes of this requirement, a “material limitation” placed on the securities or investment strategies involving securities could include, for example, recommending only proprietary products (e.g., any product that is managed, issued, or sponsored by the broker-dealer or any of its affiliates), a specific asset class, or products with third-party arrangements (e.g., revenue sharing, mutual fund service fees).393 Similarly, the fact that the broker-dealer recommends only products from a select group of issuers, or makes IPOs available only to certain clients, could also be considered a material limitation. To cite another example, if an associated person of a dually registered broker-dealer only offers brokerage services, and is not able to offer advisory services, the fact that the associated person’s services are materially narrower than those offered by the brokerdealer would constitute a material limitation. We recognize that, as a practical matter, all broker-dealers limit their offerings of securities and investment strategies to a greater or lesser degree. We do not believe that disclosing the fact that a broker-dealer does not offer the entire possible range of securities and

392 Rule 15l-1(a)(2)(A). See also Section II.C.1 for a discussion of the materiality standard under Basic, Inc. v. Levinson, 485 U.S. 224 (1988). 393 This is consistent with the approach we are taking in the Relationship Summary Adopting Release.

investment strategies would convey useful information to a retail customer, and therefore we would not consider this fact, standing alone, to constitute a material limitation. In addition, we believe that there are a number of reasonable practices by which appropriate limitations are determined, including processes for the selection of a “menu” of products that will be available for recommendations to retail customers. We further recognize that these limitations can be beneficial, such as by helping ensure that a broker-dealer and its associated persons understand the securities they are recommending, as required by paragraph (a)(2)(ii)(A) of the Care Obligation. We have also explicitly stated that Regulation Best Interest would not prohibit a broker-dealer from recommending, for example, a limited range of products, or only proprietary products, provided the broker-dealer satisfies the component obligations of Regulation Best Interest. Nonetheless, because these firm-wide threshold decisions have such a significant effect on the subsequent recommendations ultimately made to a retail customer, we are requiring disclosure of the material limitations on the securities or investment strategies involving securities that may be recommended—by the broker-dealer and its associated persons—as well as any associated conflicts of interest. Explicitly requiring disclosure of these limitations is also consistent with our approach in the Care and Conflict of Interest Obligations. As discussed below, despite the potential beneficial aspects of some limitations, we are concerned that such limitations and any associated

394 See Basic, Inc. v. Levinson, 485 U.S. 224, 224 (1988).

conflicts of interest can negatively affect the securities or investment strategies recommended to a retail customer.395 In recognition of this concern, we have revised the Conflict of Interest Obligation to specifically require the establishment of policies and procedures to identify, disclose, and address that risk.396 Furthermore, we reiterate that even if a broker-dealer discloses and addresses any material limitations on the securities or investment strategies involving securities recommended to a retail customer, and any associated conflicts of interest, as required by the Disclosure and Conflict of Interest Obligations, it would nevertheless need to satisfy the Care Obligation in recommending such products.397 Account Monitoring Services In the Proposing Release, we identified as a material fact relating to the scope and terms of the relationship with the retail customer the type and scope of services provided by the brokerdealer, including, for example, monitoring the performance of the retail customer’s account.398 Additionally, the Proposing Release stated that to the extent that the broker-dealer agrees with a retail customer by contract to provide periodic or ongoing monitoring of the retail customer’s investments for purposes of recommending changes in investments, Regulation Best Interest

395 See Section II.C.3, Conflicts of Interest. See Proposing Release at 21608 (asking commenters to comment on whether, and, if so why, the Commission should require specific disclosure on product limitations). 396 See Section II.C.4. 397 See Section II.C.2. 398 Proposing Release at 21600.

would apply to, and a broker-dealer would be liable for not complying with the proposed rule with respect to, any recommendations about securities or investment strategies made to retail customers resulting from such services.399 Commenters suggested that broker-dealers should be required to clearly define the nature of account monitoring services offered, with some commenters pointing to retail customer confusion on this topic. 400 One commenter stated that disclosure will not help a retail customer of a dual-registrant who has both brokerage and advisory accounts, who is unlikely to remember which accounts his or her financial advisor is responsible for monitoring, and for which accounts the customer bears that responsibility. Accordingly, the commenter recommends that we require broker-dealers to monitor all retail customers’ accounts.401 As discussed in the Solely Incidental Interpretation, we disagree with commenters who suggested that any monitoring of customer accounts would require a broker-dealer to register as an investment adviser and we believe that it is important for retail customers to understand: (1) the types of account monitoring services (if any) a particular broker-dealer provides, and (2)

399 Id. at 21594.
400 See, e.g., NAIFA Letter (asserting broker-dealers should be free to agree to, and define the nature of, any ongoing relationship via contract, such as including monitoring services); see also RAND 2018 (stating that participants demonstrated a lack of clarity on how a financial professional would monitor an account); OIAD/RAND (stating that some participants perceived that continuous monitoring of a client’s account is consistent with acting in the client’s best interest). 401 AFL-CIO April 2019 Letter.

whether or not the broker-dealer will be providing monitoring services for the particular retail customer’s account. Accordingly, we believe that whether or not the broker-dealer will monitor the retail customer’s account and the scope and frequency of any account monitoring services that a broker-dealer agrees to provide are material facts relating to the type and scope of services provided to the retail customer and must be disclosed pursuant to the Disclosure Obligation. This disclosure could indicate, for example, that the broker-dealer will monitor the account or investments at a stated frequency in light of the retail customer’s investment objectives for the purpose of recommending an asset reallocation where appropriate, or that the broker-dealer will monitor the account periodically to determine whether a brokerage account continues to be in the retail customer’s best interest. Or, broker-dealers that offer no account monitoring services could disclose that they will not monitor the account or consider whether any recommendations may be appropriate unless the retail customer specifically requests that they do so. The Relationship Summary requires broker-dealers to explain whether or not they monitor retail investors’ investments, including the frequency and any material limitations.403

402 As discussed in footnote 167, we recognize that a broker-dealer may voluntarily, and without any agreement with the customer, review the holdings in a retail customer’s account for the purposes of determining whether to provide a recommendation to the customer. We do not consider this voluntary review to be “account monitoring,” nor would it in and of itself on its own to create an implied agreement with the retail customer to monitor the customer’s account. Any explicit recommendation made to the retail customer as a result of any such voluntary review would be subject to Regulation Best Interest. 403 See Form CRS, Item 2.B.(i).

However, as noted above, because the Relationship Summary provides high-level disclosure, in most cases it generally would not be sufficiently specific to inform investors about the scope and frequency of any account monitoring services applicable to the particular retail customer’s account. The Disclosure Obligation is designed to provide investors with an expanded description of the material information relating to such services. Furthermore, as discussed in
Section 2.B.2.b., Regulation Best Interest applies to recommendations resulting from agreedupon account monitoring services (including implicit hold recommendations). Requiring
disclosure of whether or not the broker-dealer will monitor the retail customer’s account, and the scope and frequency of such monitoring, will help retail customers understand the terms applicable to the particular retail customer’s account. While retail customers with multiple accounts will have to keep track of the accounts for which their broker-dealer has agreed to monitor, we believe that requiring disclosure of this service will provide those retail customers with sufficient clarity about the monitoring services they may expect. Requiring all brokerdealers to monitor all retail customer accounts, as one commenter suggested, would diminish the options available to retail customers, who may wish to have their accounts monitored to a greater or lesser degree (including not at all). Account Balance Requirements The Proposing Release did not address whether a broker-dealer offering brokerage accounts subject to account balance requirements is a “material fact relating to the scope and

terms of the relationship.” However, several commenters to the Form CRS proposal suggested that the Commission require firms to disclose any account balance requirements in the Relationship Summary. 404 We believe that account balance requirements are a material fact relating to the terms and scope of the relationship. Consequently, we are interpreting the Disclosure Obligation to include disclosure of whether a broker-dealer has any requirements for retail customers to open or maintain an account or establish a relationship, such as a minimum account size. We believe that if a broker-dealer will only open a brokerage account for a retail customer with a specific account minimum, such a basic operational aspect of the account is a material fact relating to the type and scope of services provided. If dollar thresholds or other requirements apply to a retail customer’s ability to maintain an existing account, or to avoid additional fees when the threshold is crossed (for example, a “low account balance” fee), such requirements also would likely be of importance to a retail customer. 405 We further believe retail customers can use facts about different account size requirements for both current and future planning and decision-making purposes. Accordingly, the Commission believes this information constitutes a “material fact” that must be disclosed pursuant to the Disclosure Obligation.

404 See, e.g., NASAA Letter (stating that “Form CRS should specify minimum account size and include information on miscellaneous fees different categories of investors can expect to pay.”); Cetera August 2018 Letter (stating that Form CRS should include “[w]hether or not the firm has established standards for the minimum or maximum dollar amount of various account types;” and submitting mock-up form that include disclosures of account minimums); Primerica Letter. See Relationship Summary Adopting Release. 405 See Relationship Summary Adopting Release.

Other Material Facts Related to the Scope and Terms of the Relationship In the Proposing Release, although we identified the broker-dealer’s capacity, fees and charges, and type and scope of services provided as examples of what would generally be considered “material facts relating to the scope and terms of the relationship with the retail customer,” we noted that the Disclosure Obligation would also require broker-dealers and their associated persons to determine, based on the facts and circumstances, whether there are other material facts relating to the scope and terms of the relationship that would need to be disclosed.406 We also asked for comment on whether examples of other information relating to scope and terms of the relationship should be highlighted by the Commission as likely to be considered a material fact relating to the scope and terms of the relationship that would need to be disclosed.407 A number of commenters provided suggestions of additional examples of such material facts that the Commission should highlight or explicitly require to be disclosed as a “material fact relating to the scope and terms of the relationship.” Specifically, commenters raised whether a broker-dealer’s basis for, 408 and risks associated with, 409 a recommendation, or the standard of

406 See Proposing Release at 21600-21601.
407 See Proposing Release at 21607.
408 See infra footnote 411.
409 See infra footnote 412.

conduct applicable to a broker-dealer making a recommendation, 410 should be material facts relating to the scope and terms of the relationship. Basis for and Risks Associated with the Recommendation The Proposing Release did not address whether a broker-dealer’s basis for a recommendation is a “material fact relating to the scope and terms of the relationship.” However, several commenters requested that the Commission treat a broker-dealer’s basis for a recommendation as a “material fact relating to the scope and terms of the relationship” that would likely need to be disclosed prior to, or at the time of the recommendation, pursuant to the Disclosure Obligation. 411 Similarly, several commenters suggested that the Commission should treat risks associated with a broker-dealer’s recommendation as “material facts relating to the scope and terms of the relationship” that would likely need to be disclosed prior to, or at the time of the recommendation. 412 Other commenters opposed requiring particularized disclosure of the basis of individual recommendations, stating that it is sufficient to disclose that different

410 See infra footnote 417.
411 See, e.g., PIABA Letter (recommending that broker-dealers be required to provide a clear and understandable explanation as to the other lower cost investments which are available, and why the higher cost investment is being recommended); Morningstar Letter (recommending that the Commission require a firm to disclose its analysis of the reasons it is recommending a rollover from an ERISA-covered retirement plan to an IRA and why it is in the participant’s best interest). 412 See, e.g., PIABA Letter (recommending that the Commission extend the Disclosure Obligation to include the risks, benefits, and ramifications of a recommendation).

products are available with different features rather than require firms specify why the brokerdealer recommended one product over another. Our view is that the general basis for a broker-dealer’s or an associated person’s recommendations (i.e., what might commonly be described as the firm’s or associated person’s investment approach, philosophy, or strategy) is a material fact relating to the scope and terms of the relationship with the broker-dealer that must be disclosed pursuant to the Disclosure Obligation. The process by which a broker-dealer and an associated person develop their recommendations to retail customers is of fundamental importance to the retail customer’s understanding of what services are being provided, and whether those services are appropriate to the retail customer’s needs and goals. We believe that such a description can be made in standardized or summary form; however the disclosure should also address circumstances of

413 See, e.g., LPL August 2018 Letter (stating that a broker-dealer could satisfy the Care Obligation if it recommends a more expensive investment product so long as it discloses that the recommended product is not the least expensive among the alternatives and is otherwise in the investor’s best interest); Committee of Annuity Insurers Letter (recommending that the Commission clarify that a broker-dealer could satisfy the Disclosure Obligation through the use of a disclosure describing the products and services available to its retail customers and related conflicts of interest, and that a broker-dealer or associated person need not provide a disclosure particularized to a recommendation). See also CCMC Letters (requesting that the SEC confirm that it is sufficient to disclose that different products are available with different features rather than require firms to also document why the firm recommended one product over another); IPA Letter (requesting additional guidance regarding specificity of disclosure needed to demonstrate why a broker-dealer recommended one of multiple different products (with different terms, cost structures and conditions) that each meet the customer’s investment objective).

when the standardized disclosure does not apply and how the broker-dealer will notify the customer when that is the case. For example, if an associated person has a distinct investment approach, as may be the case with persons associated with an independent contractor brokerdealer, the broker-dealer’s standardized disclosure should indicate how its associated persons will notify retail customers of their own investment approach. While the general basis for the recommendation is a material fact for purposes of the Disclosure Obligation, we decline to require disclosure of the basis for each recommendation, an approach that could involve significant costs and in many cases may simply repeat the more standardized disclosure that we are already requiring. With regard to how conflicts of interest may affect the basis for a particular recommendation, we note that the Disclosure Obligation requires disclosure of the material facts relating to the conflicts of interest associated with the recommendation, which will help retail customers evaluate the incentives a broker-dealer or associated person may have in making a recommendation; and the Conflict of Interest Obligation requires a broker-dealer to have policies and procedures to mitigate, and in certain instances, eliminate, specified conflicts of interest. Accordingly, to the extent the basis for any recommendation is subject to any conflicts of interest, the Commission believes that the Care Obligation’s substantive requirement to have a reasonable basis for the recommendation, combined with the Disclosure, Conflict of Interest and Compliance Obligations, provides sufficient protections to broker-dealers’ retail customers. Similarly, we are interpreting disclosure of the risks associated with a broker-dealer’s or associated person’s recommendations in standardized terms as a material fact related to the scope and terms of the relationship that needs to be disclosed. For example, a broker-dealer could disclose: “While we will take reasonable care in developing and making recommendations to

you, securities involve risk, and you may lose money. There is no guarantee that you will meet your investment goals, or that our recommended investment strategy will perform as anticipated. Please consult any available offering documents for any security we recommend for a discussion of risks associated with the product. We can provide those documents to you, or help you to find them.” This example is purely illustrative. Whether any particular disclosure by a broker-dealer is sufficient to meet the Disclosure Obligation will depend on the facts and circumstances. The risks associated with a particular recommendation would be relevant to a retail customer. However, we believe that broker-dealers may rely on the existing disclosure regime governing securities issuers to disclose the risks associated with any issuer, security or offering, 414 and it is not our intent to require the broker-dealer to duplicate or expand on those disclosures. Consistent with our approach, discussed above, to disclosure of product-level fees and costs, we believe that describing product-level risks in standardized terms, with additional information in any available issuer disclosure documents delivered in accordance with existing

414 See, e.g., Item 503(c) of Reg. S-K (requiring disclosure of the “most significant” factors that make an offering “speculative or risky,” as well as an explanation of how each risk “affects the issuer or the securities being offered.” See also Form 10-K (requiring a description of the 503(c) risk factors that are “applicable to the registrant”). In some cases, SRO Rules applicable to recommendations of particular securities may also require disclosure of risks. See, e.g., FINRA Rule 2330 (requiring a FINRA member or its associated persons recommending deferred variable annuity to have a reasonable belief that the customer has been informed of, among other things, market risk). See also FINRA Rule 2210(d), requiring, among other things, that statements in member communications “are clear and not misleading within the context in which they are made, and that they provide balanced treatment of risks and potential benefits.”

regulatory requirements would satisfy the Disclosure Obligation. As noted above, we are not seeking to supplant the developed regulatory regime currently applicable to offering disclosure with the adoption of Regulation Best Interest. While we believe that a standardized discussion of risks is a material fact that must be disclosed to satisfy the Disclosure Obligation, we decline to impose a disclosure requirement specific to each recommendation. As with regard to the disclosure of the individualized basis for each recommendation, we believe that such specific disclosure could involve significant costs and in many cases simply repeat the more standardized disclosure that we are requiring, which we believe will sufficiently inform retail customers, in broad terms, of the nature of the risks associated with a recommendation. In addition, under the Care Obligation, a broker-dealer making a recommendation of a securities transaction or investment strategy involving securities to a retail customer must consider the risks when determining whether it has a reasonable basis for believing that the recommended transaction or investment strategy could be in the best interest of at least some retail customers, and is in the best interest of a particular retail customer. Moreover, under paragraph (a)(2)(B) of Regulation Best Interest, discussed below, broker-dealers need to disclose “all material facts relating to conflicts of interest that are associated with the recommendation,” which will require disclosure of what we believe to be a significant risk associated with a brokerdealer’s recommendations—the broker-dealer’s conflicts of interest. For these reasons, we believe that standardized written disclosure of this information in general terms is sufficient. Consistent with the Compliance Obligation, broker-dealers should consider developing policies and procedures that address the circumstances under which the basis for a particular recommendation would be disclosed to a retail customer. As a best practice, firms also should

encourage their associated persons to discuss the basis for any particular recommendation with their retail customers, including the associated risks, particularly where the recommendation is significant to the retail customer. For example, the decision to roll over a 401(k) into an IRA may be one of the most significant financial decisions a retail investor could make. Thus, a broker-dealer should discuss the basis of such recommendations with the retail customer. Similarly, we encourage broker-dealers to record the basis for their recommendations, especially for more complex, risky or expensive products and significant investment decisions, such as rollovers and choice of accounts, as a potential way a broker-dealer could demonstrate compliance with the Care Obligation. Standard of Conduct415 As stated in the Proposing Release, the Commission intended the Relationship Summary to touch on issues that are also contemplated under the Disclosure Obligation, such as facilitating greater awareness of key aspects of a relationship with a firm or financial professional, such as the applicable standard of conduct.416 Several commenters on Regulation Best Interest also requested that the Commission treat the standard of conduct applicable to a broker-dealer making the recommendation to its retail customer as a “material fact relating to the scope and terms of the relationship” that would likely need to be disclosed prior to, or at the time of the

415 See Section II.C.1.a, Disclosure Obligation, Capacity in Which the Broker-Dealer is Acting. 416 See Proposing Release at 21600.

recommendation under the Disclosure Obligation.417 Specifically, these commenters requested that the Commission require a firm to disclose whether it is providing a recommendation subject to Regulation Best Interest or advice subject to a fiduciary duty. The Commission also carefully considered numerous comments concerning the standard of conduct disclosure in proposed Form CRS, along with the results of investor testing and the Commission’s Feedback Form.419 As discussed more fully in the Relationship Summary

417 See, e.g., NASAA 2018 Letter (recommending that the Commission provide specific instructions on how associated persons of dually registered firms should disclose capacity in which they are acting and whether the information they are providing is a recommendation subject to “best interest” or advice subject to a fiduciary duty). See also Betterment Letter (recommending that the Commission require broker-dealers to disclose that they are “salespeople who are providing sales recommendations and not advice” in lieu of the adoption of a fiduciary duty on broker-dealers). 418 Id. 419 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. See, e.g., CFA Institute Letter (urging the Commission to require disclosure of the standard of conduct under which broker-dealers operate); IAA August 2018 Letter. In addition, results of investor studies and surveys indicate that retail investors view this information as helpful. See RAND 2018 (almost one third of survey respondents selected this section as one of the two most useful; Letter from Mark Quinn, Director of Regulatory Affairs, Cetera (Nov. 19, 2018) (“Cetera November 2018 Letter”) (88% of survey respondents somewhat or strongly agreed “the firm’s obligations to you” is an important topic”). See also Schwab Letter I (Hotspex) (“obligations the firm and its representatives owe me” ranked third where survey participants were asked to identify four topics as most important for a firm to communicate”). Similarly, commenters on Feedback Forms found this information to be useful. See Feedback Forms Comment Summary (38% of commenters on Feedback Forms graded the “Our Obligations to You” section of the relationship summary as “very useful” and 46% graded this section as “useful”).

Adopting Release, we are adopting a requirement in Form CRS for a description of a firm’s applicable standard of conduct using prescribed wording. 420 This “standard of conduct” disclosure (as modified from proposed Form CRS) both eliminates technical words, such as “fiduciary,” and describes the legal obligations of broker-dealers, investment advisers, or dualregistrants using similar terminology in plain English. The prescribed wording also highlights when a firm must satisfy its legal obligation—specifically, in the case of a broker-dealer, when making a recommendation. We believe the standard of conduct owed to a retail customer under Regulation Best Interest is a material fact relating to the scope and terms of the relationship. However, given that Form CRS requires firms to disclose in prescribed language the applicable standard of conduct and, as discussed above, the Disclosure Obligation requires broker-dealers to disclose the capacity (i.e., brokerage) in which they are acting with respect to a recommendation, we believe this disclosure to be sufficient and thus requiring any additional disclosure would be duplicative. b. Material Facts Regarding Conflicts of Interest As noted above, in addition to requiring disclosure of the “material facts relating to the scope and terms of the relationship,” the proposed Disclosure Obligation would have required a broker-dealer to disclose “all material conflicts of interest associated with the recommendation.”

420 Form CRS, Item 3.B.(i).a (stating that “If you are a broker-dealer that provides recommendations subject to Regulation Best Interest, include: ‘When we provide you with a recommendation, we have to act in your best interest and not put our interest ahead of yours’”).

We proposed to interpret a “material conflict of interest” as a conflict of interest that a reasonable person would expect might incline a broker-dealer—consciously or unconsciously—to make a recommendation that is not disinterested.”421 We generally modeled this proposed interpretation on the Advisers Act approach to identifying conflicts of interest for which investment advisers may face antifraud liability in the absence of full and fair disclosure.422 We expressed our preliminary belief that a material conflict of interest that generally should be disclosed would include material conflicts associated with recommending: proprietary products, products of affiliates, or a limited range of products, or one share class versus another share class of a mutual fund; securities underwritten by the broker-dealer or an affiliate; the rollover or transfer of assets from one type of account to another (such as a recommendation to roll over or transfer assets in an ERISA account to an IRA); and allocation of investment opportunities among retail customers (e.g., IPO allocation).423

421 Proposing Release at 21602.
422 See id. (citing Capital Gains (stating that as part of its fiduciary duty, an adviser must fully and fairly disclose to its clients all material information in accordance with Congress’s intent “to eliminate, or at least expose, all conflicts of interest which might incline an investment adviser—consciously or unconsciously—to render advice which was not disinterested”)). 423 See Proposing Release at 21603.

While commenters supported the disclosure of conflicts of interest, some sought clarity on the standard for determining which conflicts should be disclosed, 424 and others requested clarity on whether conflicts involving certain actions (e.g., rollovers)425 and products (e.g., proprietary products)426 should be disclosed.427 Several commenters urged the Commission to define “conflicts of interest” without a reference to the terms “consciously or unconsciously.”428 These commenters claim that discerning a broker’s conscious or unconscious state of mind is “confusing and inherently unknowable.”429 Similarly, one commenter stated that a broker-dealer would be unable to draft

424 See, e.g., SIFMA August 2018 Letter, Edward Jones Letter (requesting clarity on the definition of materiality with regards to conflicts); Ameriprise Letter (stating that the definition of “material conflicts of interest” should follow well known and understood principles); Fidelity Letter (stating that the Commission should not distinguish between conflicts of interest based on financial incentives and all other conflicts of interest); Morgan Stanley Letter; CCMC Letters; TIAA Letter; Mass Mutual Letter; Empower Letter. See also IRI Letter (stating that requiring a registered representative to predict what a hypothetical reasonable person might think is confusing); ICI Letter (stating that rather than focusing on what a “reasonable person would expect . . .” the standard should focus on that nature of the incentive and its effect on a broker-dealer’s conduct). 425 See, e.g., CFA Institute Letter. 426 See, e.g., SIFMA August 2018 Letter; State Attorneys General Letter; CFA Institute Letter. 427 See, e.g., Ameriprise Letter; State Attorneys General Letter; CFA August 2018 Letter. 428 See, e.g., Edward Jones Letter (urging the Commission to articulate a definition of materiality that does not refer to a person's unconscious activity); Empower Letter; Ameriprise Letter. 429 Id.

adequate policies and procedures that address an individual’s mindset, noting that it would be impossible for a broker-dealer to anticipate an individual’s unconscious conflicts.430 Instead, these commenters suggested revised language that eliminates the notion of conscious or unconscious inclination. 431 Similarly, several commenters opposed the Commission’s use of the term “not disinterested.”432 These commenters believe that the term is not clear and could, among other things, suggest the elimination of all conflicts.433 One of these commenters recommended that the Commission eliminate the term “not disinterested”434 while another suggested that the Commission clarify whether “material” and “not disinterested” are intended to be identical or different standards for brokers and advisers.435 Other commenters opposed the

430 See Great-West Letter.
431 See, e.g., Edward Jones Letter (suggesting that the Commission define “material conflict” as an activity that: (i) affects financial compensation of a person making a recommendation; and (ii) a reasonable investor would likely view as important to the total mix of information available when considering that recommendation); Ameriprise Letter (suggesting that the Commission define “material conflict of interest” as a conflict of interest that a reasonable person might conclude has the potential to influence the recommendation); Pacific Life August 2018 Letter (suggesting the Commission define “material conflict of interest” as a financial interest of the financial professional making a recommendation that a reasonable person would expect to affect the impartiality of such recommendation). 432 See, e.g., IPA Letter (stating that the use of the term “not disinterested” may require unnecessary legal interpretation); Empower Letter. 433 See, e.g., Empower Letter. 434 See id. 435 See IPA Letter.

proposed standard, arguing that it was not as broad as the disclosure obligation applicable to investment advisers. In particular, some commenters urged the Commission to apply the standard for disclosure applicable to investment advisers as articulated by the Supreme Court in S.E.C. v. Capital Gains Research Bureau. 436 Specifically, commenters requested that the Commission require disclosure of not only material conflicts but also the material facts related to a recommendation.437 We are adopting the obligation to disclose conflicts of interest, with several modifications and clarifications to the Proposing Release. Specifically, Paragraph (a)(2)(i)(B) of Regulation Best Interest requires that broker-dealers disclose “material facts relating to conflicts of interest that are associated with the recommendation.”438

436 375 U.S. 180 (1963). See, e.g., CFA August 2018 Letter; Schnase Letter. 437 See, e.g., CFA August 2018 Letter. 438 This supplements the disclosure required in the Relationship Summary regarding ways in which the broker-dealer and its affiliates make money from brokerage or investment advisory services they provide to retail investors, and about the related material conflicts of interest. The Relationship Summary requires firms to disclose, if applicable, conflicts related to compensation it could receive from proprietary products, third-party payments, revenue sharing, or principal trading. If firms do not have any of these conflicts, the firm must disclose at least one other material conflict of interest that affects retail investors. As described in the Relationship Summary Adopting Release, we declined to make a change pursuant to comments that 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. We recognize that broker-dealers may need to disclose additional conflicts at a point in time other than at the beginning of the relationship with a retail investor. Broker-dealers also may need to include additional information about conflicts of interest

However, as discussed in more detail below, in response to comments and in the light of the Relationship Summary, we are: (1) adopting for purposes of Regulation Best Interest a definition of “conflict of interest” associated with a recommendation “as an interest that might incline a broker, dealer, or a natural person who is an associated person of a broker or dealer— consciously or unconsciously—to make a recommendation that is not disinterested;” and (2) revising the Disclosure Obligation to require disclosure of “material facts” regarding such conflicts of interest. Under this approach, all conflicts of interest as interpreted under the Proposing Release will be covered by Regulation Best Interest. We believe distinguishing between “conflicts of interest” and “material facts” regarding such conflicts that would be disclosed would make the Disclosure Obligation more consistent with the proposal’s intent. In the Proposing Release, the Commission discussed limiting the disclosure of conflicts under the Disclosure Obligation “consistent with case law under the antifraud provisions, which limit disclosure obligations to “material facts.” After considering the comments, we have determined to retain the proposed approach to conflicts of interest as described in Capital Gains. In particular, we acknowledge commenter

summarized in the Relationship Summary. The Relationship Summary will provide a high-level summary for retail investors so that they can engage in a conversation with their financial professional about investment advisory or brokerage services, and so that the retail investors can choose the type of service that best meets their needs, but will not necessarily include all material facts related to a particular conflict of interest. We believe many firms may not be able to capture all of the necessary disclosures about their conflicts in this short standardized disclosure.

concerns about discerning a broker’s conscious or unconscious state of mind. However, the description of conflicts of interest in Capital Gains is well established, familiar to many in the industry, particularly dual-registrants, and guidance already exists regarding what constitutes a conflict of interest under this standard. To provide clarity that this interpretation is limited to Regulation Best Interest, however, we are revising Regulation Best Interest to explicitly provide that a “conflict of interest” “means an interest that might incline a, broker, dealer, or natural person who is an associated person of a broker-dealer—consciously or unconsciously—to make a recommendation that is not disinterested,”439 consistent with the scope of the meaning of “conflict of interest” for investment advisers under Capital Gains. Several commenters also made suggestions regarding the Commission’s interpretation of the term “material” as used in the proposed Disclosure Obligation (i.e., the proposed requirement to disclose “all material conflicts of interest that are associated with the recommendation”).441 Many commenters agreed with the Commission’s decision to use a “materiality” standard to determine those facts about conflicts of interest that must be disclosed. 442 However, several

439 Rule 15l-1(b)(3).
440 For the same reasons, we have eliminated the phrase “a reasonable person would expect” that was included in the definition of “material conflict of interest” discussed in the Proposing Release at 21602. 441 See, e.g., Transamerica August 2018 Letter; Fidelity Letter; SIFMA August 2018 Letter; Morgan Stanley Letter; IPA Letter; Great-West Letter. 442 See, e.g., Morgan Stanley Letter; Great-West Letter.

other commenters asked the Commission to clarify the meaning of “material.”443 These latter commenters stated, among other things, that the term “material” in proposed Regulation Best Interest was not clearly defined and would be subjectively interpreted.444 Accordingly, many of these commenters recommended that the Commission adopt a materiality standard based on the standard articulated in Basic v. Levinson. The Supreme Court in Basic articulated a standard for materiality, stating that information is material if there is “a substantial likelihood that a reasonable shareholder would consider it important.”446 This definition of “material” is well established and thus limiting disclosure to material facts in the Disclosure Obligation will eliminate confusion and reduce the compliance burden on broker-dealers in fulfilling the Disclosure Obligation. It will also help focus the information made available to retail customers. 447 Accordingly, we interpret “material facts” consistent with the Basic standard. Moreover, while the Regulation Best Interest

443 See, e.g., FSI August 2018 Letter (recommending the Commission publish examples of when a conflict is material); Wells Fargo Letter; Cetera August 2018 Letter; IPA Letter. 444 See, e.g., Great-West Letter (stating that the Commission appears to have created a very subjective standard to determine materiality). 445 See, e.g., Mass Mutual Letter; SIFMA August 2018 Letter; Bank of America Letter; CCMC Letters; TIAA Letter; Cetera August 2018 Letter; Fidelity Letter. 446 Basic v. Levinson. 447 As stated in the Proposing Release, we are sensitive to the potential that broker-dealers could adopt an approach that results in lengthy disclosures that undermine the Commission’s goal of facilitating meaningful disclosure to assist retail customers in making informed investment decisions. Proposing Release at 21604.

definition of “conflict of interest” is modeled on the regulatory regime applicable to investment advisers, and is not by its terms explicitly limited to “material” conflicts of interest, it would be difficult to envision a “material fact” that must be disclosed pursuant to the Disclosure Obligation that is not related to a conflict of interest that is also material under the Basic standard.448 Interpretation of Disclosure of Material Facts Relating to Conflicts of Interest In response to comments, we are providing our view regarding what we would consider “material facts relating to conflicts of interest that are associated with a recommendation” that would need to be disclosed under the Disclosure Obligation. We believe the conflicts of interest identified in the Relationship Summary may provide a useful starting point for the identification of material facts that need to be disclosed pursuant to the Disclosure Obligation. 449 In addition, we also view how a broker-dealer’s investment professionals are compensated, and the conflicts associated with those arrangements, as material facts relating to conflicts of interest that are associated with a recommendation. 450 While these conflicts of interest must be summarized in the Relationship Summary to the extent they are applicable, we believe that additional details

448 See Fiduciary Interpretation.
449 See, e.g., Form CRS, Item 3 (Fees, Costs, Conflicts, and Standard of Conduct). 450 See Form CRS, Item 3.C.(i) (“Description of How Financial Professionals Make Money:
Summarize how your financial professionals are compensated, including cash and noncash compensation, and the conflicts of interest those payments create.”).

regarding many of these conflicts need to be disclosed under the Disclosure Obligation as “material facts” relating to conflicts of interest associated with a recommendation. Disclosure of Compensation Broker-dealers receive compensation that typically varies depending on what securities transaction or investment strategy involving securities is being recommended. The source of the compensation may also vary, for example being paid directly by the investor, or by a product sponsor, or a combination of both. A broker-dealer may also pay its associated persons different rates of compensation depending on the type of security they sell.451 Similarly, broker-dealers can receive different payments from different product providers (e.g., mutual funds) for a variety of reasons, such as payments for inclusion on a broker-dealer’s menu of products offered (sometimes referred to as shelf space). These compensation arrangements create a variety of conflicts of interest that must be addressed under both Form CRS and the Disclosure Obligation. We believe that compensation associated with recommendations to retail customers and related conflicts of interest—whether at the broker-dealer or the associated person level—is a conflict of interest about which material facts must be disclosed as part of the Disclosure Obligation. This disclosure should summarize how the broker-dealer and its financial professionals are compensated for their recommendations and, as importantly, the conflicts of interest that such compensation creates. This summary should include the sources and types of

451 See NASD NTM 03-54.

compensation received, and may include the fact that fees and costs disclosed pursuant to Paragraph (a)(2)(i)(A) of Regulation Best Interest that a retail customer may pay directly or indirectly are a source of compensation, if that is the case. For example, if a broker-dealer receives compensation derived from the sale of securities or other investment products held by retail customers of the firm, including asset-based sales charges or service fees on mutual funds, that fact and the conflicts associated with the receipt of such compensation should be fully and fairly described. Broker-dealers could meet the Disclosure Obligation by making certain required disclosures of information regarding conflicts of interest to their customers at the beginning of a relationship, and this form of disclosure may be standardized. However, if standardized disclosure, provided at such time, does not sufficiently identify the material facts relating to conflicts of interest associated with any particular recommendation, the disclosure would need to be supplemented so that such disclosure is tailored to the particular recommendation. For example, with regard to mutual fund transactions and holdings, a broker-dealer might disclose broadly that it is compensated by funds out of product fees or by the funds’ sponsors, and that such compensation gives it an incentive to recommend certain products over other products for which the broker-dealer receives less compensation; later, when a broker-dealer recommends a particular fund, it could provide more specific detail about compensation arrangements, for example revenue sharing associated with the fund family. In the alternative, so long as the “material facts” regarding the conflicts associated with a recommendation of a mutual fund were disclosed at the outset of the relationship, no further disclosure need be made at the time of recommendation; we are not requiring that information regarding conflicts be disclosed on a recommendation-by-recommendation basis.

The Disclosure Obligation also does not require specific written disclosure of the amounts of compensation received by the broker-dealer or the financial representative. For example, we are not requiring broker-dealers to disclose the amount, if any, they compensate their financial professionals per transaction, or for year-end bonuses. We believe that disclosure of the material facts regarding conflicts of interest associated with a recommendation need not entail such individualized numerical disclosure, and that in any event such a level of detail may be difficult and costly to calculate with accuracy, and also confusing to investors in many instances. Instead, disclosure regarding conflicts must reasonably inform investors so that the investor may use the information to evaluate the recommendation, and that can be done without specific disclosure of the amount of the compensation. Although disclosure of specific compensation amounts is not required, depending on facts and circumstances, full and fair disclosure may require disclosure of the general magnitude of the compensation.452

452 See, e.g., Advantage Investment Management, Advisers Act Release No. 4455 (Jul. 18,
2016) (settled order) (the Commission brought an enforcement action against an adviser
for failing to disclose the existence, nature and magnitude of a forgivable loan from a broker-dealer that the adviser had engaged to provide services to the adviser’s clients); Taberna Capital Management LLC, Advisers Act Release No. 4186 (Sep. 2, 2015) (settled order) (the Commission brought an enforcement action against an adviser for failing to disclose the existence, nature, and extent of a conflict of interest raised by the adviser’s receipt of certain fees from issuers); BISYS Fund Services, Inc., Advisers Act Release No. 2554 (Sep. 26, 2006) (settled order) (the Commission brought an enforcement action against a mutual fund administrator for failure to disclose information concerning the existence or magnitude of the conflicts of interest created by a marketing arrangement that called for BISYS to rebate a portion of its administrative fees to 27

We are also clarifying that while product fees and costs can be a significant source of compensation received by broker-dealers and associated persons, no disclosure regarding the particular amounts of these fees and costs is required under Regulation Best Interest with regard to conflicts of interest. Instead, what must be disclosed under Paragraph (a)(2)(i)(B) of Regulation Best Interest are the “material facts relating to conflicts of interest” created by compensation sourced from product fees and costs, rather than the fees and costs themselves. Differences in Compensation and Proprietary Products Several commenters recommended that required conflict disclosure address recommendations where a less expensive alternative is available, or condition the ability to recommend a more expensive product on the adequacy of a broker-dealer’s conflict disclosures. 453 Similarly, several commenters expressed differing views on how payment of varying compensation should be handled under the “best interest” standard of Regulation Best

mutual fund advisers so that the fund advisers would continue to recommend BISYS as an administrator). 453 See PIABA Letter (stating that where less expensive alternatives are available, disclosure should include an explanation of why the recommendation is nevertheless in the best interest given other factors associated with the recommendation); LPL August 2018 Letter (recommending that the Commission clarify that a broker-dealer can recommend a product involving costs and charges that are within a range of reasonableness that has been disclosed to the investor in advance provided the recommendation is otherwise in the investor’s best interest); UMiami Letter; SIFMA August 2018 Letter.

Interest and how related conflicts should be disclosed.
454 For example, one commenter identified compensation differences within product lines as an example of a conflict that should be disclosed.455 Several commenters also recommended that the Commission require disclosure of conflicts of interest related to use of proprietary products, and whether the broker-dealer offers alternatives to proprietary products.456 Similarly, several commenters requested that the Commission clarify that broker-dealers can limit their offerings to proprietary products or products that make revenue sharing payments if, among other things, appropriate disclosure is made.457

454 See, e.g., CFA August 2018 Letter (recommending that the Commission include compensation differences within product lines as an example of a conflict that should be disclosed); Ameriprise (stating that differential compensation for diverse products aligns with Regulation Best Interest provided the firm mitigates the potential related conflicts); Pacific Life August 2018 Letter (stating that the definition of “material conflicts of interest” must encompass, among other things, the types of compensation received by the person making the recommendation). 455 See CFA August 2018 Letter. 456 See, e.g., Money Management Institute Letter (recommending the SEC allow firms to meet the Conflict of Interest Obligation with respect to their preference for proprietary products through disclosure); CFA Institute Letter; IRI Letter; SIFMA August 2018 Letter. 457 See, e.g., SIFMA August 2018 Letter (stating that a firm should be allowed to limit its offerings to proprietary products or revenue sharing products, as long as: (a) the brokerdealer discloses to its customer that it is limiting the recommendation to a specific set of securities, and (b) the specific set of securities contains appropriate securities to meet the customer’s needs); CFA Institute Letter (stating that when a firm only offers proprietary products it should disclose not only the higher product cost, but the potential cost to the investor of such a limited offering).

As discussed above, we agree with commenters who stated that it may be compatible with the Care Obligation to recommend a more expensive product that is otherwise in a retail customer’s best interest when there are less expensive alternatives available, to receive compensation that varies among products, and to recommend proprietary products. 458 However, we also believe that the conflicts of interest associated with such practices constitute “material facts” relating to conflicts of interest that must be disclosed under the Disclosure Obligation. The receipt of higher compensation for recommending some products rather than others, whether received by the broker-dealer, the associated person, or both, is a fundamental and powerful incentive to favor one product over another.459 While we are requiring firms to establish policies and procedures reasonably designed to mitigate the conflicts of interest that create an incentive for financial professionals to place the interest of the professional or brokerdealer ahead of the interest of the retail customer, we believe also that full and fair disclosure of the material facts concerning conflicts raised by variable compensation schemes is of particularly critical importance for an investor seeking to evaluate a recommendation under such

458 See generally Section II.A.1, Commission’s Approach.
459 See Proposing Release at 21578 (referencing the Commission’s long-held concerns about the incentives that commission-based compensation provides to churn accounts, recommend unsuitable securities, and engage in aggressive marketing of brokerage services); FINRA Report on Conflicts of Interest (Oct. 2013), available at https://www.finra.org/sites/default/files/Industry/p359971.pdf (“FINRA Conflicts Report”) at p. 4.

circumstances, a concern further underscored by our approach under the Conflict of Interest Obligation of requiring policies and procedures to mitigate or eliminate certain conflicts. The benefits that accrue to a broker-dealer and its financial professionals from recommending proprietary products also raise conflicts of interest that must be disclosed. Material facts relating to the conflicts of interest associated with recommending proprietary products could include, as relevant, that the broker-dealer owns the product, and that in addition to any commission associated with purchasing the product, the broker-dealer or an affiliate may receive additional fees and compensation461 related to that product.462
c. Full and Fair Disclosure
As proposed, the Disclosure Obligation would have required broker-dealers to “reasonably disclose” material facts relating to the scope and terms of the relationship with the retail customer, including all material conflicts of interest associated with the recommendation. The Commission used this formulation in order to give flexibility to broker-dealers in determining the most appropriate way to meet the proposed Disclosure Obligation depending on

460 See generally Section II.C.3.
461 For example, a broker-dealer’s sale of proprietary products potentially generates a compensation stream for the broker-dealer, in addition to commissions, which may need to be disclosed under paragraph (a)(2)(i)(A). 462 As discussed further in Section II.C.3, in addition to disclosure of such conflicts, brokerdealers are also required under the Conflict of Interest Obligation to establish, maintain, and enforce written policies and procedures reasonably designed to mitigate or address the conflicts presented.

their individual business practices. The Commission also provided preliminary guidance on what it believed would be to “reasonably disclose” in accordance with the Disclosure Obligation by setting forth the aspects of effective disclosure, including the form and manner of disclosure and the timing and frequency of disclosure. In this regard, the Commission requested comment on whether broker-dealers should be required to “reasonably disclose” and whether additional guidance as to how broker-dealers could meet this standard should be provided. The Commission also requested comment on whether disclosure should explicitly be required to be “full and fair.” In response, some commenters raised questions about using the term “reasonably disclose”463 and whether brokerdealers should be subject to less rigorous disclosure obligations for recommendations made to retail customers than investment advisers.464 These commenters recommended that the Commission explicitly require broker-dealers to provide full and fair disclosure of material facts.465 One commenter reasoned that the Commission should not make Regulation Best

463 See, e.g., CFA August 2018 Letter (stating that a “reasonable” disclosure standard gives firms too much discretion to determine how the disclosures will be presented); Galvin (arguing that the proposed standard would give broker-dealers more opportunities to argue that they acted “reasonably” under the rules). 464 See, e.g., CFA August 2018 Letter (stating that “[t]he Commission offers no explanation for why broker-dealers should be subject to less rigorous disclosure obligations than investment advisers”). 465 See, e.g., Pace Investor Rights Clinic August 2018 Letter (urging the Commission to require broker-dealers to provide full and fair disclosure of any conflicts that are not eliminated or mitigated); Better Markets August 2018 Letter (urging the Commission to

Interest any more stringent than in the Proposing Release, stating that “full and fair” is both inapplicable and unnecessary given the proposed standard under the Disclosure Obligation. After careful consideration of the comments received, the Commission is adopting the Disclosure Obligation with revisions to require “full and fair disclosure” of all material facts relating to the scope and terms of the relationship with the retail customer and all material facts relating to conflicts of interest associated with the recommendation for the reasons described below. While we do not believe that adopting a “full and fair disclosure” standard is significantly different from the proposed requirement to “reasonably disclose,” we believe that the Regulation Best Interest serves the Commission’s goal of facilitating disclosure to assist retail customers in making informed investment decisions. 467 In addition, Regulation Best Interest will more

further enhance the Disclosure Obligations by requiring broker-dealers to make full and fair disclosure of all information required to be disclosed); State Attorneys General Letter; NASAA August 2018 Letter. 466 See SIFMA August 2018 Letter. 467 This approach is consistent with the rationale articulated in the Fiduciary Interpretation. See Fiduciary Interpretation at Section II.C (stating, “In order for disclosure to be full and fair, it should be sufficiently specific so that a client is able to understand the material fact or conflict of interest and make an informed decision whether to provide consent. For example, it would be inadequate to disclose that the adviser has ‘other clients’ without describing how the adviser will manage conflicts between clients if and when they arise, or to disclose that the adviser has ‘conflicts’ without further description. Similarly, disclosure that an adviser ‘may’ have a particular conflict, without more, is not adequate when the conflict actually exists.” [However,] “[t]he word ‘may’ could be appropriately used to disclose to a client a potential conflict that does not currently exist

closely align the Disclosure Obligation with existing requirements for investment advisers468 and is consistent with disclosure standards in other contexts under the federal securities laws. The full and fair disclosure standard that the Commission is adopting for broker-dealers under the Disclosure Obligation is generally similar to the disclosure standard applicable to

but might reasonably present itself in the future.”). See also In the Matter of The Robare Group, Ltd., et al., Advisers Act Release No. 4566 (Nov. 7, 2016) (Commission Opinion) (finding, among other things, that adviser’s disclosure that it may receive a certain type of compensation was inadequate because it did not reveal that the adviser actually had an arrangement pursuant to which it received fees that presented a potential conflict of interest); aff’d in part and rev’d in part on other grounds Robare Group, Ltd., et al. v. SEC, 922 F.3d 468 (D.C. Cir. 2019); SEC v. Blavin, 760 F.2d 706, 711 (6th Cir. 1985) (disclosure that investment adviser “may” trade in recommended securities for its own account was false and misleading where the adviser actually invested in 10%-25% of the publicly available stock of the companies it recommended); ICI Letter (commenting on the Fiduciary Interpretation proposing release). 468 See Fiduciary Interpretation at Section II.A (stating that “[t]he [investment adviser’s] fiduciary duty follows the contours of the relationship between the adviser and its client, and the adviser and its client may shape that relationship by agreement provided that there is full and fair disclosure and informed consent” (emphasis added)). 469 For instance, the Municipal Securities Rulemaking Board requires that municipal advisors provide full and fair disclosure of material conflicts of interest and material legal or disciplinary events. See MSRB Rule G-42. In addition, the registration and disclosure requirements of the Securities Act of 1933 (“Securities Act”) are based on the concept that investors in a public offering should be provided with full and fair disclosure of material information needed for an informed investment decision. See Securities Act Concepts and Their Effects on Capital Formation, Securities Act Release No. 7314 (Jul. 25, 1996); 61 FR 40044 (Jul. 31, 1996) at text accompanying footnote 13; see also SEC
v. Ralston Purina Co., 346 U.S. 119, 124 (1953). Finally, Regulation FD under the
Securities Act was “designed [in part] to promote the full and fair disclosure of information by issuers.” See Selective Disclosure and Insider Trading, Securities Act Release No. 7881 (Aug. 15, 2000), 65 FR 51715 (Aug. 24, 2000).

investment advisers under the Advisers Act.
470 Similar to the Proposing Release’s interpretation of the phrase “reasonably disclose,” broker-dealers’ obligation to provide full and fair disclosure should give sufficient information to enable a retail investor to make an informed decision with regard to the recommendation. We disagree with commenters who believe the “full and fair” standard is too stringent. While the general standard for broker-dealers under the Disclosure Obligation will be generally similar to the disclosure requirements applicable to investment advisers, the scope of the required disclosure is not as broad. For example, the Disclosure Obligation only requires disclosure of material facts relating to the scope and terms of the relationship with the broker-dealer, and material facts relating to conflicts of interest associated with a broker-dealer’s recommendations, and not of all material facts relating to the relationship. In addition, the Disclosure Obligation only applies to retail customers. In contrast, the disclosure requirements imposed by the fiduciary duty under the Advisers Act generally and Form ADV in particular are broader (e.g., Form ADV requires disclosure of the adviser’s principal owner(s) and certain financial industry activities and affiliations, which are not explicitly required under the Disclosure Obligation; Form ADV and the fiduciary duty also go to disclosure of the entire relationship while the

470 See supra footnote 468. See also Fiduciary Interpretation, stating that the disclosure “should be sufficiently specific so that a client is able to understand the material fact or conflict of interest and make an informed decision whether to provide consent.” 471 See Proposing Release at 21604, footnote 208.

Disclosure Obligation is tailored to the recommendation and also given at relevant points in time). We designed our approach to avoid having retail customers receive overwhelming amounts of information.472 Some commenters suggested that disclosure and informed consent should be required in order to comply with the obligations under Regulation Best Interest, similar to the approach taken under the fiduciary duty under the Advisers Act.473 We have carefully considered these comments. As noted above, under the Disclosure Obligation, broker-dealers are required to provide full and fair disclosure such that a retail customer can make an informed decision with regard to the recommendation (i.e., whether to accept (or reject) that recommendation). In making such an informed decision after being provided with full and fair disclosure, we believe that the retail customer has provided “informed consent” in a manner that is analogous to the informed consent required to be provided by a client in the context of an investment adviser-

472 Commenters pointed out that requiring too much information regarding conflicts of interest would go beyond the standard of materiality set forth under Basic. See, e.g., SIFMA August 2018 Letter; Cetera August 2018 Letter (citing Basic at 231, noting that “an avalanche of trivial information” would not be “conducive to informed decision making.”). See also Letter from David Schwartz, President and CEA, Florida International Bankers Association (“FIBA”) (Feb. 8, 2019) FIBA (“February 2019 Letter”) (stating that “the amount of required disclosure may overwhelm rather than educate”). 473 See, e.g., ASA Letter (stating that the Commission should reaffirm that broker-dealers can address conflicts of interest by disclosing them and obtaining informed consent); Primerica Letter (suggesting that the Commission clarify that broker-dealers can effectively address all material conflicts by providing full and fair disclosure and obtaining customer consent); Morgan Stanley Letter.

client relationship.474 An investment advisory client must provide informed consent to the adviser’s conflicts of interest in the context of the entire relationship, which can be broader than the informed consent provided by a retail customer when making an informed decision to accept or reject a particular recommendation by a broker-dealer. We believe this is appropriate because the investment-adviser client relationship is generally broader and can include, for example, unlimited investment discretion by the investment adviser to conduct securities transactions on behalf of the client. The broker-dealer customer relationship on the other hand is generally transaction-based and the retail customer must accept (or reject) each recommendation by a broker-dealer after the broker-dealer has provided full and fair disclosure as required under the Disclosure Obligation. Thus, in this regard, Regulation Best Interest will more closely align the Disclosure Obligation with the existing requirements for investment advisers, as noted above, but is tailored to the broker-dealer relationship.475 The Commission believes that the final Disclosure Obligation along with the protections provided by the requirements of Regulation

474 As discussed in the Fiduciary Interpretation, a client’s informed consent can be either explicit or, depending on the facts and circumstances, implicit. See Fiduciary Interpretation at Section II.C. Under Regulation Best Interest, however, assuming the retail customer has been provided with full and fair disclosure, the retail customer will be considered to have provided informed consent by affirmatively accepting a recommendation. 475 See Fiduciary Interpretation (describing an investment adviser’s obligation to provide disclosure designed to put a reasonable client in a position to be able to understand and provide informed consent).

Best Interest, including the Care Obligation and Conflict of Interest Obligation, will further serve to enhance the protections available to retail customers. One commenter recommended that the Commission clarify what a broker-dealer is required to deliver to a retail customer in order to permit the retail customer to make an “informed decision,” and asked the Commission to confirm that it does not require a case-bycase analysis of what is reasonable to permit the retail customer to make an informed decision.476 In addition, other commenters underscored the importance of providing retail customers with sufficient time to review and comprehend the disclosed information prior to making an informed decision about a recommendation.477 Other commenters questioned whether providing “sufficient information” to enable a retail customer to make an informed decision broadens the Disclosure Obligation beyond “material facts” and “material conflicts.”478 We have considered the issues raised by the commenters and in the sections that follow are providing guidance on what we believe constitutes “full and fair disclosure” for purposes of

476 See, e.g., CCMC Letters.
477 See, e.g., Financial Planning Coalition Letter (stating that disclosures should be made prior to the recommendation so a retail customer has sufficient time to review and understand them, as well as to ask questions); CFA August 2018 Letter (stating that if the Commission wants to give investors time to consider the information and make an informed choice disclosure should be provided as soon as reasonably feasible and, when possible, no later than the point of recommendation). 478 See, e.g., IPA Letter (requesting clarification on whether providing sufficient information to enable a retail investor to make an informed decision broadens the disclosure obligation beyond material facts); CCMC Letters.

the Disclosure Obligation, including the form and manner, and the timing and frequency, of the disclosure. Similar to the proposal, in lieu of setting explicit requirements by rule for what constitutes full and fair disclosure of all material facts, we are providing broker-dealers flexibility in determining the most appropriate way to meet the Disclosure Obligation depending on each broker-dealer’s specific business practices. As we noted in the Proposing Release, while we are providing flexibility to brokerdealers to meet the Disclosure Obligation, we continue to be sensitive to the potential that broker-dealers could opt to disclose all facts, including those that do not meet the materiality threshold.479 We are cognizant of the likelihood that some broker-dealers could provide lengthy disclosures that do not meaningfully convey the material facts regarding the scope and terms of the relationship and material facts regarding conflicts of interest, an outcome that could undermine the Commission’s goal of facilitating disclosure to assist retail customers in making an informed investment decision. To this end, broker-dealers will only be required to disclose material facts about the scope and terms of the relationship or conflicts of interest. Although we are adopting the requirement with revisions to require full and fair disclosure of all material facts, we still believe it is important to clarify that broker-dealers’ compliance with the Disclosure Obligation will be measured against a negligence standard, not against a standard of strict liability, consistent with the Proposing Release. The Commission has

479 Id.

taken this position in other contexts where full and fair disclosure is required, including under the fiduciary duty under the Advisers Act. Form and Manner In the Proposing Release, the Commission noted that it was not proposing to specify by rule the form (e.g., narrative v. graphical/tabular) or manner (e.g., relationship guide or other written communications) of disclosure required under the Disclosure Obligation. The Commission stated that disclosure should be concise, clear and understandable to promote effective communication between a broker-dealer and a retail customer. 481 We also stated that broker-dealers would be able to deliver disclosure required pursuant to Regulation Best Interest consistent with the Commission’s guidance regarding electronic delivery of documents.482 Although we preliminarily believed that broker-dealers should have the flexibility to make

480 While establishing scienter is a requirement to establish violations of Section 206(1) of the Advisers Act, it is not required to establish a violation of Section 206(2); a showing of negligence is adequate. See SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195 (1963); see also SEC v. Steadman, 967 F.2d at 643 and footnote 5; Steadman v. SEC, 603 F.2d 1126, 1132-34 (5th Cir. 1979), aff’d on other grounds, 450 U.S. 91 (1981). See also Prohibition of Fraud by Advisers to Certain Pooled Investment Vehicles, Advisers Act Release No. 2628 (Aug. 3, 2007). In its adoption of Rule 206(4)- 8 under the Advisers Act, the Commission stated that it would not need to demonstrate that an adviser violating the rule acted with scienter. 481 See Proposing Release at 21604, footnote 211. 482 Id. at 21604 and footnote 214.

disclosures by any means, as opposed to requiring a standard written document at the outset of the relationship, we stated our belief that any such disclosure should be provided in writing.483 Commenters sought further guidance in a number of areas relating to disclosure, including the extent to which the Relationship Summary or other disclosures may satisfy the Disclosure Obligation, 484 the circumstances under which standardized disclosure could be sufficient, as well as how, and the extent to which, disclosures made pursuant to the Disclosure Obligation should be made in writing.485 In response to comments we are providing additional guidance. We are also reaffirming guidance that we provided in the Proposing Release.

483 Id. at 21604 and footnote 213.
484 See, e.g., Cambridge Letter (arguing that the Relationship Summary and Disclosure Obligation are duplicative requirements); CUNA Mutual Letter (seeking greater clarification regarding the extent to which information provided in other documents could satisfy the Disclosure Obligation); Financial Services Institute August 2018 Letter (arguing that providing the Relationship Summary should be deemed to satisfy the requirements of the broker-dealer’s Disclosure Obligation); Morningstar Letter (arguing that due to the brevity of the Relationship Summary, additional broker-dealer disclosures would be necessary); Wells Fargo Letter (recommending that the requirements of the Disclosure Obligation be incorporated into Form CRS). 485 See, e.g., Schwab Letter (arguing that because most recommendations occur over the phone and through various digital means, the Commission should remove the “in writing” requirement and allow firms to determine the best method for disclosure depending on the situation); SIFMA August 2018 Letter (seeking clarification that oral disclosure at the time of the recommendation may be sufficient to satisfy the Disclosure Obligation in certain circumstances). But see AARP August 2018 Letter (stating that oral disclosures should never be permitted).

Prescribed Form of Disclosure
As noted in the Proposing Release, we believe it is important to provide broker-dealers with flexibility in determining the most appropriate and effective way to meet the Disclosure Obligation to reflect the structure and characteristics of their relationships with retail customers.486 Many commenters agreed with this reasoning, arguing that there was a need to preserve flexibility for broker-dealers to comply with the Disclosure Obligation as proposed.487 Other commenters believed, however, that the proposed Disclosure Obligation gave brokerdealers too much discretion.488 After careful consideration of these comments, the Commission has decided not to require any standard written disclosures (other than the Relationship Summary) at this time. Although we recognize the potential value to retail customers of standardizing the disclosures required pursuant to the Disclosure Obligation, we believe that retail customers can derive value from disclosures that accommodate the structure and characteristics of the particular broker-

486 See Proposing Release at 21604.
487 See, e.g., Prudential Letter; SIFMA August 2018 Letter; TIAA Letter; UBS Letter. 488 See, e.g., Better Markets August 2018 Letter (arguing that proving broker-dealer discretion in this area will virtually assure a failure to communicate helpfully with investors); CFA August 2018 Letter (arguing that the flexibility the Commission provides will result in disclosure that does not effectively convey key information). See also Morningstar Letter (supporting the expansion of disclosures, but arguing that “publicly available disclosures with a standard taxonomy work best because they empower third parties such as “fintech” and “reg-tech” firms to analyze and contextualize critical information and amplify a call to action for ordinary investors”).

dealer. On balance, we recognize the wide variety of business models and practices and we continue to believe it is important to provide broker-dealers with flexibility to enable them to better tailor disclosure and information that their retail customers can understand and may be more likely to read at relevant points in time, rather than, for example, mandating a standardized all-inclusive (and likely lengthy) disclosure. We disagree that flexibility will prevent investors from obtaining information necessary to make an informed investment decision and do not believe that requiring a standard written disclosure beyond the Relationship Summary is necessary at this time. We emphasize, however, that the adequacy of the disclosure will depend on the facts and circumstances. We intend to

489 With respect to the length of disclosure documents, investor testing of proposed Form CRS examined retail investors’ likelihood of reading only longer documents (such as Form ADV Part II or an account opening agreement), only a short document (Form CRS), both, or neither when choosing a financial professional, account type or firm. Although the context was specific to Form CRS and the retail investor’s initial determination regarding a financial professional, account type or firm, the survey suggests that retail investors may be more likely to read either both longer and shorter disclosures or just shorter disclosures. See RAND 2018 (“Whereas Figure 2.20 shows that half of all investors reported having reviewed neither a Form ADV nor an account opening agreement in the past and another 20 percent reported not knowing whether they had ever done so, Figure 2.21 shows that about 70 percent of all respondents and of all investors reported that they would be likely to read either both types of documents or only the Relationship Summary when choosing a financial professional in the future. Just 2 percent of investors and 1 percent of noninvestors reported being likely to read only the longer documents, whereas 29 percent of investors and 13 percent of noninvestors were likely to read only the Relationship Summary.” More specifically, Figure 2.21 shows that over 40% of all respondents indicated they would read both and under 30% indicated that they would read only the Relationship Summary.)

evaluate broker-dealer disclosure practices in response to Regulation Best Interest over time to determine whether additional disclosure initiatives may be appropriate. Relying on Other Disclosures and Standardized Documents In the Proposing Release, we described how the Disclosure Obligation builds upon the requirements of Form CRS and the disclosures in the Relationship Summary.490 We also stated that we anticipated that broker-dealers may elect to use other documents to satisfy elements of the Disclosure Obligation, such as an account agreement, a relationship guide, or a fee
schedule.491
Several commenters requested guidance on their ability to use other documents to meet the requirements of the Disclosure Obligation. For example, some commenters recommended that the Commission harmonize the Disclosure Obligation with the broad, firm-level disclosure obligations of Form CRS so that firms can use the Relationship Summary to help satisfy the Disclosure Obligation.492 Commenters also recommended that broker-dealers should be permitted to satisfy the Disclosure Obligation by using standardized language generally to

490 See Proposing Release at 21600.
491 See id. at 21605.
492 See, e.g., Cambridge Letter (recommending that providing the Form CRS should fulfill the broker-dealer’s Disclosure Obligation under Regulation Best Interest); ACLI Letter (noting that a single disclosure fulfilling Regulation Best Interest and Form CRS would reduce the disclosure burdens and increase the likelihood consumers will read the required information); FSI August 2018 Letter; Mutual of America Letter; Northwestern Mutual Letter; IPA Letter; Transamerica August 2018 Letter; NAIFA Letter.

describe the broker-dealer’s products and services available to their retail customers and related conflicts of interest, including the ranges of remuneration payable to a broker-dealer in connection with its recommendation of different products.493 Several commenters also suggested that the Commission should clarify that the Disclosure Obligation should not apply where an existing disclosure regime already exists.494 Similarly, other commenters recommended that the Commission clarify whether broker-dealers could meet the Disclosure Obligation by referencing information required to be disclosed pursuant to other regulatory requirements such as FINRA disclosure rules. After careful consideration of the comments, the Commission is providing guidance to permit a broker-dealer to utilize existing disclosures and standardized documents, such as a product prospectus, relationship guide, account agreement, or fee schedule to help satisfy the Disclosure Obligation. The Commission recognizes that broker-dealers are subject to disclosure

493 See, e.g., LPL August 2018 Letter (recommending that all investors be provided with general disclosures setting forth the ranges of remuneration payable to broker-dealers in connection with its recommendations of different products); Committee of Annuity Insurers (urging the Commission to clarify that a broker-dealer can satisfy the Disclosure Obligation through disclosure describing products and services available to its retail customers and need not provide a disclosure particularized to a recommendation). 494 See, e.g., SIFMA August 2018 Letter (asking the Commission to clarify that the Disclosure Obligation does not apply in contexts where there is an existing regime, such as for equity and debt research); Transamerica August 2018 Letter (recommending that the Commission recognize that existing disclosure regimes suffice to meet certain disclosure requirements). 495 See, e.g., Transamerica August 2018 Letter (stating that the disclosure obligation should expressly take into consideration existing disclosures).

requirements other than the Disclosure Obligation and Form CRS, and believes utilizing such existing disclosures where appropriate is a reasonable and cost-effective way to satisfy the requirements of the Disclosure Obligation, and can also help avoid duplicative or voluminous disclosure by not requiring the creation of new disclosure documents. 496 We recognize also that in many instances, information necessary to satisfy the Disclosure Obligation may be broadly applicable to a broker-dealer’s retail customers, and therefore the use of standardized disclosure may be appropriate. However, while broker-dealers may choose to standardize certain forms of their disclosure, whether such materials would be sufficient to satisfy the Disclosure Obligation will depend on the facts and circumstances.497 For example, disclosures may need to be tailored to a particular recommendation if the standardized disclosure does not sufficiently identify the material facts about a conflict of interest presented by a particular recommendation. Accordingly,

496 See Proposing Release at 21599, footnotes 175 and 176. For example, broker-dealers must disclose information about a transaction on trade confirmations pursuant to Exchange Act Rule 10b-10. 17 CFR § 240.10b-10. See also Morgan Stanley Letter (noting that the securities laws and FINRA rules already require firms to provide significant disclosures to clients at natural touchpoints in the client relationship). 497 Similarly, we also note that a number of broker-dealers are modeling their disclosure of fees other than transaction-based fees on the NASAA Schedule of Miscellaneous Account and Service Fees. See NASAA August 2018 Letter. A broker-dealer may use this schedule to comply in part with its obligation to disclose fees and costs pursuant to the Disclosure Obligation. We note, however, that the NASAA Schedule may recommend the disclosure of certain fees that may not be required under the Disclosure Obligation depending on the facts and circumstances, for example those that are not “material facts” for purposes of Regulation Best Interest.

a broker-dealer remains responsible for disclosing all material facts relating to the scope and terms of the relationship with the retail customer (as discussed above), as well as all material facts relating to conflicts of interest that are associated with a recommendation whether or not the firm relies on other materials to fulfill that obligation. With regard to commenters’ request that the Relationship Summary be considered sufficient to satisfy the Disclosure Obligation, we note that the Relationship Summary will provide succinct information and is designed to assist retail investors with the process of deciding whether to engage, or to continue to engage, a particular firm or financial professional, deciding whether to establish or continue to maintain a brokerage or investment advisory relationship, and asking questions and easily finding additional information. We recognize that additional details regarding many of the topics (e.g., services, fees and conflicts of interest) would in many cases be necessary to satisfy the Disclosure Obligation. Thus, although a brokerdealer could use a Relationship Summary and other standardized disclosures about its products and services to help satisfy the Disclosure Obligation, these disclosures may not be sufficient to satisfy the Disclosure Obligation. Whether the Relationship Summary standing alone, or any additional or existing disclosures, satisfy any of these required disclosures in full would depend on the facts and circumstances. In most instances, broker-dealers will need to provide additional information beyond that contained in the Relationship Summary in order to satisfy the Disclosure Obligation.

In Writing
We proposed requiring that disclosures be provided in writing.
498 We also stated that requiring written disclosures would help facilitate investor review of the disclosure, promote compliance by firms, facilitate effective supervision, and facilitate more effective regulatory oversight to help ensure and evaluate whether the disclosure complies with the requirements of Regulation Best Interest.499 We also stated that the “in writing” requirement could be satisfied either through paper or electronic means consistent with existing Commission guidance on electronic delivery of documents. We also provided guidance on how broker-dealers could comply with the “in writing” requirement when recommendations are given over the telephone.500 A number of commenters supported the “in writing” requirement.501 Other commenters, however, recommend that the Commission also permit the use of oral disclosure.502 For example, several commenters recommend that the Commission permit broker-dealers to orally

498 See Proposing Release at 21604.
499 Id.
500 Id.
501 See, e.g., Vanguard Letter (recommending that the Commission require a consolidated written disclosure of all material conflicts); CFA August 2018 Letter. 502 See Schwab Letter (recommending that the Commission eliminate the “in writing” requirement and allow firms to design and document the best method depending on the situation); SIFMA August 2018 Letter; TIAA Letter. But see AARP August 2018 Letter (stating that oral disclosures should never be permitted).

disclose information to their customers provided they later follow-up in writing. 503 Other commenters highlighted concerns associated with such oral disclosure.504 After carefully considering the comments, we are adopting the “in writing” requirement as proposed, subject to discussion in Section II.C.1, Oral Disclosure or Disclosure After a Recommendation. As stated above, we believe that retail customers would benefit from receiving a written disclosure to assist their investment decisions and form the basis of an informed investment decision. 505 However, we also believe that broker-dealers require

503 See PIABA Letter (recommending that the Commission allow broker-dealers to discharge their disclosure obligations by: (i) orally explaining the relationship, any conflicts, how the broker-dealer is paid, and the features, benefits and risks of the recommendation; and (ii) confirming the discussion by letter or email, which is signed or confirmed as being accurate by the customer, and retained in customer’s file); SIFMA August 2018 Letter (recommending that the Commission clarify that oral disclosure at the time of the recommendation may satisfy the Disclosure Obligation if: (1) the associated person documents that the oral disclosure was made, or (2) the firm provides written disclosure after the trade); USAA Letter (suggesting that the Commission could allow oral productlevel disclosures, while providing the client the choice to request confirming disclosure in writing at her option). 504 See Edward Jones Letter (expressing concern that the Commission is implying that a dual-registrant would need to provide an oral point of sale disclosure regarding the capacity in which it is acting when it makes a recommendation, and that such oral disclosure would be difficult to supervise and of little value); CCMC Letters (stating that a dual-registrant should not have to make an oral disclosure of the capacity for each and every conversation it has with retail customers). 505 One commenter stated that certain foreign laws do not permit firms to provide their customers with written materials prior to entering into a contractual relationship. See FIBA February 2019 Letter. In response, we note that the Disclosure Obligation requires disclosure to be provided prior to or at the time of the recommendation and is not tied to a contractual relationship. In addition, the staff will continue to evaluate the application of

flexibility to make proper written disclosures to their customers. Accordingly, the Commission is not requiring a specific form or method of written disclosure. Although we are requiring that disclosure be made “in writing,” we recognize that a broker-dealer may need to supplement, clarify or update written disclosure it has previously made before it provides a retail customer with a recommendation. For instance, as we stated in the Proposing Release, we recognized that broker-dealers may provide recommendations by telephone and offer clarifying disclosure orally in some instances subject to certain conditions, such as a dual-registrant informing a retail customer of the capacity in which the dual-registrant is acting in conjunction with a recommendation.507 In such instances, we believe that it may be necessary as a practical matter to provide oral disclosure of a material fact to supplement, clarify, or update written disclosure made previously. 508 Therefore, firms may make oral disclosures

the Disclosure Obligation in circumstances such as the one raised by this commenter. Interested parties are invited to provide further feedback on issues involving non-U.S.- resident retail customers. 506 See Proposing Release at 21604, footnote 213. 507 See id. at 21605, footnote 216. We stated that a broker-dealer could orally clarify the capacity in which it is acting at the time of the recommendation if it had previously provided written disclosure to the retail customer beforehand disclosing its capacity as well as the method it planned to use to clarify its capacity at the time of the recommendation. 508 For more discussion on guidance relating to updating disclosures, see Section II.C.1.d, Disclosure Obligation, Updating Disclosure.

under the circumstances outlined in Section II.C.1, Oral Disclosure or Disclosure After a Recommendation. When making such an oral disclosure, firms must maintain a record of the fact that oral disclosure was provided to the retail customer.510 We are not explicitly requiring broker-dealers to create a record documenting the substance of the oral disclosure itself, but rather a record of the fact that such oral disclosure was made. 511 This record should include documentation sufficient to demonstrate that disclosure was made to the retail customer, which could include, for example, recordings of telephone conversations or contemporaneous written notations. Nonetheless, although it is not required by Regulation Best Interest, as a best practice we encourage broker-dealers that make oral disclosures to subsequently provide to their retail customers in a timely manner written disclosure summarizing the information conveyed orally. Plain English In the Proposing Release, we stated that broker-dealers should apply plain English principles to written disclosures including, among other things, the use of short sentences and active voice, and avoidance of legal jargon, highly technical business terms, or multiple

509 See Section II.C.1, Disclosure Obligation, Oral Disclosure or Disclosure After a Recommendation. 510 See Section II.D. 511 See Section II.C.1, Disclosure Obligation, Oral Disclosure or Disclosure After a Recommendation.

negatives.512 Similarly, several commenters recommended that whatever format broker-dealers use for their disclosure, they should be written in plain English and easy to understand.513 Accordingly, although it is not required, the Commission encourages broker-dealers to use plain English in preparing any disclosures they make in satisfaction of the Disclosure Obligation. Electronic Delivery In the Proposing Release, we took the position that broker-dealers could deliver written disclosures required by Regulation Best Interest in accordance with the Commission’s existing guidance regarding electronic delivery of documents. 514 This framework consists of the

512 Proposing Release at 21604, footnote 213.
513 See State Attorneys General Letter (stating that all disclosures must be in plain language and easily understood by investors); CFA Institute (recommending that the Commission require a clear English listing of all conflicts of interest in which a broker-dealer engages). One commenter requested that the Commission consider clarifying that the Plain English standard in the Disclosure Obligation is not an English-only requirement to address the needs of certain non-U.S. customers. See FIBA February 2019 Letter. In response, we note that any disclosure should be made consistent with Plain English principles. 514 See Proposing Release at 21604. We cited to a number of prior Commission releases on electronic delivery in the Proposing Release, including Use of Electronic Media by Broker-Dealers, Transfer Agents, and Investment Advisers for Delivery of Information, Exchange Act Release No. 37182 (May 9, 1996), 61 FR 24644 (May 15, 1996) (“1996 Release”) (providing Commission views on electronic delivery of required information by broker-dealers, transfer agents and investment advisers) and Use of Electronic Media, Exchange Act Release No. 42728 (Apr. 28, 2000), 65 FR 25843 (May 4, 2000) (“2000 Release”) (providing updated interpretive guidance on the use of electronic media to deliver documents on matters such as telephonic and global consent; issuer liability for website content; and legal principles that should be considered in conducting online offerings).

following elements: (1) notice to the investor that information is available electronically; (2) 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 (3) 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). 515 We have furthermore clarified that one method to satisfy the evidence of delivery element is to obtain informed consent from investors.516 Several commenters agreed with this approach.517 These commenters typically supported the use of electronic disclosure and recommended various methods (e.g., hyperlinks to webbased documents) but recommended paper delivery as the default option.518 Other commenters

515 See 1996 Release at 24646-47; see also Relationship Summary Proposing Release at 21454. 516 See 2000 Release at 25845-46 (clarifying how market intermediaries and other market participants can obtain consent for electronic delivery). 517 See, e.g., CFA August 2018 Letter (stating that giving firms discretion to choose the delivery mechanism would all but ensure that many investors would never see the disclosures); AARP August 2018 Letter (recommending that the Commission prohibit firms from solely providing electronic access to disclosures and require delivery of paper copies). 518 Id. See also LPL August 2018 Letter (noting that modern communication practices underscore the need for the Commission to provide more flexibility to broker-dealers to satisfy their document delivery obligations; and requesting that the Commission confirm that broker-dealers can deliver disclosures in compliance with existing guidance regarding electronic delivery of documents (which requires paper delivery as a default)).

recommended permitting electronic delivery for required disclosures.
519 While investor testing on the proposed Relationship Summary indicated that some retail investors generally support some form of electronic copies, most participants in the study “generally liked having a paper version of the Relationship Summary.”520 Similarly, as stated in the Form CRS adopting release, the IAC has cited one study indicating 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 accessing them online (6%).521 After considering investor testing results and commenters’ concerns and recommendations, the Commission reaffirms the application of existing Commission guidance relating to paper and electronic delivery of disclosure documents to broker-dealers in meeting the Disclosure Obligation. Specifically, we believe that broker-dealers should be able to satisfy the

519 See, e.g., IPA Letter (urging the Commission to confirm that all required disclosures may be delivered electronically); see also AXA Letter (urging the Commission to encourage the use of appropriate electronic disclosures, which can make information available to consumers more quickly and in a more digestible format); Prudential Letter (recommending that electronic delivery be deemed to comply with the Disclosure Obligation). 520 See RAND 2018. 521 Relationship Summary Adopting Release at Section II.D.3.a (citing 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/recommendationpromotion-of-electronic-delivery-and-development.pdf (citing FINRA Investor Education Foundation, “Investors in the United States 2016,” December 2016, available at http://bit.ly/2hMrppX).

Disclosure Obligation by using electronic delivery.
522 However, if a broker-dealer is providing its customers with electronic delivery (upon their consent) it cannot solely offer electronic delivery and must make paper delivery available, upon request. Both Regulation Best Interest and Form CRS require firms to provide electronic delivery of documents within the framework of the Commission’s existing guidance regarding electronic delivery. d. Timing and Frequency We proposed requiring broker-dealers to provide the disclosures required by the Disclosure Obligation “prior to or at the time of” the recommendation. We noted the importance of determining the appropriate timing and frequency of disclosure that may be effectively provided “prior to or at the time of” the recommendation.524 In cases where a broker-dealer determines that disclosure may be more effectively be provided in an initial, more general disclosure (such as a relationship guide) followed by specific information in a subsequent disclosure that is provided at a later time, the initial disclosure would address when and how a broker-dealer would provide more specific information regarding the material fact or conflict in

522 See 1996 Release (stating that “the Commission believes that broker-dealers . . . similarly should have reason to believe that electronically delivered information will result in the satisfaction of the delivery requirements under the federal securities laws. Thus, whether using paper or electronic media, broker-dealers . . . should consider the need to establish procedures to ensure that applicable delivery obligations are met”); see also 2000 Release. 523 See Relationship Summary Adopting Release, Section II.C.3. 524 See Proposing Release at 21605.

a subsequent disclosure. We stated also that in circumstances where a broker-dealer determines to provide an initial, more general disclosure (such as a relationship guide) followed by specific information in a subsequent disclosure that is provided after the recommendation (such as a trade confirmation), the initial disclosure must address when and how a broker-dealer would provide more specific information regarding the material fact or conflict in a subsequent disclosure (e.g., after the trade in the trade confirmation).525 We also stated that disclosure after the recommendation, such as in a trade confirmation for a particular recommended transaction would not, by itself, satisfy the Disclosure Obligation, because the disclosure would not be “prior to, or at the time of the recommendation.” We noted also that whether there is sufficient

525 The Commission has granted exemptions to certain dual-registrants, subject to a number of conditions, from the written disclosure and consent requirements of Advisers Act
Section 206(3) (which makes it unlawful for an adviser to engage in a principal trade
with an advisory client, unless it discloses to the client in writing before completion of the transaction the capacity in which the adviser is acting and obtains the consent of the client to the transaction). The exemptions are subject to several conditions, including conditions to provide disclosures at multiple points in the relationship, including disclosure that the entity may be acting in a principal capacity in a written confirmation at or before completion of a transaction. See, e.g., In the matter of Merrill Lynch Pierce Fenner & Smith, Incorporated, Investment Advisers Act Release No. 4595; (Dec. 28, 2016); In the matter of Robert W. Baird & Co., Incorporated, Advisers Act Release No. 4596 (Dec. 28, 2016); In the matter of UBS Financial Services, Inc., Advisers Act Release No. 4597 (Dec. 28, 2016); In the matter of Wells Fargo Advisors, LLC, Wells Fargo Advisors Financial Network, LLC, Advisers Act Release No. 4598 (Dec. 28, 2016).

disclosure in both the initial disclosure and any subsequent disclosure would depend on the facts and circumstances.526 Several commenters supported the Commission’s proposal to require broker-dealers to make disclosure prior to or at the time of the recommendation, but disagreed about the precise timing with which disclosure should be provided.527 For example, some commenters recommended that the Commission require or allow broker-dealers to meet the Disclosure Obligation prior to or at account opening.528 Similarly, several commenters recommended that the Commission require broker-dealers to provide disclosure prior to a recommendation or investment decision.529 Specifically, commenters recommended that the Commission require

526 See Proposing Release at 21605.
527 See, e.g., CFA August 2018 Letter (stating that any information that can be provided before the transaction is entered into should be provided to give investor time to consider it); AARP August 2018 Letter (stating that all key disclosures should be made significantly in advance of an investment decision; disclosure made at the time of or immediately prior to investing is not adequate); Bank of America Letter (stating that disclosure of material conflicts of interest can be satisfied in advance of a particular recommendation on a one-time basis); Pacific Life August 2018 Letter (stating that disclosure of material conflicts of interest must be disclosed at or prior to the point of sale or at the time the recommendation is made); FPC Letter. 528 See, e.g., TIAA Letter (recommending that the Commission require firms to meet their Regulation Best Interest and CRS disclosure obligations at or before the point the investor: (i) opens a brokerage account; or (ii) engages the broker-dealer to provide advice services (including for recommendations provided by phone)). 529 See, e.g., Better Markets August 2018 Letter (stating that disclosure should be provided in a timely fashion so investors have a meaningful opportunity to read, digest, understand, and discuss them); FPC Letter; AARP August 2018 Letter.

disclosures to be made with enough time prior to a recommendation that a retail customer has sufficient time to review and understand them, as well as ask questions. Several other commenters, however, recommended that the Commission clarify whether broker-dealers could meet the Disclosure Obligation at the point of sale531 or after a recommendation is made.532 Conversely, several commenters recommended that the

530 See, e.g., NAIFA Letter (recommending that disclosure be provided at or before the time of a recommendation because it helps consumers better understand and evaluate the recommendations they receive and preserves flexibility for professionals who may be interacting with clients of various levels of financial sophistication, duration of relationship, and investment history); CFA August 2018 Letter (recommending that transaction-specific information should be provided, whenever possible, at the point of recommendation rather than at the point of sale); Groom Letter (recommending that the Commission require disclosure of material conflicts of interest related to investing plan distribution proceeds at the inception of any discussions of the matter); PIABA Letter (recommending that the Commission require firms to provide specific charges prior to or at the time the recommendation is made); FPC Letter (stating that disclosures should be made prior to the recommendation so the retail customer has sufficient time to review and understand them, as well as to ask questions); Better Markets August 2018 Letter; AARP August 2018 Letter; Bank of America Letter. 531 See Pacific Life August 2018 Letter (stating that material conflicts of interest must be disclosed at or prior to the point-of-sale or at the time the recommendation is made). 532 See, e.g., LPL August 2018 Letter (suggesting that the Commission permit a brokerdealer to satisfy the Disclosure Obligation by directing an investor in writing to review the recommended product’s offering documents, along with hyperlinks to those documents, prior to the recommendation or shortly thereafter via a trade confirmation); SIFMA August 2018 Letter (recommending that the Commission confirm that firms would be permitted to provide disclosures on a website or on a post-trade basis, provided customers have been informed in advance of the timing of those disclosures).

Commission clarify that it will not require point of sale or point of recommendation disclosure obligations.533 After carefully considering the comments received, we are providing our view on what it means for broker-dealers to provide the required disclosures in writing “prior to or at the time of” the recommendation. As with the “form and manner” of making disclosures, the Commission continues to believe that broker-dealers should have flexibility with respect to the “timing and frequency” of providing disclosure to determine the most appropriate and effective way to meet the Disclosure Obligation. Accordingly, the Commission has decided not to provide any prescriptive requirements for the timing and frequency of written disclosures, other than requiring disclosure prior to or at the time of the recommendation. In order to make an informed decision about a securities recommendation, retail customers must have appropriate information at the time or before a recommendation is made.

533 See, e.g., SIFMA August 2018 Letter (requesting the Commission clarify that there is no requirement for a point of sale or point of recommendation disclosure, as such a requirement would be unworkable for the industry); Morgan Stanley Letter (noting that point-of-sale disclosures pose operational issues and may not afford clients sufficient time to adequately consider and understand them); HD Vest Letter (recommending that the Commission not mandate written point of recommendation or point of sale disclosure); Prudential Letter (requesting that the Commission clarify that it is not mandating a point of sale or point of recommendation disclosure obligation). But see NASAA August 2018 Letter (stating that only a transaction-by-transaction disclosure obligation will ensure that broker-dealers are meeting their “best interest” duties and provide investors the level of protection they deserve); AARP August 2018 Letter (recommending that the Commission require firms to disclose their fees any time a recommendation is made).

Being in possession of relevant information gives investors the tools with which to judge the merits of acting on a particular recommendation. As stated in the Proposing Release, the Commission believes that broker-dealers should provide retail customers information early enough in the process to give them adequate time to consider the information and promote the investor’s understanding in order to make informed investment decisions.534 Similarly, the Commission believes that broker-dealers should not provide information so early that the disclosure fails to provide meaningful information (e.g., does not sufficiently identify material conflicts presented by a particular recommendation, or overwhelms the retail customer with disclosures related to a number of potential options that the retail customer may not be qualified to pursue). 535 Nevertheless, in order to provide broker-dealers the flexibility to determine how and when to make relevant disclosures pursuant to the Disclosure Obligation, we are not mandating a requirement that disclosures be made within a certain timeframe preceding a recommendation. However, we continue to encourage broker-dealers to consider whether it would be helpful to repeat or highlight disclosures already made pursuant to the Disclosure Obligation at the time of the recommendation.

534 Proposing Release at 21605.
535 Id.

We are also clarifying the ability of a broker-dealer to supplement, clarify, or update information after making a recommendation.536 In particular, if a broker-dealer determines to disclose information, in part, after the recommendation, such as in a prospectus or trade confirmation, that disclosure may be used to supplement, clarify, or update the initial, general disclosure. For example, any necessary information in a product offering document, such as information about product risks or fees, may be provided in accordance with existing disclosure mechanisms that occur after a transaction, such as the delivery of a trade confirmation or a prospectus, private placement memorandum, or offering circular. 537 However, the broker-dealer must comply with the circumstances outlined in Section II.C.1, Oral Disclosure or Disclosure After a Recommendation, in order to make any such disclosure after the recommendation. Layered Disclosure We proposed to require broker-dealers to provide disclosure prior to or at the time of the recommendation but gave guidance on a number of approaches they could take to achieve this requirement, including providing layered disclosure, in which more general information is

536 See id. In the proposal, we noted that there may be material information that the brokerdealer may not be in a position to disclose at or prior to the recommendation that may be revealed following the transaction, such as the final transaction information contained in a trade confirmation. 537 In instances where a recommended transaction is not acted upon by the retail customer, and therefore there is no subsequent delivery of disclosure otherwise required by the transaction, the fact that such information is not provided would not be a violation of the Disclosure Obligation.

supplemented by more detailed information provided either at the same time or subsequently. We received a number of comments supporting our proposed guidance concerning a layered approach to the Disclosure Obligation.539 In addition, investor testing illustrates that many retail investors support a layered approach as well.540

538 See Proposing Release at 21605 (suggesting the Disclosure Obligation could be satisfied, for example, at multiple points in the relationship or through a layered approach to disclosure, such as an initial disclosure conveying more general information regarding the material fact or conflict followed by more specific information in a subsequent disclosure). 539 See, e.g., Commonwealth Letter (supporting a layered disclosure approach that includes (i) the Relationship Summary at the inception of the relationship; (ii) the traditional disclosures included in account-opening agreements; (iii) product-specific point-of-sale disclosures (e.g., prospectuses and alternative investment offering documents); and (iv) more detailed disclosures on the firm’s website); IRI Letter (supporting a principlesbased disclosure regime, which leverages the benefits of layered disclosure to combat information overload); Morgan Stanley Letter (concurring with the Commission’s proposed layered approach to disclosure of material facts regarding the scope of the relationship with the client and fees, as well as material conflicts of interest associated with the recommendation); Stifel Letter; Mass Mutual Letter; Triad Advisors Letter; Investacorp Letter; Ladenburg Letter. 540 See, e.g., Study Regarding Financial Literacy Among Investors As Required by Section 917 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, August 2012 at
iv. A key finding of the SEC staff’s 917 study was that Investors favor “layered”
disclosure and, wherever possible, the use of a summary document containing key information about an investment product or service. That study described layered disclosure as an “approach to disclosure in which key information is sent or given to the investor and more detailed information is provided online and, upon request, is sent in paper or by e-mail.” See Enhanced Disclosure and New Prospectus Delivery Option for Registered Open-End Management Investment Companies, Securities Act Release No. 8998 (Jan. 13, 2009). This layered approach is “intended to provide investors with better ability to choose the amount and type of information to review, as well as the format in which to review it (online or paper).” Id. Other studies that considered the use of

We have considered these comments and results of investor testing and will continue to permit broker-dealers to use a layered approach to disclosure. We acknowledge that different investors have different preferences for the type and length of disclosures they receive, and that some investors may not read additional information provided in any particularized disclosure that supplements initial, standardized disclosure. Nonetheless, we believe that permitting brokerdealers to provide their retail customers with a standardized summary of information supplemented by more particularized information will help avoid the likelihood that retail customers receive a single, potentially voluminous disclosure document, and enable the many investors who prefer a shorter, summary document to have it available to them, with additional information available should they wish to have it. This approach to layering information is also consistent with our concurrent effort in Form CRS to provide retail investors with high level

hyperlinks for layered disclosure in proposed Form CRS suggested that retail investors are generally interested in receiving additional information, but recognized the possibility that retail investors may not click on a hyperlink. See, e.g., RAND 2018 (finding 58% of participants selecting “very likely” and another 32% selecting “somewhat likely” to click on a hyperlink relating to fees; although no other potential hyperlink generated a majority with “very likely” usage, other potential hyperlinks concerning services, conflicts and investor education generated a majority when combining responses of “very likely” and “somewhat likely” to click on the hyperlink). See also 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 (indicating 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).

information and context concerning key material facts, supplemented by additional layers of information regarding their relationship. We also continue to believe that broker-dealers should have flexibility in determining when to make disclosures and whether, in light of their retail customer base, certain material facts would be more effectively conveyed in a more general manner in an initial written disclosure accompanied or followed by more specific information in a separate disclosure. Similarly, we believe that providing broker-dealers with flexibility to best target their disclosures to their particular retail customer base will increase the likelihood that investors will view them. The Commission is not prescribing specific procedures obligating broker-dealers to fulfill the Disclosure Obligation in a particular way. Rather, Regulation Best Interest as adopted provides broker-dealers with flexibility to provide disclosures that are consistent with the various ways in which broker-dealers may already provide disclosure to their customers. 541 This could include, for example, providing multiple or “layered” disclosures either initially or over time, but that in total constitute full and fair disclosure of the information required by the Disclosure Obligation. While we are not setting forth a prescriptive approach regarding exactly when disclosures should be made as suggested by some commenters, we believe that a broker-dealer may determine that certain disclosures are most effective if they are made at multiple points of

541 See Proposing Release at 21605.

the relationship, or alternatively, certain material facts may be conveyed in a more general manner in an initial written disclosure accompanied or followed by more specific information.542 Updating Disclosures Several commenters recommend that the Commission clarify under what circumstances a broker-dealer would be required to update prior disclosures made pursuant to the Disclosure Obligation. 543 Among the suggestions are to only require broker-dealers to update their disclosures when there are material changes to the disclosed information;544 require brokerdealers to update their disclosures at least 30 days before raising or imposing new fees;545 and require broker-dealers to update their disclosures when changes are made, as well as annually. The Commission has carefully considered the commenters’ suggestions and is providing guidance on a broker-dealer’s duty to update disclosures made to customers under Regulation

542 See id.
543 See, e.g., LPL August 2018 Letter (recommending that the Commission provide additional guidance with respect to the updating and amendment requirements that apply to the Disclosure Obligation); CFA Institute Letter (recommending that the Commission require broker-dealers to provide updated disclosures at least 30 days before raising or imposing new fees); Bank of America Letter (recommending that the Commission require firms to update existing disclosures when there are changes to material conflicts of interest, as well as annually); NAIFA Letter (recommending that the Commission not require regular disclosure (e.g., quarterly, annual, etc.) of any new information items, unless the information has materially changed). 544 See NAIFA Letter. 545 See CFA Institute Letter. 546 See Bank of America Letter.

Best Interest. The Disclosure Obligation requires broker-dealers to provide their retail customers with full and fair disclosure of material facts related to several aspects of their relationship with their customers. Therefore, a broker-dealer cannot provide customers with full and fair disclosure if the disclosures contain materially outdated, incomplete, or inaccurate information. Additional disclosure will be necessary when any previously provided information becomes materially inaccurate, or when there is new relevant material information (e.g., a new material conflict of interest has arisen that is not addressed by the standardized disclosure).547 Therefore, a broker-dealer’s duty to update disclosures made to its customers under Regulation Best Interest is based on the facts and circumstances. While we are not prescribing an explicit timeframe in which required updates must be made, generally the Commission encourages broker-dealers to update their disclosures to reflect material changes or inaccuracies as soon as practicable, and thus generally should be no later than 30 days after the material change; in the meantime, broker-dealers are encouraged to provide, supplement, or correct any written disclosure with oral disclosure as necessary prior to or at the time of the recommendation. 548 However, if updated information is to be provided

547 See Proposing Release at 21605.
548 The 30-day period aligns with other requirements to update disclosures in similar contexts. For instance, NASD Notice to Members 92-11, Fees and Charges for Services (Feb. 1992) states that its member firms need to provide written notification to customers of all service charges when accounts are opened, and . . . written notification at least 30 days prior to the implementation or change of any service charge. Failure to do so could

either orally, or after a recommendation, such disclosure must be made under the circumstances outlined in Section II.C.1, Oral Disclosure or Disclosure After a Recommendation.
2. Care Obligation
We proposed the Care Obligation to require a broker-dealer, when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer, to exercise reasonable diligence, care, skill, and prudence to: (1) understand the potential risks and rewards associated with the recommendation, and have a reasonable basis to believe that the recommendation could be in the best interest of at least some retail customers; (2) have a reasonable basis to believe that the recommendation is in the best interest of a particular retail customer based on that retail customer’s investment profile and the potential risks and rewards associated with the recommendation; and (3) have a reasonable basis to believe that a series of recommended transactions, even if in the retail customer’s best interest when viewed in isolation, is not excessive and is in the retail customer’s best interest when taken together in light of the retail customer’s investment profile. As we indicated in the Proposing Release, the Care Obligation was intended to incorporate and enhance existing suitability requirements applicable to broker-dealers under the federal securities laws by, among other

be construed as conduct inconsistent with just and equitable principles of trade under FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade).

things, imposing a “best interest” requirement that will require a broker-dealer to not place its own interest ahead of the retail customer’s interest, when making recommendations.549 Commenters generally supported the proposed Care Obligation, including its principlesbased approach, but many commenters requested additional guidance or clarification on how a broker-dealer could satisfy the Care Obligation under different circumstances and regarding specific products.550 Relatedly, several commenters requested further guidance regarding the role of costs and other relevant factors when making a best interest determination, 551 while other commenters expressed concern over the usage of the term “prudence”552 or expressed concern that Regulation Best Interest is not a major change from FINRA’s suitability rule.553 Numerous commenters also requested clarification on the meaning and scope of “reasonably available alternatives” and “otherwise identical securities,” including how the phrase “reasonably available alternatives” would apply in situations where a broker-dealer operated in an open architecture

549 As discussed in the Fiduciary Interpretation, the duty of care of the investment adviser’s fiduciary duty includes a duty to provide investment advisory services that are in the best interest of the client. See Fiduciary Interpretation at footnote 34. 550 See, e.g., NASAA August 2018 Letter; Cambridge Letter; BlackRock Letter. 551 See, e.g., Wells Fargo Letter; Primerica Letter; CFA Institute Letter. 552 See, e.g., BISA Letter; Raymond James Letter; Transamerica August 2018 Letter. 553 See, e.g., CFA August 2018 Letter (stating “[n]owhere does the Commission explain how the standard differs from, or even whether it improves upon, the existing suitability standard under FINRA rules”); AFL-CIO April 2019 Letter (stating “that the intent of [proposed Regulation Best Interest] is to codify, rather than enhance, protections investors currently receive under FINRA’s suitability standard”).

environment,554 or maintained a limited product menu such as where broker-dealers limited available offerings to proprietary products.555 Finally, several commenters recommended the Commission include other factors in building a retail customer’s investment profile, such as longevity risk,556 market risk,557 or income profile.558 We are adopting the Care Obligation substantially as proposed, but with certain modifications and additional guidance to address comments. As discussed in more detail below, in response to comments, we are revising the Care Obligation to remove the term “prudence,” as we have concluded that its inclusion creates legal uncertainty and confusion, and it is redundant of what we intended in requiring a broker-dealer to exercise “diligence, care, and skill,” and its removal does not change the requirements under the Care Obligation. Accordingly, the Care Obligation will require broker-dealers to “exercise reasonable diligence, care, and skill” to meet the three components of the Care Obligation.

554 For purposes of this requirement, we use the term “open architecture” to mean a firm’s product menu that includes both third-party and proprietary products, or as a concept wherein a firm offers a large range of products to their retail customers that are not limited, for example, to a small list of approved managers or funds (i.e., a product menu that is not limited to proprietary products or otherwise constrained to certain retail customers or registered representatives). See generally FINRA 2013 Conflicts Report; Morgan Stanley Letter. 555 See, e.g., Fidelity Letter; ICI Letter; LPL August 2018 Letter; SIFMA August 2018 Letter; Prudential Letter; Morningstar Letter. 556 See, e.g., CCMC Letters; Lincoln Financial Letter; Pacific Life August 2018 Letter. 557 See, e.g., Jackson National Letter. 558 See, e.g., Lincoln Financial Letter.

In addition, after careful consideration of the comments received, we are expressly adding cost to the rule text as a factor that a broker-dealer must consider in fulfilling the Care Obligation. While certain commenters expressed concerns about the prominence of cost and how cost would be balanced against other factors under the Care Obligation,559 other commenters supported incorporating cost into the rule text.560 As noted in the Relationship Summary Adopting Release, participants in investor testing and roundtables also overwhelmingly supported including fees in the Relationship Summary, and believed that the “fees and costs” section was the most important for determining which type of investment accounts and services are right for that person.561 We believe that while the factors that a brokerdealer should understand and consider when making a recommendation may vary depending

559 See, e.g., ICI Letter; Putnam Letter; Morgan Stanley Letter; Letter from Eric R. Dinallo, Executive Vice President, General Counsel, Guardian Life (Aug. 7, 2018) (“Guardian August 2018 Letter”) (cautioning against inclusion of “costs” into rule text or overemphasizing its importance). 560 See, e.g., AFL-CIO April 2019 Letter (stating “If, as has been suggested, one goal is to ensure that brokers give greater consideration to costs in determining what investments to recommend, [Regulation Best Interest] should incorporate an explicit requirement to consider costs in the rule text.”); NASAA August 2018 Letter; U. of Miami Letter (supporting addition of “costs” into rule text). See also CFA August 2018 Letter (supporting the Commission’s emphasis of cost and associated financial incentives as more important factors, and stating “[t]his requirement would be clearer, however, if it were incorporated into the rule text, which requires the broker to consider the ‘potential risks and rewards associated with the recommendation,’ rather than the material characteristics, including costs, of the recommended investment or investment strategy.”). 561 See Relationship Summary Adopting Release.

upon the particular product or strategy recommended, cost—along with potential risks and rewards—will always be a relevant factor that will bear on the return of the security or investment strategy involving securities. 562 This would include, for example, both costs associated with the purchase of the security, as well as any costs that may apply to the future sale or exchange of the security, such as deferred sales charges or liquidation costs. Elevating cost to the rule text clarifies that this factor must always be considered when making a recommendation. Thus, a broker-dealer, in fulfilling its obligation to make a recommendation in the best interest of its retail customer, must exercise reasonable diligence, care, and skill to understand the “potential risks, rewards, and costs” associated with the recommendation and have a reasonable basis to believe that the recommendation is in the best interest of the retail customer based on these factors. Importantly, however, while cost, like potential risks and rewards, is always a factor that a broker-dealer must consider in making a recommendation, it is not a dispositive factor and its inclusion in the rule text is not meant to limit or foreclose the recommendation of a more costly or complex product that a broker-dealer has a reasonable basis to believe is in the best interest of a particular retail customer.563 Moreover, we are reiterating that the standard does not

562 See Vanguard Letter (“We agree that costs and remuneration should play a central role in meeting the revise best interest standards. Cost is a critical factor because of its compounding effect upon performance.”). 563 See Proposing Release at 21587-21589; 21610-21612.

necessarily require the lowest cost option, and that while cost is an important factor that always needs to be taken into consideration in making a recommendation, it is not the only one.564 Rather, as explained more fully below, the evaluation of cost would be more analogous to a broker-dealer’s best execution analysis, which does not require the lowest possible cost, but rather looks at whether the transaction represents the best qualitative execution for the customer using cost as one factor. Several commenters expressed concern over the emphasis of “cost” and suggested that, for example, more emphasis be placed on additional or subjective factors beyond specific product attributes.566 Those commenters stated that the emphasis on cost may discourage certain products or investment strategies. Our intent is not to discourage or otherwise limit the

564 See Proposing Release at 21610.
565 Under the antifraud provisions of the federal securities laws and SRO rules, brokerdealers have a legal duty to seek to obtain best execution of customer orders. See Regulation NMS, Exchange Act Release No. 51808 (Jun. 9, 2005) (“Regulation NMS Release”); FINRA Rule 5310 (Best Execution and Interpositioning). A broker-dealer’s duty of best execution requires a broker-dealer to seek to execute customers’ trades at the most favorable terms reasonably available under the circumstances. See Regulation NMS Release at 160; see also Proposing Release at 21615. Certain commenters pointed to best execution analysis as an example of a rule or guidance that is facts-and-circumstancesbased. See, e.g., CFA August 2018 Letter (“Just as compliance with the best execution standard will not always be met by sending trades to the exchange where the lowest cost is displayed, compliance with a best interest standard will not always be satisfied by recommending the lowest cost option.”). 566 See, e.g., ICI Letter; BlackRock Letter; Putnam Letter; Transamerica August 2018 Letter; Northwestern Mutual Letter; see also Vanguard Letter (recognizing the importance of cost, but urging the Commission to maintain a principles-based approach recognizing the importance of “holistic advice that necessarily contemplates factors beyond cost.”).

recommendation of products or investment strategies where a broker-dealer concludes that the recommendation is in the best interest of the retail customer. Instead, we believe that cost will always be relevant to a recommendation and accordingly should be a required consideration as set forth in the rule text. It should never be the only consideration. Additional factors such as those cited by commenters also should be taken into consideration as the broker-dealer formulates a recommendation consistent with the best-interest standard. Though we are declining to expressly define “best interest” in the rule text, as discussed above,568 we are providing guidance regarding the application of the Care Obligation and in particular what it means to make a recommendation in the retail customer’s “best interest.” In addition, to emphasize the importance of determining that each recommendation is in the best interest of the retail customer and that it does not place the broker-dealer’s interests ahead of the retail customer’s interests, we are expressly incorporating into the rule text of Paragraph (a)(2)(ii)(B) and Paragraph (a)(2)(ii)(C) of Regulation Best Interest that a broker-dealer must

567 See, e.g., BlackRock Letter (citing consideration of investors’ needs and desired outcomes relative to service offerings of several different managers); Vanguard Letter (“considerations include important factors such as product structure, investment features, liquidity, volatility, issuer reputation, brand and business practices (securities lending activities, portfolio tracking error, or usage of derivatives in a portfolio)”); ICI Letter (citing several subjective factors, such as the “nature and quality of a provider’s services (including advantages to the investor of consolidating investments as a single firm, such as higher levels of service that may be offered), minimum initial investments, and firm reputation”); FIBA February 2019 Letter (citing “highly personalized non-economic reasons underlying cross-border investment”). 568 See Section II.A.2.

have a reasonable basis to believe that the recommendation “does not place the financial or other interest of the [broker-dealer]… ahead of the interest of the retail customer.” While we acknowledge that a broker-dealer and an associated person can and will have some financial interest in a recommendation, as noted above, this addition to the Care Obligation makes clear these interests cannot be placed ahead of the retail customer’s interests when making a recommendation. Finally, we believe that by explicitly requiring in the rule text that the broker-dealer have a reasonable basis to believe that a recommendation is both in the retail customer’s “best interest” and does “not place the financial or other interest” of the broker-dealer ahead of the retail customer’s interests, we are enhancing the Care Obligation by imposing obligations beyond existing suitability obligations. Under existing suitability requirements, a broker-dealer is required to make recommendations that are “suitable” for the customer. While certain cases and guidance have interpreted FINRA’s suitability rule to require that “a broker's recommendations must be consistent with his customers' best interests,” and FINRA has further interpreted the requirement to be “consistent with the customer’s best interest” to prohibit a broker-dealer from placing his or her interests ahead of the customer's interests, this obligation is not explicitly

569 See id. See also AFL-CIO April 2019 Letter (noting “Adopting a standard that explicitly states that brokers are prohibited form placing their own interests ahead of the retail customer’s interests reinforces [investors’ reasonable expectations that the financial professionals they rely on for investment advice will put their interests first]” and asserting that “a requirement to place the customer’s interests ahead of the brokers’ interests must be included in the operational provisions of Reg BI….”).

required by FINRA’s rule (or its supplementary material), nor does the interpretation require recommendations to be in the best interest (as opposed to “consistent with the best interest”) of a retail customer. 570 We believe that requiring recommendations to be in the best interest is declarative of what must be done, and therefore stronger than, requiring recommendations to be “consistent with” the best interest of the retail customer, which we believe at a minimum creates ambiguity as to whether the recommendation must be in the retail customer’s best interest or something less. The Care Obligation significantly enhances the investor protection provided as compared to current suitability obligations by: (1) explicitly requiring in Regulation Best Interest that recommendations be in the best interest of the retail customer and do not place the brokerdealer’s interests ahead of the retail customer’s interests; (2) explicitly requiring by rule the

570 See FINRA Regulatory Notice 12-25 at Q1. See also FINRA Letter to Senators Warren, Brown, and Booker (Aug. 3, 2018) (“FINRA 2018 Letter”) (stating that “[w]hile FINRA’s suitability rule implicitly requires a broker-dealer’s recommendations to be consistent with customer’s best interests, the SEC’s proposed best interest standard explicitly establishes the customer’s best interest as an overarching standard of care for broker-dealers.” (internal citations omitted)). Some commenters have also made this point. See, e.g., CFA August 2018 Letter (“In enforcing that standard, however, FINRA has only rarely and very narrowly enforced the obligation to do what is best for the customer—typically in cases that involve recommending the most appropriate share class of a particular mutual fund. . . . Indeed, as we detailed in our July 2015 comment letter to the Department of Labor, most of the cases in which FINRA and the Commission have asserted an obligation for brokers to act in customers’ best interest have involved egregious frauds rather than questions of whether customers’ best interests were being served.”). 571 See, e.g., CFA August 2018 Letter.

consideration of costs when making a recommendation; and (3) applying the obligations relating to a series of recommended transactions (currently referred to as “quantitative suitability”) irrespective of whether a broker-dealer exercises actual or de facto control over a customer’s account. 572 In addition, it is our view that a broker-dealer should consider “reasonably available alternatives” as part of having a “reasonable basis to believe” that the recommendation is in the best interest of the retail customer, which we also believe is an enhancement beyond existing suitability expectations. a. Exercise Reasonable Diligence, Care, and Skill A broker-dealer is required to “exercise reasonable diligence, care, and skill” to satisfy the three components of the Care Obligation set forth in Regulation Best Interest. In the

572 See FINRA 2018 Letter (noting that proposed Regulation Best Interest augments and enhances current requirements by, among other things: “explicitly impos[ing] a ‘best interest’ standard, making clear that a broker-dealer cannot put its interests ahead of the interests of its customers. While FINRA’s suitability rule implicitly requires a brokerdealer’s recommendations to be consistent with customers’ best interests, the SEC’s proposed best interest standard explicitly establishes the customer's best interest as an overarching standard of care for broker-dealers;” “explicitly requir[ing] broker-dealers to consider ‘reasonably available alternatives’ to a recommended security and justify any choice of a more costly product. … Although case law and FINRA guidance establish cost and available alternatives as factors to consider as part of a FINRA suitability assessment, particularly regarding mutual fund share classes, proposed Reg Bl expressly establishes the significance of these factors”; and “remov[ing] the ‘control’ element for purposes of quantitative suitability, which would make this obligation more enforceable.”) (internal citations omitted). 573 See infra Section II.C.2.c, Application of the Care Obligation – Reasonably Available Alternatives and Otherwise Identical Securities.

Proposing Release, we included “prudence,” and explained that “prudence” “conveys the fundamental importance of conducting a proper evaluation of any securities or investment strategy recommendation in accordance with an objective standard of care.”574 Further, we solicited comment on all aspects of the Care Obligation, and also asked specifically whether there was adequate clarity and understanding regarding the term “prudence,” or whether other terms were more appropriate in the context of broker-dealer regulation. Several commenters supported adopting a principles-based obligation, thus requiring the broker-dealer to assess the adequacy of a recommendation based on the facts and circumstances of each recommendation.575 We also received numerous comments asking for further guidance relating to recommendations of specific securities or asking how the Care Obligation applies to certain factual scenarios.576 With respect to the term “prudence,” a number of comments requested removal of the term, stating that such language is unnecessary given the other requirements to satisfy the Care Obligation, as well as the fact that the term introduces legal confusion and uncertainty.577 Other commenters supported the use of the term “prudence”

574 Proposing Release at 21609.
575 See, e.g., SIFMA August 2018 Letter; Vanguard Letter; Morningstar Letter; Edward Jones Letter. 576 See, e.g., SIFMA August 2018 Letter; Direxion Letter; Chapman Letter. 577 See, e.g., Primerica Letter (stating “….the term [prudence] raises numerous interpretative issues and compliance risks. Regulatory and judicial interpretations of ERISA ‘prudence’ and its requirements abound, but these are exclusive to employee benefit plan duties and do not address duties with respect to retail accounts for individual

because they believed that Regulation Best Interest’s component obligations generally rested on a “prudence” standard or maintained that the Care Obligation “echoes elements found in the common law ‘prudent person rule,’” and thus thought its addition was appropriate to capture, or describe, these obligations. After careful consideration of comments, we are revising the Care Obligation to remove the term “prudence.” Accordingly, the Care Obligation will require broker-dealers to “exercise reasonable diligence, care, and skill” to meet the three components of the Care Obligation. We

customers.”); Transamerica August 2018 Letter (“The term ‘prudence’ is one used primarily in the ERISA context and is not generally used in the federal securities laws. We believe inclusion of the term ‘prudence’ in describing the care obligation is unnecessary and could lead to confusion in interpretation of the care obligation set forth in the Proposal”); IPA Letter (“‘Prudence’ is an ERISA term based on trust law that is not generally used under the federal securities laws”). See also Fein Letter (discussing that the “duties of loyalty and care are the core fiduciary standards that apply across all fiduciary fields, including trust law, agency law, and employee benefits law;” that “[b]oth of these duties are reflected in the existing regulation of broker-dealers and investment advisers when they give investment advice to retail customers;” and that the “duty of care—also called ‘prudence’—requires a fiduciary to act with care, skill and diligence in fulfilling his designated functions.”) (internal citations omitted). 578 See LPL August 2018 Letter (“We believe that each of the four component obligations identified in Regulation BI generally rests on a ‘prudence’ standard that is the foundation of the common law principles and the Federal law that have governed the activities of financial services providers for decades. The obligation to provide prudent recommendations that are appropriate for an investor’s circumstances is a principal component of the suitability obligations that apply to investment advisers under the [Advisers Act]” (internal citations omitted); FPC Letter (stating that “the duty of care, as described by both Reg BI and CFP Board Standards, echoes elements found in the common law ‘prudent person rule’ which can serve to measure the reasonableness of a prudent professional’s actions….”); see also CFA August 2018 Letter; NAIFA Letter.

are persuaded by commenters that its inclusion in the proposed rule text to satisfy the components of the Care Obligation is superfluous and unnecessarily presents the possibility for confusion and legal uncertainty.579 We believe requiring broker-dealers “to exercise reasonable diligence, care, and skill” conveys “the fundamental importance of conducting a proper evaluation of any securities recommendation in accordance with an objective standard of care”580 that was intended by the inclusion of “prudence.” Removing “prudence” does not lessen nor otherwise change the requirements or our expectations under the Care Obligation, or Regulation Best Interest more broadly as it was duplicative of the phrase “diligence, care, and skill.”581 The revised obligation, in requiring the broker-dealer to “exercise[] reasonable diligence, care and skill” and to have a “reasonable basis to believe that the recommendation is in the best interest…and does not place” the interest of the broker-dealer ahead of the interest of the retail customer, will continue to require an analysis that is comparable to the notion of “prudence” as described in other regulatory frameworks, 582 but does so using the terms “diligence, skill, and

579 See supra footnote 577.
580 Proposing Release at 21609.
581 See, e.g., LPL August 2018 Letter (noting that the component obligations of Regulation Best Interest generally rest on “prudence” concepts); Fein Letter. 582 See Fein Letter (stating that the “duty of care—also called ‘prudence’—requires a fiduciary to act with care, skill and diligence in fulfilling his designated functions”) (citing Restatement 3d of Agency, § 8.08 Duties of Care, Competence, and Diligence (“[s]ubject to any agreement with the principal, an agent has a duty to the principal to act with care, competence, and diligence normally exercised by agents in similar circumstances….”)). The DOL interpreted “prudence” to represent “an objective standard

care”—terminology with which broker-dealers are familiar and that is well understood under the federal securities laws. 583 As such, we believe that the revised language will minimize the potential confusion and legal uncertainty created by using a term that is predominantly interpreted in other legal regimes, 584 and will aid broker-dealers in achieving compliance with Regulation Best Interest as well as permit broker-dealers to utilize existing compliance and supervisory systems that already rely on this language. Moreover, we note that certain commenters’ support for the term “prudence” was based on our interpretation of the Care Obligation in the Proposing Release.585 As noted above, the removal of the term “prudence” does not change the obligations or our interpretation of the Care Obligation, which we believe are addressed by the “diligence, care, and skill” language and through Regulation Best Interest more broadly. In light of concerns regarding legal uncertainty associated with the term “prudence,” and our view that its inclusion or removal would not

of care that requires investment advice fiduciaries to investigate and evaluate investments, make recommendations, and exercise sound judgment in the same way that knowledgeable and impartial professionals would.” BIC Exemption Release, 81 FR 21208 at 21028-21029. 583 See, e.g., Proposing Release at 21595, 21609-21613. The discussion that follows addresses what it means to “exercise reasonable diligence, care, and skill” in the context of each aspect of the Care Obligation. 584 See supra footnote 577. 585 See, e.g., NAIFA Letter.

change the requirements or expectations of Regulation Best Interest, we have determined to remove it from the rule text. Finally, in response to comments, we are retaining the facts-and-circumstances determination for the reasons set forth in the Proposing Release,586 and providing additional guidance on the application of the components of the Care Obligation with respect to certain securities and under certain scenarios. As we noted in the Proposing Release, such an approach is consistent with how broker-dealers are currently regulated with respect to the suitability of their recommendations and would allow broker-dealers to utilize and incorporate pre-existing compliance systems. In addition, this approach is generally consistent with the principles-based approach applicable to the duty of care of investment advisers. b. Understand potential risks, rewards, and costs associated with recommendation, and have a reasonable basis to believe that the recommendation could be in the best interest of at least some retail customers. Under the proposed “reasonable basis” component of the Care Obligation, broker-dealers would be required to understand the potential risks and rewards of the recommendation and have a reasonable basis to believe that the recommendation could be in the best interest of at least

586 Proposing Release at 21587 (“[W]e preliminarily believe that whether a broker-dealer acted in the best interest of the retail customer when making a recommendation will turn on the facts and circumstances of the particular recommendation and the particular retail customer, along with the facts and circumstances of how the four specific components of Regulation Best Interest are satisfied.”). 587 See Fiduciary Interpretation.

some retail customers. Although potential costs were not specifically included in the proposed rule text as a factor to be considered as part of a recommendation, the Proposing Release identified potential costs associated with a recommendation as an important factor to understand and consider as part of making a recommendation, and likewise as a key factor to consider when evaluating whether or not a broker-dealer had a reasonable basis to believe it was acting in the best interest of the retail customer when making the recommendation.588 After careful consideration of comments, the Commission is adopting, for the reasons set forth in the Proposing Release, Paragraph (a)(2)(ii)(A) of the Care Obligation substantially as proposed. However, as discussed above, in addition to requiring broker-dealers to understand the potential risks and rewards associated with the recommendation, we are also expressly requiring them to understand and consider the potential costs associated with a recommendation. Elevating costs to the rule text is consistent with a number of commenters’ recommendations and, importantly, stresses that cost will always be a salient factor to be considered when making a recommendation.589 Additionally, this requirement that the broker-dealer understands and considers costs is a distinct enhancement over existing reasonable basis suitability obligations, which do not expressly require this consideration.590 Nevertheless, we recognize—and emphasize—that cost is one important factor among many factors, and thus provide additional

588 See Proposing Release at 21609-21612. See also supra footnote 572.
589 See, e.g., AFL-CIO April 2019 Letter; NASAA August 2018 Letter; U. of Miami Letter. 590 See supra footnote 572.

guidance below regarding the importance of weighing and considering costs in light of other relevant factors and the retail customer’s investment profile. Paragraph (a)(2)(ii)(A) of Regulation Best Interest is intended to incorporate and build upon broker-dealer’s existing “reasonable-basis suitability” obligations and would relate to the broker-dealer’s understanding of the particular security or investment strategy recommended, rather than to any particular retail customer. Without establishing such a threshold understanding of its particular recommended security or investment strategy involving securities, we do not believe that a broker-dealer could, as required by Regulation Best Interest, have a reasonable basis to believe that it is acting in the best interest of a retail customer when making a recommendation.591 In order to meet the requirement under Paragraph (a)(2)(ii)(A), a broker-dealer would need to undertake reasonable diligence, care, and skill to understand the nature of the recommended security or investment strategy involving a security or securities, as well as the potential risks, rewards—and now costs—of the recommended security or investment strategy, and have a reasonable basis to believe that the recommendation could be in the best interest of at least some retail customers based on that understanding. A broker-dealer must adhere to both components of Paragraph (a)(2)(ii)(A). For example, a broker-dealer could violate the obligation by not understanding the potential risks, rewards, or costs of the recommended security or

591 See Proposing Release at 21609-21610 (for further discussion regarding this requirement).

investment strategy, even if the security or investment strategy could have been in the best interest of at least some retail customers. Conversely, even if a broker-dealer understands the recommended security or investment strategy, the broker-dealer must still have a reasonable basis to believe that the security or investment strategy could be in the best interest of at least some retail customers. What would constitute reasonable diligence, care, and skill under Paragraph (a)(2)(ii)(A) will vary depending on, among other things, the complexity of and risks associated with the recommended security or investment strategy and the broker-dealer’s familiarity with the recommended security or investment strategy.592 While every inquiry will be specific to the particular broker-dealer and the recommended security or investment strategy, broker-dealers generally should consider important factors such as the security’s or investment strategy’s investment objectives, characteristics (including any special or unusual features), liquidity, volatility, and likely performance in a variety of market and economic conditions; the expected return of the security or investment strategy; as well as any financial incentives to recommend the security or investment strategy. Together, this inquiry should allow the broker-dealer to develop a sufficient understanding of the security or investment strategy and to be able to reasonably believe that it could be in the best interest of at least some retail customers.

592 See FINRA Rule 2111.05(a).

This “reasonable-basis” component of the Care Obligation is especially important when broker-dealers recommend securities and investment strategies that are complex or risky.593 For example, in recent years, the Commission staff and FINRA have addressed broker-dealer sales practice obligations under existing law relating to complex products, such as inverse or leveraged exchange-traded products. 594 These products, which may be useful for some sophisticated trading strategies, are highly complex financial instruments and are typically designed to achieve their stated objectives on a daily basis.595 However, because of the effects of compounding, the performance of these products over longer periods of time can differ significantly from their

593 See FINRA Rule 2111 (Suitability) FAQ at Q5.1 (“The reasonable-basis obligation is critically important because, in recent years, securities and investment strategies that brokers recommend to customers, including retail investors, have become increasingly complex and, in some cases, risky.). See also SEC v. Hallas, No. 17-cv-02999 (S.D.N.Y. filed Apr. 25, 2017). 594 See FINRA Regulatory Notice 09-31, Non-Traditional ETFs – FINRA Reminds Firms of Sales Practice Obligations Relating to Leveraged and Inverse Exchange-Traded Funds (June 2009); SEC staff and FINRA, Investor Alert, Leveraged and Inverse ETFs:
Specialized Products with Extra Risks for Buy-and-Hold Investors (Aug. 1, 2009); SEC Office of Investor Education and Advocacy, Investor Bulletin: Exchange-Traded Funds (ETFs) (Aug. 2012). 595 See id. See also Exchange-Traded Funds, Securities Act Release No. 10515 (Jun. 28, 2018); Use of Derivatives by Registered Investment Companies and Business Development Companies, Investment Company Act Release No. 31933 (Dec. 11, 2015) [80 FR 80883 (Dec. 28, 2015)] (“Derivatives Proposing Release”); Direxion Letter (recognizing that leveraged ETFs are not appropriate for all customers, and thus the importance for broker-dealers to perform sufficient diligence to adequately “understand the terms and features of such funds, including how they are designed to perform, how they achieve that objective, and the impact that market volatility, the ETF’s use of leverage, and the customer’s intended holding period will have on their performance”).

stated daily objectives. Thus, broker-dealers recommending such products should understand that inverse and leveraged exchange-traded products that are reset daily may not be suitable for, and as a consequence also not in the best interest of, retail customers who plan to hold them for longer than one trading session, particularly in volatile markets.596 Without understanding the terms, features, and risks of inverse and leveraged exchange-traded products—as with the potential risks, rewards, and costs of any security or investment strategy—a broker-dealer could not establish a reasonable basis to recommend these products to retail customers.597 Further, these products may not be in the best interest of a retail customer absent an identified, short-term, customer-specific trading objective. Similarly, when a broker-dealer recommends a potentially high risk product to a retail customer—such as penny stocks or other thinly-traded securities— the broker-dealer should generally apply heightened scrutiny to whether such investments are in a retail customer’s best interest.

596 See supra footnotes 593 - 595.
597 See id.
598 See, e.g., FINRA Regulatory Notice 17-32, Volatility-Linked Exchange Traded Products – FINRA Reminds Firms of Sales Practice Obligations for Volatility-Linked ExchangeTraded Products (Oct. 2017) (explaining that “The level of reasonable diligence that is required will rise with the complexity and risks associated with the security or strategy. With regard to a complex product such as a volatility-linked ETP, an associated person should be capable of explaining, at a minimum, the product’s main features and associated risks.”); FINRA Regulatory Notice 12-03, Complex Products – Heightened Supervision of Complex Products (Jan. 2012) (stating that “Reasonable diligence must provide the firm or registered representative ‘with an understanding of the potential risks and rewards associated with the recommended security or strategy.’ This understanding

Finally, several commenters expressed concern about the applicability of Regulation Best Interest to variable annuities and variable life insurance products.599 Variable annuities and variable life insurance products have generated special attention from regulators and their staff, such as statements regarding sales practice obligations and specific FINRA rules relating to the recommendation of variable annuities.600 These variable insurance products are often unique and have different features depending on the company providing the product, as well as depending on the chosen investment options, benefits, fees and expenses, liquidity restrictions, and other considerations.601 Consistent with existing FINRA rules and existing suitability obligations under the federal securities laws and SRO rules, regulators and their staffs have stated that recommendations of these products would require careful attention and a specific

should be informed by an analysis of likely product performance in a wide range of normal and extreme market actions. The lack of such an understanding when making the recommendation could violate the suitability rule.”) (internal citations omitted). 599 See related discussion in Section II.C.2.c, Retail Customer Investment Profile. 600 See, e.g., FINRA Rule 2330, Members Responsibilities Regarding Deferred Variable Annuities; FINRA Rule 2320, Variable Contracts of Insurance Companies; FINRA Regulatory Notice 10-05, Deferred Variable Annuities – FINRA Reminds Firms of Their Responsibilities Under FINRA Rule 2330 for Recommended Purchases or Exchange of Deferred Variable Annuities (Jan. 2010); SEC Updated Investor Bulletin: Variable Annuities (Oct. 30, 2018); SEC Investor Bulletin: Variable Life Insurance (Oct. 30, 2018). 601 See id. See also Updated Disclosure Requirements and Summary Prospectus for Variable Annuity and Variable Life Insurance Contracts, Investment Advisers Act Release No. 10569 (Oct. 30, 2018) [83 FR 61730 (Nov. 30, 2018)] (“VA Summary Prospectus Proposal”).

understanding of certain factors, such as whether the product provides tax-deferred growth, or a death or living benefit, before a broker-dealer could establish an understanding of the product, and apply that understanding to a retail customer’s investment profile in making a recommendation. While we stress the importance of understanding the potential risks, rewards, and costs associated with a recommended security or investment strategy, as well as other factors depending on the facts and circumstances of each recommendation, we do not intend to limit or foreclose broker-dealers from recommending complex or more costly products or investment strategies where the broker-dealer has a reasonable basis to believe that a recommendation could be in the best interest of at least some retail customers and the broker-dealer has developed a proper understanding of the recommended product or investment strategy. As discussed below, once a broker-dealer develops an appropriate understanding of a securities product or investment strategy, including its potential costs, and believes it could be in the best interest of at least some retail customers, the broker-dealer will then need to apply that understanding to reasonably determine that the recommended product or investment strategy is in the particular retail customer’s best interest at the time of the recommendation.
c. Have a Reasonable Basis to Believe the Recommendation is in the Best
Interest of a Particular Retail Customer Based on that Retail Customer’s Investment Profile and the Potential Risks, Rewards, and Costs Associated with the Recommendation and Does Not Place the Interest of the BrokerDealer Ahead of the Interest of the Retail Customer In the Proposing Release, we stated that beyond establishing an understanding of the recommended securities transaction or investment strategy, in order to act in the best interest of the retail customer, a broker-dealer would be required to have a reasonable basis to believe that a specific recommendation is in the best interest of the particular retail customer based on its

understanding of the investment or investment strategy under Paragraph (a)(2)(ii)(A), and in light of the retail customer’s investment objectives, financial situation, and needs. Accordingly, under proposed paragraph (a)(2)(ii)(A), the second sub-component of the Care Obligation would require a broker-dealer to “exercise reasonable diligence, care, skill, and prudence to … have a reasonable basis to believe that the recommendation is in the best interest of a particular retail customer based on that retail customer’s investment profile and the potential risks and rewards associated with the recommendation.” In the Proposing Release, the Commission further articulated that under this standard, a broker-dealer could not have a reasonable basis to believe that the recommendation is in the “best interest” of the retail customer, if the broker-dealer put its interest ahead of the retail customer’s interest. This was intended to incorporate a brokerdealer’s existing well-established obligations under “customer-specific suitability,” but also to enhance these obligations by requiring that the broker-dealer have a reasonable basis to believe that the recommendation is in the “best interest” of (rather than “suitable for”) the retail customer. Commenters largely supported the Commission’s proposed approach, but several commenters requested clarifying guidance regarding the importance of costs and other specific factors in a “best interest” evaluation, as well as more broadly how “best interest” was to be determined.602 For example, several commenters requested additional guidance on the role of costs and other “relevant factors,” including subjective and qualitative factors such as

602 See, e.g., Wells Fargo Letter; Primerica Letter; Great-West Letter; NASAA August 2018 Letter; Cambridge Letter; BlackRock Letter.

shareholder support services, redemption procedures, or qualifications of the investment adviser.603 Similarly, several commenters asked for clarification that “best interest” does not necessarily mean the lowest cost option or require the broker-dealer to look at every single possible security.604 Commenters also requested further direction regarding guidance in the Proposing Release related to the consideration of “reasonably available alternatives” and “otherwise identical securities,” and requested certain modifications to the definition of “Retail Customer Investment Profile.”605 After careful consideration of these comments, for the reasons set forth in the Proposing Release, the Commission is adopting the “customer specific” component of the Care Obligation substantially as set forth in the Proposing Release. However, as included under the reasonable basis component of the Care Obligation and for the reasons discussed above, the Commission is expressly incorporating “costs” into the rule text to emphasize that broker-dealers must consider the potential costs associated with a recommendation to a particular retail customer. As noted above, the Commission is also incorporating into the rule text that brokerdealers must have a reasonable basis to believe that the recommendation “does not place the

603 See Chapman Letter; BlackRock Letter; Vanguard Letter; ICI Letter; Morgan Stanley Letter. 604 See Great-West Letter; SIFMA August 2018 Letter. 605 See, e.g., Committee of Annuity Insurers Letter; Guardian August 2018 Letter; IPA Letter; Morgan Stanley Letter; Invesco Letter; CFA August 2018 Letter.

financial or other interest of the broker-dealer ahead of the interest of the retail customer.”606 This addition is intended to make clear that while a broker-dealer typically will have some interest in a recommendation, the broker-dealer cannot put that interest ahead of the retail customer’s interest when making the recommendation. To address feedback from commenters, the Commission is also providing further interpretations and guidance regarding the application of the Care Obligation, and in particular, what it means to make a recommendation in a retail customer’s best interest and not place the broker-dealer’s interest ahead of the retail customer’s interest. Specifically, recognizing that a facts and circumstances evaluation of a recommendation makes it difficult to draw bright lines around whether a particular recommendation would meet the Care Obligation, the Commission is providing further interpretations and guidance on how a broker-dealer could have a “reasonable basis to believe” that a recommendation is in the best interest of its retail customer and does not place the broker-dealer’s interest ahead of the retail customer’s interest, as well as circumstances when we believe that a broker-dealer could not have such a reasonable belief. Factors to Consider Regarding a Recommendation to a Particular Retail Customer and Relevance of Cost Consistent with paragraph (a)(2)(ii)(A) of the Care Obligation, we are incorporating “costs” in the rule text of paragraph (a)(2)(ii)(B) of Regulation Best Interest as a relevant factor that, in addition to risks and rewards, must always be understood and considered by the broker-

606 See related discussion in Section II.A.2; see also Fiduciary Interpretation.

dealer prior to recommending a particular securities transaction or investment strategy involving securities to a particular retail customer. As discussed above, under paragraph (a)(2)(ii)(A) of the Care Obligation, a broker-dealer will be required to exercise reasonable diligence, care, and skill to understand the potential risks, rewards, and costs of a recommended security or investment strategy and have a reasonable basis to believe that it could be in the best interest of at least some retail customers.607 Paragraph (a)(2)(ii)(B) of the Care Obligation builds on this obligation and will require a broker-dealer to have a reasonable basis to believe, based on its understanding of the potential risks, rewards, and costs of the recommendation, and in light of the retail customer’s investment profile, that the recommendation is in the best interest of a particular retail customer and does not place the broker-dealer’s interest ahead of the retail customer’s interest. Accordingly, when making a recommendation to a particular retail customer, broker-dealers must weigh the potential risks, rewards, and costs of a particular security or investment strategy, in light of the particular retail customer’s investment profile. As discussed above,608 a broker-dealer’s diligence, care, and skill to understand the potential risks, rewards, and costs of a security or investment strategy should generally involve a consideration of factors, depending on the facts and circumstances of the particular recommendation and the particular retail customer’s investment profile, as discussed below.

607 See Proposing Release at 21610-21611.
608 See related discussion in Section II.C.2.a and Section II.C.2.b.

While the factors noted above are examples of important factors to consider based on the particular security or investment strategy, this list is not exhaustive and additional factors, including those raised by commenters, could be relevant depending on the particular security or investment strategy being recommended and depending on the particular retail customer’s investment profile. For example, prior to recommending a variable annuity to a particular retail customer, broker-dealers should generally develop a reasonable basis to believe that the retail customer will benefit from certain features of deferred variable annuities, such as tax-deferred growth, annuitization, or a death or living benefit. As stated in the Proposing Release, the importance of each factor in determining the customer-specific component of the Care Obligation will depend on the facts and circumstances of each recommendation. Thus, one or more factors may have more or less relevance—or may not be obtained or analyzed at all—if the broker-dealer has a reasonable basis for determining that the factors are not relevant. Regardless of which factors are evaluated—and equally important, which factors are not evaluated—a broker-dealer must have a reasonable basis to believe that the particular recommendation is in the best interest of the particular retail customer and does not place the broker-dealer’s interest ahead of the retail customer’s interest, consistent with the interpretations and guidance provided. For example, recommendations of the “lowest cost” security or investment strategy, without consideration of other factors, could violate

609 Cf. also FINRA Rule 2330, Members’ Responsibilities Regarding Deferred Variable Annuities. See Transamerica November 2018 Letter.

Regulation Best Interest. In the same vein, it is important to consider that a recommendation may be considered to be in a retail customer’s best interest when viewed in the context of the retail customer’s portfolio even if seemingly not in a retail customer’s best interest when viewed in isolation (e.g., inclusion of what otherwise might be seen as a risky investment in the portfolio of a risk-adverse customer, such as including hedging instruments in a conservative portfolio). The customer-specific component of the Care Obligation will rest on whether a brokerdealer had a reasonable basis to believe that the recommendation was in the best interest of the particular retail customer at the time of the recommendation, based on that retail customer’s investment profile and the potential risks, rewards, and costs associated with the recommendation, and did not place the financial or other interest of the broker, dealer, or such natural person ahead of the interest of the retail customer. Thus, as discussed further below, the importance of each factor, and which factors to consider, will depend on the facts and circumstances of each recommendation, as well as the specific security or investment strategy. While the Care Obligation does not require broker-dealers to document the basis for a recommendation, broker-dealers may choose to take a risk based approach when deciding whether or not to document certain recommendations. For example, broker-dealers may wish to document an evaluation of a recommendation and the basis for the particular recommendation in certain contexts, such as the recommendation of a complex product, or where a recommendation

may seem inconsistent with a retail customer’s investment objectives on its face. 610 Similarly, broker-dealers may consider using existing compliance measures, such as generating and reviewing exception reports that identify transactions that fall outside of firm-specified parameters to help evaluate and review for compliance with the Care Obligation. These measures are not meant to be exhaustive, but rather are examples of the sorts of compliance tools and methods broker-dealers should generally consider using in evaluating whether recommendations are consistent with a retail customer’s best interests. Retail Customer Investment Profile The Proposing Release would have required a “Retail Customer Investment Profile” to include, but not be limited to, “the retail customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the retail customer may disclose to the broker, dealer, or a natural person who is an associated person of a broker or dealer in connection with a recommendation.”611 The Proposing Release also explained that broker-dealers would be

610 See FINRA Regulatory Notice 11-25 at FAQ 2 (explaining that FINRA Rule 2111 (Suitability) permits firms to take a risk-based approach with respect to documenting suitability determinations). Regulation Best Interest similarly does not require documentation; however, as noted above, we encourage broker-dealers to take a riskbased approach when deciding whether or not to document certain recommendations. 611 Proposing Release at 21611 (noting the proposed definition of Retail Customer Investment Profile was consistent with FINRA Rule 2111(a) (Suitability), which provides that “A customer's investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives,

required to exercise “reasonable diligence” to ascertain the retail customer’s investment profile as part of satisfying proposed paragraph (a)(2)(i)(B), and that when retail customer information is unavailable despite a broker-dealer’s reasonable diligence to obtain such information, a broker-dealer should consider whether it has sufficient understanding of the retail customer to properly evaluate whether the recommendation is in the retail customer’s best interest.612 Furthermore, under the proposed rule, a broker-dealer would not meet its Care Obligation if it made a recommendation to a retail customer for whom it lacks sufficient information to have a reasonable basis to believe that the recommendation is in the best interest of that retail customer based on such customer’s investment profile. In response to this definition and the related discussion, commenters identified several additional factors that they believed should be included or discussed as part of a retail customer’s investment profile. For example, several commenters suggested adding “longevity risk,” “retirement income needs,” or “lifetime income needs” as factors that should be included as part

investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation”). 612 Id. This is similar to the approach articulated below, as well as in FINRA Regulatory Notice 12-25, which outlines what constitutes “reasonable diligence” under FINRA’s suitability rule in attempting to obtain customer-specific information and that the reasonableness of the effort also will depend on the facts and circumstances. See FINRA Regulatory Notice 12-25 at Q16. Moreover, under Regulation Best Interest, as with the approach under FINRA’s suitability rule, broker-dealers may generally rely on a retail customer’s responses absent “red flags” indicating that the information is inaccurate. Id.

of an investor’s investment profile.613 Other commenters suggested additional factors, such as, for trust accounts, considering the profile of trust beneficiaries and not the trustee, or adding a retail customer’s “income profile.”614 While we agree that many of these factors will likely be relevant to a broker-dealer’s recommendation of various securities or investment strategies involving securities, we are adopting the definition of “retail customer investment profile” as proposed. We believe that the list of factors under “retail customer investment profile” is widely understood and importantly, offers broker-dealers the flexibility to consider additional factors as deemed necessary.615 Although many of the additional factors cited by commenters may be relevant to securities or investment strategy recommendations under certain facts and circumstances, we are not persuaded that we should add any specific factor or factors to the existing list of profile factors, particularly given that the list of factors is non-exhaustive and broker-dealers can consider additional factors as appropriate under the unique facts and circumstances of each recommendation. Thus, for example, where a broker-dealer making a variable annuity

613 See, e.g., IRI Letter, The Committee of Annuity Insurers Letter, CCMC Letters, Jackson National Letter, Pacific Life August 2018 Letter, Lincoln Financial Letter, AXA Letter, Principal Letter; Transamerica November 2018 Letter; Letter from Mark F. Halloran, VP Managing Director, Business Development, Transamerica (Dec. 14, 2018) (“Transamerica December 2018 Letter”). 614 See, e.g., Jackson National Letter, Lincoln Financial Letter; Transamerica December 2018 Letter. 615 See, e.g., CCMC Letters; Jackson National Letter; Pacific Life August 2018 Letter; Committee of Annuity Insurers Letter; AXA Letter.

recommendation believes that longevity risk is an important factor for a particular retail customer and that such factor is necessary to develop a reasonable basis to believe that the product is in the best interest of that retail customer, that broker-dealer should consider and utilize that factor.616 We believe that this approach appropriately provides broker-dealers with a well-understood starting framework, but also gives broker-dealers the ability to consider additional factors based on the unique nature of its particular securities products, investment strategies, and retail customers. Broker-dealers must obtain and analyze enough customer information to have a reasonable basis to believe that the recommendation is in the best interest of the particular retail customer. The significance of specific types of customer information generally will depend on the facts and circumstances of the particular case, including the nature and characteristics of the product or strategy at issue. Where retail customer information is unavailable despite a brokerdealer’s reasonable diligence, the broker-dealer should carefully consider whether it has a sufficient understanding of the retail customer to properly evaluate whether the recommendation is in the best interest of that retail customer.617 In addition, a broker-dealer generally should make a reasonable effort to ascertain information regarding an existing customer’s investment profile prior to the making of a recommendation on an “as needed” basis—that is, where a

616 See, e.g., AXA Letter; Committee of Annuity Insurers Letter; Pacific Life August 2018 Letter. 617 See supra footnotes 611-612 and accompanying text.

broker-dealer knows or has reason to believe that the customer’s investment profile has changed.618 The reasonableness of a broker-dealer’s efforts to collect information regarding a customer’s investment profile information depends on the facts and circumstances of a given situation, and the importance of each factor may vary depending on the facts and circumstances of the particular case.619 Under Regulation Best Interest, as with the approach under FINRA’s suitability rule, broker-dealers may generally rely on a retail customer’s responses absent “red flags” indicating that the information is inaccurate.620 Moreover, as noted in the Proposing Release, one or more factors may have more or less relevance, or may not be obtained or analyzed at all if the broker-dealer has a reasonable basis for determining that the factor is irrelevant to that particular best interest determination. However, consistent with existing obligations, where a broker-dealer determines not to obtain or analyze one or more of the factors specifically identified in the definition of “Retail Customer Investment Profile,” the broker-dealer should document its determination that the factor(s) are not relevant components of a retail customer’s investment profile in light of the facts and circumstances of the particular recommendation.621

618 See id.; see also Proposing Release at 21611-21612.
619 See id.; see also FINRA Regulatory Notice 12-25 at Q16.
620 See supra footnote 612.
621 FINRA Rule 2111.04.

Regulation Best Interest, as noted above, does not require documentation of the basis for believing a particular recommendation was in a particular retail customer’s best interest. Nevertheless, broker-dealers may wish to consider documenting the basis for determining that the recommendation is in the best interest of the retail customer when it is not evident from the recommendation itself. 623 Documentation by itself will not cure a recommendation in circumstances in which a broker-dealer could not have reasonably believed the recommendation was in the best interest of the retail customer at the time the recommendation was made. Application of the Care Obligation—Reasonably Available Alternatives and Otherwise Identical Securities In the Proposing Release, we provided guidance on what types of recommendations would or would not be in the best interest of a particular retail customer. In particular, the Proposing Release stated that where a broker-dealer is choosing among identical securities available to the broker-dealer, it would be inconsistent with the Care Obligation to recommend the more expensive alternative for the customer.625 Similarly, in the Proposing Release, we

622 As discussed in Section II.C.1, we believe that the basis for and risks associated with a broker-dealer’s recommendations in standardized terms (as opposed to individualized disclosure of the basis for each recommendation made) is a material fact relating to the scope and terms of the relationship that is required to be disclosed under the Disclosure Obligation. 623 See supra footnote 610 and accompanying text. 624 See FINRA Rule 2111 (Suitability) FAQ. 625 Proposing Release at 21612.

noted our belief that it would be inconsistent with the Care Obligation if the broker-dealer made a recommendation to a retail customer in order to: maximize the broker-dealer’s compensation, further the broker-dealer’s business relationships, satisfy firm sales quotas or other targets, or win a firm-sponsored sales contest.626 We also stated that under the Care Obligation a broker-dealer generally should consider reasonable alternatives, if any, offered by the broker-dealer in determining whether it has a reasonable basis for making the recommendation.627 The Proposing Release explained that this approach would not require a broker-dealer to analyze all possible securities, all other products, or all investment strategies to recommend the single “best” security or investment strategy for the retail customer, nor necessarily require a broker-dealer to recommend the least expensive or least remunerative security or investment strategy. Further, the Proposing Release indicated that under the Care Obligation, when a broker-dealer recommends a more expensive security or investment strategy over another reasonably available alternative offered by the broker-dealer, the broker dealer would need to have a reasonable basis to believe that the higher cost is justified (and thus nevertheless is in the retail customer’s best interest) based on other factors (e.g., the product’s or strategy’s investment objectives, characteristics (including any special or unusual features), liquidity, risks and potential benefits, volatility and likely performance in a variety of

626 Id.
627 Proposing Release at 21608-21610.

market and economic conditions), in light of the retail customer’s investment profile.628 Relatedly, we stated that a broker-dealer could not meet the Care Obligation through disclosure alone.629 The Commission received numerous comments relating to the Proposing Release’s discussion of “reasonably available alternatives” and regarding recommendations of “otherwise identical securities.”630 For example, commenters sought clarification regarding what factors need to be considered in the evaluation, and also how the evaluation could be performed in

628 Proposing Release at 21612 (emphasis in original). We similarly noted that “when a broker-dealer recommends a more remunerative security or investment strategy over another reasonably available alternative offered by the broker-dealer, the broker-dealer would need to have a reasonable basis to believe that—putting aside the broker-dealer’s financial incentives—the recommendation was in the best interest of the retail customer based on the factors noted [therein], in light of the retail customer’s investment profile. Nevertheless, this does not mean that a broker-dealer could not recommend the more remunerative of two reasonably available alternatives, if the broker-dealer determines the products are otherwise both in the best interest of—and there is no material difference between them from the perspective of—the retail customer, in light of the retail customer’s investment profile.” Id. (emphasis in original). 629 Id. at 21612-21613 (further explaining that “where a broker-dealer is choosing among identical securities with different cost structures, we believe it would be inconsistent with the best interest obligation for the broker-dealer to recommend the more expensive alternative for the customer, even if the broker-dealer had disclosed that the product was higher cost and had policies and procedures reasonably designed to mitigate the conflict under the Conflict of Interest Obligation, as the broker-dealer would not have complied with the Care Obligation. Such a recommendation, disclosure aside, would still need to be in the best interest of a retail customer, and we do not believe it would be in the best interest of a retail customer to recommend a higher-cost product if all other factors are equal.”) (internal citations omitted). 630 See, e.g., Fidelity Letter; Vanguard Letter; MMI Letter; BlackRock Letter.

certain contexts, such as where a broker-dealer operates with an open architecture framework, recommends only a limited menu of products, or recommends only proprietary products.631 A majority of the IAC recommended that Regulation Best Interest should be clarified to require recommendations of “the investments, investment strategies, accounts, or services, from among those that [the broker-dealers, investment advisers, and their associated persons] have reasonably available to recommend, that they reasonably believe represent the best available options for the investor” and that a “determination regarding the best reasonably available options should be based on a careful review of the investor’s needs and goals, as well as the full range of the reasonably available products’, strategies’, accounts’, or services’ features, including, but by no means limited to cost.”632 Several other commenters recommended that the Commission confirm that Regulation Best Interest will not require broker-dealers to offer an unlimited number of securities or investment strategies.633 Commenters also expressed concern over

631 See, e.g., CFA August 2018 Letter; Wells Fargo Letter; Fidelity Letter; Morgan Stanley Letter. See also LPL August 2018 Letter (suggesting that its representatives could not conduct a meaningful comparison across “all similar available securities” and that, such recommendations would be subject to legal challenges in hindsight). 632 IAC 2018 Recommendation (emphasis in original). 633 See LPL August 2018 Letter (recommending that the Commission clarify that a financial professional can satisfy his or her obligations under Regulation Best Interest, even if he or she limits recommendations to a smaller number of product sponsors because financial professionals participating on large platforms may, in practice, be discouraged from conducting focused analysis of product offerings, instead opting for a more cursory review of a few high-level cost, risk, and performance metrics across all available

whether the consideration of “reasonably available alternatives” would effectively require a broker-dealer to document the basis of any recommendation, as well as concerns about disclosure’s role in satisfying the Care Obligation.634 Finally, a majority of the IAC and other commenters sought clarification on whether broker-dealers were required to recommend only the single “best” product.635 The Care Obligation will require a broker-dealer to have a reasonable basis to believe, based on its understanding of the potential risks, rewards, and costs of the recommended security or investment strategy involving securities, and in light of the retail customer’s investment profile, that the recommendation is in the best interest of a particular retail customer and does not place the broker-dealer’s interest ahead of the retail customer’s interest. As noted above, determining what is in a retail customer’s best interest is an objective evaluation turning on the

products). See also Fidelity Letter; Cetera August 2018 Letter; SIFMA August 2018 Letter; Guardian August 2018 Letter; Prudential Letter. 634 See, e.g., Fidelity Letter; Wells Fargo Letter. 635 See 2018 IAC Recommendation (“The Commission should recognize that there will often not be a single best option and that more than one of the available options may satisfy this standard,” and that “compliance should be measured based on whether the broker or adviser had a reasonable basis for the recommendation at the time it was made, and not on how the recommendation ultimately performed for the investor. . . .”); see also SIFMA August 2018 Letter.

facts and circumstances of the particular recommendation and the particular retail customer at the time the recommendation is made. Accordingly, as noted above, a broker-dealer would not satisfy the Care Obligation by simply recommending the least expensive or least remunerative security without any further analysis of these other factors and the retail customer’s investment profile. A broker-dealer could recommend a more expensive security or investment strategy if there are other factors about the product that reasonably allow the broker-dealer to believe it is in the best interest of the retail customer, based on that retail customer’s investment profile. Similarly, a broker-dealer could recommend a more remunerative security or investment strategy if the broker-dealer has a reasonable basis to believe that there are other factors about the security or investment strategy that make it in the best interest of the retail customer, in light of the retail customer’s investment profile. We also continue to have the view that, as part of determining whether a broker-dealer has a reasonable basis to believe that a recommendation is in the best interest of the retail customer, a broker-dealer generally should consider reasonably available alternatives offered by the broker-dealer. It is our view that such a consideration is an inherent aspect of making a “best interest” recommendation, and is a key enhancement over existing broker-dealer suitability

636 As noted and further reiterated below, a broker-dealer will not be required to recommend the single “best” of all possible alternatives that might exist, in part because many different options may in fact be in the retail customer’s best interest. See infra footnote 640 and accompanying text.

obligations, which do not necessarily require a comparative assessment among such alternatives. 637 Similarly, this concept has been applied in the context of guidance regarding suitability and heightened supervision of complex products, stating that when broker-dealers are recommending complex or costly products, they should first consider whether less complex or costly products could achieve the same objectives for their retail customers. In terms of conducting such an evaluation, a broker-dealer does not have to conduct an evaluation of every possible alternative, either offered outside of the firm (such as where the firm offers only proprietary or other limited range of products) or available on the firm’s platform. We appreciate commenter concerns about the impracticality and potential impossibility of such a

637 While enforcement actions and related guidance may be construed as interpreting the suitability obligation to include a consideration of available alternatives, it is generally limited to certain circumstances, such as recommendations of mutual funds with different share classes or recommendations of complex or costly products. See In re Application of Raghavan Sathianathan, Exchange Act Release No. 54722 at 21 (Nov. 8, 2006); In the Matter of Wendell D. Belden, 56 S.E.C. 496 (2003); FINRA Regulatory Notice 12-03. See also FINRA 2018 Letter; MSRB Rule G-42 (requiring a municipal advisor to inform its municipal entity or obligated person client whether it has investigated or considered other reasonably feasible alternatives to the recommended municipal securities transaction). Thus, although certain enforcement actions and guidance contemplate a consideration of available alternatives under certain situations, it not a general expectation. Nevertheless, such statements serve as an example and evidence that the concept is not unfamiliar to broker-dealers. 638 See FINRA Regulatory Notice 12-03 (“For example, registered representatives should compare a structured product with embedded options to the same strategy through multiple financial instruments on the open market, even with any possible advantages of purchasing a single product.”). See also supra footnote 635.

comparative evaluation, particularly where the firm offers numerous different products, many of which may have similar strategies but with other varying characteristics, including cost structures, that may apply differently based on the particular retail customer. 639 We also recognize that different products are rarely perfectly equal, and that differences will be both quantitative and qualitative in nature. A broker-dealer will not be required to recommend the single “best” of all possible alternatives that might exist, in part because many different options may in fact be in the retail customer’s best interest. 640 We are sensitive to commenters’ concern that this determination, to the extent it can be made at all, may be judged in hindsight even though Regulation Best Interest applies at the time of the recommendation.641 In particular, we are not requiring a natural person who is an associated person of the broker-dealer to be familiar with every product on a broker-dealer’s platform, particularly where a broker-dealer operates in an open architecture framework or otherwise operates a platform with

639 See, e.g., Morgan Stanley Letter (“Large firms with an open architecture like Morgan Stanley offer an enormous range of products to their clients. To take but one example, Morgan Stanley offers approximately 300 large capitalization equity mutual funds to its retail customers.”); see also Morningstar Letter; Primerica Letter; ICI Letter; Chapman Letter (stating that “identical” is too stringent because they believe all securities have distinctions). 640 Commenters suggesting different approaches acknowledged this concern. See, e.g., IAC 2018 Recommendation (“[T]he Commission should recognize there will often not be a single best option and that more than one of the available options may satisfy this standard.”). 641 See LPL August 2018 Letter.

a large number of products or options.642 Such a requirement might not allow an associated person of a broker-dealer to develop a proper understanding of every security or investment strategy’s potential risks, rewards, or costs, and thus it might not be possible to fulfill the obligation set forth in paragraph (a)(2)(ii)(A). Furthermore, such a requirement could encourage broker-dealers to limit their product menus or otherwise restrict access to products and services currently available to retail customers, which is contrary to the purpose and goals of Regulation Best Interest.643 As discussed above, the determination of whether a recommendation is in the “best interest” of the retail customer and does not place the interests of the broker-dealer ahead of the retail customer’s interest must be based on information reasonably known to the associated person (based on her reasonable diligence, care, and skill) at the time the recommendation is made. Accordingly, in fulfilling the Care Obligation, the associated person should exercise reasonable diligence, care, and skill to consider reasonably available alternatives offered by the

642 Conversely, where a broker-dealer only has a few products, an associated person of the broker-dealer may be expected to understand and consider all of these options when recommending a security or investment strategy. We recognize that this facts-andcircumstances approach does not provide a clear bright-line rule; however, we are providing further guidance below on a broker-dealer’s process for evaluating reasonably available alternatives and the scope herein. Furthermore, nothing in this discussion excuses a broker-dealer from satisfying the Care Obligation. An associated person of the broker-dealer cannot use a large platform as an excuse for not developing a proper understanding of a recommended security or investment strategy’s potential risks, rewards, or costs. 643 See LPL August 2018 Letter.

broker-dealer. This exercise would require the associated person to conduct a review of such reasonably available alternatives that is reasonable under the circumstances. Consistent with the Compliance Obligation discussed below, a broker-dealer should have a reasonable process for establishing and understanding the scope of such “reasonably available alternatives” that would be considered by particular associated persons or groups of associated persons (e.g., groups that specialize in particular product lines) in fulfilling the reasonable diligence, care, and skill requirements under the Care Obligation. What will be a reasonable determination of the scope of alternatives considered will depend on the facts and circumstances, at the time of the recommendation, including both the nature of the retail customer and the retail customer’s investment profile, and the particular associated persons or groups of associated persons that are providing the recommendations. With respect to broker-dealers that materially limit the range of products or services that they recommend to retail customers (e.g., limits its product offerings to only proprietary or other limited menus of products), the Conflict of Interest Obligation provision requires broker-dealers to have reasonably designed policies and procedures to identify and disclose the material limitations and any conflicts of interest associated with such limitations, and to prevent such limitations and associated conflicts of interest from causing the broker-dealer or associated person to make recommendations that place the interest of the broker-dealer or associated person

ahead of the interest of the retail customer.644 Similarly, where a broker-dealer offers numerous products on its platform, a broker-dealer or an associated person could reasonably limit the universe of “reasonably available alternatives” if there is a reasonable process or methodology for limiting the scope of alternatives or the universe considered for a particular retail customer, particular category of retail customers, or the retail customer base more generally. In addition to the particular retail customer’s investment profile, we believe the scope of reasonably available alternatives considered could depend upon a variety of factors, including but not limited to, the associated person’s customer base (including the general investment objectives and needs of the customer base), the investments and services available to the associated person to recommend (including limitations due to licensing of the associated person), and other factors such as specific limitations on the available investments and services with respect to certain retail customers (e.g., product or service income thresholds; product geographic limitations; or product limitations based on account type, such as those only eligible

644 See Section II.C.3. Broker-dealers would be required to disclose the conflict of interest, as well as the material facts associated with such a conflict pursuant to the Disclosure Obligation provision as described in Section II.C.1. 645 We note that where a broker-dealer (or an associated person) limits the securities or investment strategies that are considered as “reasonably available alternatives” from the universe of securities or investment strategies involving securities offered by the brokerdealer, this limitation may constitute a material limitation placed on the securities or investment strategies involving securities that may be recommended, which the brokerdealer (or an associated person) would need to disclose and address as provided in the Disclosure and Conflict of Interest Obligations.

for IRA accounts). A reasonable process would not need to consider every alternative that may exist (either outside the broker-dealer or on the broker-dealer’s platform) or to consider a greater number of alternatives than is necessary in order for the associated person to exercise reasonable diligence, care, and skill in providing a recommendation that complies with the Care Obligation. Importantly, where all reasonably available alternatives considered would be inconsistent with a retail customer’s investment profile, a broker-dealer would not be able to form a reasonable belief that the best of these options is in the best interest of that retail customer. All recommendations to retail customers of securities or investment strategies are required to satisfy the Care Obligation, and broker-dealers cannot use a limited product menu or a process to determine the scope of reasonably available alternatives considered to justify a recommendation that is not in the best interest of the retail customer. We recognize that the process by which a broker-dealer and its associated persons develop and make recommendations to retail customers, including the scope of reasonably available alternatives considered, will depend upon a variety factors, including the nature of the broker-dealer’s business.646 The disclosure of this process pursuant to the Disclosure Obligation

646 Accordingly, we believe that disclosure of this process is of fundamental importance to a retail customer’s understanding of what services are being provided, and in deciding whether those services are appropriate to the retail customer’s needs and goals, and have thus clarified that the basis for a broker-dealer’s or an associated person’s recommendations as a general matter (i.e., what might commonly be described as the firm’s or associated person’s investment approach, philosophy or strategy) is a material

will provide critical information to retail customers and underscores our acknowledgment that we do not expect every broker-dealer or associated person to follow the same process. Instead, consistent with the Compliance Obligation, broker-dealers and their associated persons must have a reasonable process for developing and making recommendations to retail customers in compliance with the Care Obligation, including the consideration of reasonably available alternatives, which will depend on the facts and circumstances. We emphasize that what is in the “best interest” of a retail customer depends on the facts and circumstances of a recommendation at the time it is made, including matching the recommended security or investment strategy to the retail customer’s investment profile at the time of the recommendation, and the process for coming to that conclusion. Whether a brokerdealer has complied with the Care Obligation will be evaluated based on the facts and circumstances at the time of the recommendation (and not in hindsight) and will focus on whether the broker-dealer had a reasonable basis to believe that the recommendation is in best interest of the retail customer. Finally, broker-dealers or their associated persons are not required to prepare and maintain documentation regarding the basis for each specific recommendation, including an evaluation of a recommended securities transaction or investment strategy against similar available alternatives. In circumstances where the “match” between the retail customer profile

fact relating to the scope and terms of the relationship that must be disclosed pursuant to the Disclosure Obligation. See Section II.C.1.

and the recommendation appears less reasonable on its face (for example, where a retail customer’s account objective is preservation of income and the recommendation involves higher risk, or where there are more significant conflicts of interest present), the more important the process will likely be for a broker-dealer to establish that it had a reasonable belief that the recommendation was in the best interest of the retail customer and did not place the brokerdealer’s interest ahead of the retail customer. This could include reasonably designed policies and procedures to establish compliance with the Care Obligation, as required by the new Compliance Obligation, and could include maintaining supporting documentation for certain recommendations. Application of Care Obligation to Account Type Recommendations As discussed above, Regulation Best Interest will apply to recommendations by a brokerdealer of a securities account type. Thus, the Care Obligation will require a broker-dealer to have a reasonable basis to believe that a recommendation of a securities account type (e.g., brokerage or advisory, or among the types of accounts offered by the firm) is in the retail customer’s best interest at the time of the recommendation and does not place the financial or other interest of the broker-dealer ahead of the interest of the retail customer.

647 See supra footnote 610 and accompanying text.
648 As discussed in Section II.B.2, whether and how Regulation Best Interest applies will depend on whether the financial professional making the recommendation is dually registered.

We believe broker-dealers would need to consider various factors in determining whether a particular account is in a particular retail customer’s best interest. For example, broker-dealers generally should consider: (1) the services and products provided in the account (ancillary services provided in conjunction with an account type, account monitoring services, etc.); (2) the projected cost to the retail customer of the account; (3) alternative account types available; (4) the services requested by the retail customer; and (5) the retail customer’s investment profile. Moreover, retail customer-specific factors, such as those identified in the definition of “Retail Customer Investment Profile,” may not be applicable or available in every context, and would depend on the facts and circumstances at the time of account type recommendation. For example, one or more factors may have more or less relevance, or information about those factors may not be obtained or analyzed at all where the broker-dealer has a reasonable basis for believing that a particular factor is or is not relevant.649 In addition, as discussed above, we recognize that factors other than cost may properly be considered when determining whether an account is in a retail customer’s best interest.650

In the section that follows we discuss how the Care Obligation will apply to recommendations to open an IRA or to roll over assets into an IRA. 649 As discussed above, where a broker-dealer determines not to obtain or analyze one or more of the factors specifically identified in the definition of “Retail Customer Investment Profile,” the broker-dealer generally should document its determination that the factor(s) are not relevant components of a retail customer's investment profile in light of the facts and circumstances of the particular recommendation. 650 See id.

Where the financial professional making the recommendation is dually registered (i.e., an associated person of a broker-dealer and a supervised person of an investment adviser (regardless of whether the professional works for a dual-registrant, affiliated firms, or unaffiliated firms)) the financial professional would need to make this evaluation taking into consideration the spectrum of accounts offered by the financial professional (i.e., both brokerage and advisory taking into account any eligibility requirements such as account minimums), and not just brokerage accounts. For example, all other things being equal, it may be in the retail customer’s best interest to recommend a brokerage account to the retail customer who intends to buy and hold a long-term investment (e.g., maintain an account primarily composed of bonds or mutual funds and has a stated buy-and-hold strategy), as opposed to an advisory account (i.e., it may not be in the retail customer’s best interest in this context to pay an ongoing fee for a security that he or she plans to hold to maturity). 651 On the other hand, it may not be in the retail customer’s best interest to recommend a brokerage account where the retail customer plans to engage in at least a moderate level of trading and prefers to pay for advice in connection with such trading on the basis of a consistent recurring monthly or annual charge. 652 Furthermore, where a retail customer holds a variety of investments, or prefers differing levels of services (e.g., both episodic

651 See id.
652 See id. We reiterate that this is a facts and circumstances determination, and that these examples are not meant to provide a bright line rule, but rather to illustrate certain considerations that a broker-dealer could consider when determining whether a recommended account type is in the best interest of the retail customer.

recommendations from a broker-dealer and continuous advisory services including discretionary asset management from an investment adviser), it may be in the retail customer’s best interest to recommend both a brokerage and an advisory account. Similarly, where the financial professional is only registered as an associated person of a broker-dealer (regardless of whether that broker-dealer entity is a dual-registrant or affiliated with an investment adviser), he or she would need to take into consideration only the brokerage accounts available. 653 However, even if a broker-dealer only offered brokerage accounts, the associated person would nevertheless need to have a reasonable basis to believe that the recommended account was in the best interest of the retail customer. For example, if the retail customer were seeking a relationship where the financial professional would have unlimited investment discretion (i.e., having responsibility for a customer’s trading decisions), 654 the associated person would not have a reasonable basis to believe that a brokerage account was in the best interest of the retail customer. Thus, as with limited product menus, a limited selection of account types would not excuse a broker-dealer from making a recommendation not in the best interest of the retail customer.

653 For example, if the natural person that is an associated person of the broker-dealer is not registered as an investment adviser representative, but is associated with a broker-dealer that is a dual-registrant, that associated person would only need to consider the brokerage accounts offered by the firm, and not the firm’s advisory accounts in making the recommendation. 654 See Solely Incidental Interpretation.

Application of Care Obligation to IRA Rollovers and Related Recommendations Regulation Best Interest also applies to recommendations to open an IRA or to roll over assets into an IRA. Thus, the Care Obligation will require a broker-dealer to have a reasonable basis to believe that the IRA or IRA rollover is in the best interest of the retail customer at the time of the recommendation and does not place the financial or other interest of the broker-dealer ahead of the interest of the retail customer, taking into consideration the retail customer’s investment profile and other relevant factors, as well as the potential risks, rewards, and costs of the IRA or IRA rollover compared to the investor’s existing 401(k) account or other circumstances.655 When making a recommendation to open an IRA, or to roll over workplace retirement plan assets into an IRA rather than keeping assets in a previous employer’s workplace retirement plan (or rolling over assets to a new employer’s workplace retirement plan), broker-dealers should consider a variety of factors, the importance of which will depend on the particular retail customer’s needs and circumstances. In addition to the Factors to Consider Regarding a Recommendation to a Particular Retail Customer discussed above, as well as the Retail Customer’s Investment Profile, broker-dealers should consider a variety of additional factors specifically salient to IRAs and workplace retirement plans, in order to compare the retail customer’s existing account to the IRA offered by the broker-dealer. These factors should

655 See infra Section II.C.2; see also FINRA Regulatory Notice 13-45 (outlining several considerations regarding IRA rollovers).

generally include, among other relevant factors: fees and expenses; level of service available; available investment options; ability to take penalty-free withdrawals; application of required minimum distributions; protection from creditors and legal judgments; holdings of employer stock; and any special features of the existing account. 656 With respect to available investment options, we caution broker-dealers not to rely on, for example, an IRA having “more investment options” as the basis for recommending a rollover. Rather, as with other factors, broker-dealers should consider available investment options in an IRA, among other relevant factors, in light of the retail customer’s current situation and needs in order to develop a reasonable basis to believe that the rollover is in the retail customer’s best interest. While these examples may be relevant to an analysis of available options, this list is not meant to be exhaustive. Furthermore, each factor generally should be analyzed with respect to a particular retail customer in order for a broker-dealer to form a reasonable belief that the recommendation is in the best interest of that retail customer and does not place the financial or other interest of the broker-dealer ahead of the interest of the retail customer. Finally, as described above, certain factors may have more or less relevance, or not be relevant at all, depending on the particular facts and circumstances of each recommendation. d. Have a Reasonable Basis to Believe that a Series of Recommended Transactions, Even if in the Retail Customer’s Best Interest When Viewed in Isolation, is not Excessive and is the Retail Customer’s Best Interest When Taken Together in Light of the Retail Customer’s Investment Profile and

656 See id.

Does Not Place the Interest of the Broker-Dealer Ahead of the Interest of the Retail Customer. As proposed, the third component of the Care Obligation would require a broker-dealer to exercise reasonable diligence, care, skill, and prudence to have a reasonable basis to believe that a series of recommended transactions, even if in the retail customer’s best interest when viewed in isolation, is not excessive and is in the retail customer’s best interest when taken together in light of the retail customer’s investment profile.657 The Proposing Release noted that this requirement is intended to incorporate and enhance a broker-dealer’s existing “quantitative suitability” obligation by applying the requirement irrespective of whether a broker-dealer exercises actual or de facto control over a customer’s account, thereby making the obligation consistent with the current requirements for “reasonable basis suitability” and “customer specific suitability.”658 We received a few comments suggesting modifications to this component of the obligation. For example, one commenter recommended the Commission clarify the meaning of “series of transactions,” while a second commenter requested a carve-out for “active traders” who are “interested in trading individual stocks… with a great degree of regularity.”659 Another

657 Proposing Release at 21613.
658 Proposing Release at 21613-21614.
659 See Letter from Keith Lampi, President, Alternative and Direct Investment Securities Association (“ADISA”) (Aug. 7, 2018) (“ADISA Letter”) (recommending the Commission clarify the meaning of “series of transactions”); Letter from Joseph C.

commenter maintained that the quantitative suitability obligations should only apply to those accounts over which the member firm has “control,” and that if the Commission does not include the control element of FINRA Rule 2111 as part of the Care Obligation, that the Commission “should at a minimum confirm that this requirement applies only to recommendations by a single associated person, not across multiple associated persons at the firm who act independently.”660 After considering these comments, the Commission is adopting the proposed “quantitative care” component of the Care Obligation as proposed. As noted in the Proposing Release, we believe that imposing the quantitative care obligation without a “control” element would provide consistency in the investor protections provided to retail customers by requiring a broker-dealer to always form a reasonable basis as to the recommended frequency of trading in a retail customer’s account—irrespective of whether the broker-dealer “controls” or exercises “de facto control” over the retail customer’s account.661 This would also be consistent with the other components of the Care Obligation, which apply regardless of whether a broker-dealer “controls” or exercises “de facto control” over the retail customers’ account. While the Commission appreciates the concern raised about “active traders” and the concern relating to a retail customer that could maintain several accounts at the same firm, we

Cascarelli, Corporate Counsel, Network 1 Financial Securities (Aug. 7, 2018) (“Network 1 Letter”) (suggesting a “carve-out exemption formula” from Regulation Best Interest to accommodate investors and their stockbrokers who specialize in “active trading”). 660 SIFMA August 2018 Letter. 661 See Proposing Release at 21613-21614.

nevertheless believe that retail customers could, and should, benefit from the protections of this requirement, namely the protection from a broker-dealer recommending a level of trading that is so excessive that the resulting cost-to-equity ratio or turnover rate makes a positive return virtually impossible.662 As we indicated in the Proposing Release, the fact that a customer may have some knowledge of financial markets or some “control” should not absolve the brokerdealer of the ultimate responsibility to have a reasonable basis to believe that any recommendations it makes are in the best interest of the retail customer.663 Where a retail customer expresses a desire for “active trading,”664 a broker-dealer may take this factor into consideration when evaluating a recommendation; however, the broker-dealer will nevertheless need to reasonably believe that a series of recommended transactions is in the best interest of the retail customer. We further note that Regulation Best Interest does not require a broker-dealer to refuse to accept a customer’s order that is contrary to the broker-dealer’s recommendation. Nor does Regulation Best Interest apply to self-directed or otherwise unsolicited transactions by a retail customer, whether or not he or she also receives separate recommendations from the broker-dealer. With respect to the concern about applying the requirement “only to recommendations by a single associated person, not across multiple associated persons at the firm who act

662 See id.
663 See id.
664 See Network 1 Letter.

independently,”665 we note that both the firm and their associated persons have to comply with the Care Obligation. If we took this commenter’s suggestion, we are concerned we would potentially create a loophole and a perverse outcome that would allow for avoidance of the Care Obligation, and permit potentially excessive trading, by encouraging recommendations across a number of associated persons. We reiterate our position that, consistent with the other components of the Care Obligation under the Care Obligation, when a series of transactions is recommended to a retail customer, a broker-dealer must evaluate whether the series of recommended transactions places the broker-dealer’s interest ahead of the retail customer’s—this is true for both the associated person making the recommendation, as well as for the firm. This will necessarily depend on the facts and circumstances of each particular recommendation, and of each particular series of transactions; however, we note that, as part of developing a retail customer’s investment profile, a broker-dealer is required to exercise reasonable diligence to ascertain the retail customer’s investment profile, which would include seeking to obtain and analyze a retail customer’s other investments.667 Finally, with respect to the meaning of series of recommended transactions, what would constitute a “series” of recommended transactions would depend on the facts and circumstances, and would need to be evaluated with respect to a particular retail customer. In other words, a

665 See SIFMA 2018 Letter.
666 See Proposing Release at 21613-21614.
667 See supra Section II.C.2.c.

broker-dealer would need to reasonably believe that the level of trading (series of recommended transactions) is appropriate for a particular retail customer, and thus a bright line definition across all retail customers would be unworkable. Moreover, providing a bright line definition could encourage firms to focus on a particular number of transactions rather than focusing on ensuring that a series of recommendations, taken together, are in the best interest of the retail customer. Finally, a “series” of recommended transactions is an established term under the federal securities laws and SRO rules that is evaluated in concert with existing guideposts, such as turnover rate,668 cost-to-equity ratio,669 and use of in-and-out trading, 670 which have been developed over time and which serve as indicators of excessive trading.

668 See, e.g., Carras v. Burns, 516 F.2d 251, 258 (4th Cir. 1975); Shearson Lehman Hutton Inc., 49 S.E.C. 1119, 1122 at footnote 10 (1989); Laurie Jones Canady, 54 S.E.C. 65, 74 (1999), Exchange Act Release No. 41250 (Apr. 5, 1999) (using the turnover rate for relevant period), petition denied, 230 F.3d 362 (D.C. Cir. 2000). 669 See, e.g., Shearson Lehman, 49 S.E.C. at 1121 (stating that “[o]ne test for excessive trading is the relationship between the account opening balance and the amounts of markups, commissions, and margin charges”); Michael E. Tennenbaum, 47 S.E.C. 703 (Jan.19, 1982). 670 See, e.g., Hecht v. Harris, Upham & Co., 283 F. Supp. 417, 435-36 (N.D. Cal. 1968), modified in part and aff’d, 430 F.2d 1202 (9th Cir. 1970); R.H. Johnson & Co., 36 S.E.C. 467 (1955); Behel, Johnson & Co., 26 S.E.C. 163 (1947). Cody v. S.E.C., 693 F.3d 251, 260 (1st Cir. 2012).

Conflict of Interest Obligation
We proposed the Conflict of Interest Obligation to require a broker-dealer entity671 to: (1) establish, maintain, and enforce written policies and procedures reasonably designed to identify, and disclose, or eliminate all material conflicts of interest associated with recommendations covered by Regulation Best Interest; and (2) establish, maintain and enforce written policies and procedures reasonably designed to identify and disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives associated with such recommendations. This proposed approach reflected our view that establishing reasonably designed policies and procedures is critical to identifying and addressing conflicts of interest. In addition, the proposed approach would serve the Commission’s goal of addressing conflicts of interest that may harm investors while providing flexibility to establish systems tailored to broker-dealers’ business models.

671 Unlike the Disclosure and Care Obligations, which apply to a broker or dealer and to natural persons who are associated persons of a broker or dealer, the Conflict of Interest Obligation (and the Compliance Obligation discussed in Section II.C.4 below) applies solely to the broker or dealer entity, and not to the natural persons who are associated persons of a broker or dealer. For purposes of discussing the Conflict of Interest Obligation and the Compliance Obligation, the term “broker-dealer” refers only to the broker-dealer entity, and not to such individuals. While the Conflict of Interest Obligation applies only to the broker-dealer entity, the conflicts of interest that the broker-dealer entity must analyze are conflicts (as defined in paragraph (c)(3) of the rule) between: (i) the broker-dealer entity and the retail customer, (ii) the natural persons who are associated persons and the retail customer, and (iii) the broker-dealer entity and the natural persons who are associated persons.

The Commission solicited comment on the Conflict of Interest Obligation, including the specific requirements to create policies and procedures with respect to disclosure, mitigation, and elimination of conflicts of interest. Commenters requested changes to several aspects of the Conflict of Interest Obligation, including providing more clarity and guidance surrounding when specific conflicts need to be disclosed, mitigated or eliminated. In consideration of these comments, we are adopting the Conflict of Interest Obligation with revisions to: (1) create an overarching obligation to establish written policies and procedures to identify and at a minimum disclose, pursuant to the Disclosure Obligation, or eliminate all conflicts of interest associated with the recommendation; and (2) require brokerdealers to establish policies and procedures to be reasonably designed to mitigate or eliminate certain identified conflicts of interest. In addition to the overarching obligation, we specifically require broker-dealers to establish, maintain, and enforce written policies and procedures reasonably designed to: (i) identify and mitigate any conflicts of interest associated with recommendations that create an incentive for a natural person who is an associated person of a broker or dealer to place the interest of the broker or dealer, or such natural person making the recommendation, ahead of the interest of the retail customer; (ii) (A) identify and disclose any material limitations placed on the securities or investment strategies involving securities that may be recommended (i.e. only make

672 See, e.g., SIFMA August 2018 Letter; Primerica Letter; BISA Letter; CCMC Letters; Wells Fargo Letter.

recommendations of proprietary or other limited range of products) to a retail customer and any conflicts of interest associated with such limitations, in accordance with the Disclosure Obligation, and (B) prevent such limitations and associated conflicts of interest from causing the broker, dealer, or a natural person who is an associated person of the broker or dealer to make recommendations that place the interest of the broker, dealer, or such natural person ahead of the interest of the retail customer; and (iii) identify and eliminate any conflicts of interest associated with sales contests, bonuses, and non-cash compensation that are based on the sales of specific securities or specific types of securities within a limited period of time. Each of these changes and the requirements pursuant to the Conflict of Interest Obligation is discussed in more detail below. a. Reasonably Designed Policies and Procedures We proposed to require broker-dealers to establish reasonably designed policies and procedures as we believe they are critical to identifying and addressing conflicts of interest674 and helping ensure compliance with the requirements to disclose conflicts of interest pursuant to

673 Rule 15l-1 under the Exchange Act.
674 See FSI August 2018 Letter (“Experience shows that investors already ignore much of the enormous volume of regulatory disclosures they are being provided. Instead, a more realistic approach is to require broker-dealers to adopt written supervisory procedures to detect and manage conflicts of interest, to avoid those they can and take steps to mitigate the impact of those conflicts that can’t be avoided.”).

the Disclosure Obligation.675 In addition, policies and procedures may minimize compliance costs that may be passed on to retail customers.676 As discussed in the Proposing Release, it would be reasonable for broker-dealers to use a risk-based compliance and supervisory system rather than requiring a detailed review of each recommendation and to have flexibility to tailor policies and procedures to their specific business models. The Commission also provided guidance on components a broker-dealer should consider including in its program with regard to the Conflict of Interest Obligation.677 In response to the proposed policies and procedures requirement, some commenters asserted that it was an effective means of addressing conflicts678 while others were concerned that the Commission was providing too much flexibility in addressing conflicts of interest. 679 A

675 See Proposing Release at Section II.D.3.b. See also CCMC Letters (policies and procedures requirement should assist broker-dealers in managing the potential impact of conflicts of interest); FPC Letter (acknowledging the importance of firms’ policies and procedures when providing financial planning to act in the client’s best interest). 676 See Proposing Release at Section II.D.3.b. See also Cambridge Letter (“Cambridge believes the SEC’s goals of facilitating disclosure and mitigating material conflicts of interest, while minimizing additional compliance costs that may be passed on to the retail customers can best be accomplished by requiring broker-dealers to adopt written supervisory procedures to detect and manage conflicts of interest, to avoid those they can and take steps to mitigate the impact of those conflicts that can’t be avoided.”). 677 Proposing Release at Section II.D.3.b. 678 See Fidelity Letter; SIFMA August 2018 Letter; Morgan Stanley Letter. 679 See, e.g., NASAA August 2018 Letter; CFA Institute Letter; Galvin Letter; Better Markets August 2018 Letter (policies and procedures should be “actually designed” to achieve those ends, not just “reasonably designed” to do so). But see IRI Letter (“The

few commenters expressed agreement with allowing a flexible risk-based approach tailored to a broker-dealer’s business model as opposed to a detailed review of each recommendation.680 A few commenters expressed concern with the Commission’s assertion that policies and procedures may minimize compliance costs that may be passed on to retail customers, noting the uncertainty surrounding how conflicts of interest should be addressed by policies and procedures. 681 One commenter suggested that the Commission should adopt a safe harbor for the Conflicts of Interest Obligation by demonstrating compliance with certain existing FINRA rules.682 As discussed below under the new Compliance Obligation, some commenters suggested that the policies and procedures requirement should apply to aspects of the entire rule.683 In consideration of the comments received, we are adopting the approach with respect to reasonably designed policies and procedures to identify and address conflicts of interest set forth in the proposal substantially as proposed. As stated in the Proposing Release, we believe that

Conflict of Interest Obligation should be simplified and streamlined to give BDs the flexibility to determine appropriate steps to manage material conflicts.”). 680 See Cambridge Letter; CCMC Letters. But see NASAA August 2018 Letter (suggesting the Commission reconsider the risk-based approach to comply with its duties). 681 See, e.g., Better Markets August 2018 Letter; CFA Institute Letter. 682 See AXA Letter. 683 See, e.g., NASAA August 2018 Letter (suggesting that, at a minimum, a firm’s policies and procedures should require an analysis of the costs and risks of a product as well as the client’s financial goals).

broker-dealers should have flexibility to tailor their policies and procedures to their particular business model, focusing on specific areas of their business that pose the greatest risk of noncompliance and greatest risk of potential harm to retail customers as opposed to a detailed review of each recommendation. While we recognize a commenter’s statement685 that policies and procedures should be “actually designed” to address conflicts of interest, we do not believe that the design of policies and procedures should be measured against a standard of strict liability, but should instead be measured against a standard of reasonableness. In addition, we believe that policies and procedures are an effective tool to identify and address conflicts of interest, and would allow the Commission to identify and address potential compliance deficiencies or failures (such as inadequate or inaccurate policies and procedures, or failure to follow the policies and procedures) early on, reducing the chance of retail customer harm. 686 We also believe that there is no one-size-fits all framework, and, as such, broker-dealers should have flexibility to reasonably design their policies and procedures to tailor them to account for their business model, given the structure and characteristics of their relationships with retail customers, including the varying levels and frequency of recommendations provided and the types of conflicts that may be presented. This requirement of “reasonably designed” policies and procedures is also

684 See Proposing Release at II.D.3.b.
685 See Better Markets August 2018 Letter.
686 See infra footnote 809.

consistent with Commission rules and regulations in other contexts, including under the Advisers Act. 687 Further, the Commission continues to believe that while not required components, as an effective practice, broker-dealers should consider including in their supervisory and compliance programs the components listed in the Proposing Release, which may be relevant in considering whether policies and procedures are reasonably designed. The Commission is not providing a safe harbor to Regulation Best Interest for brokerdealers who demonstrate compliance with FINRA rules689 because, while FINRA rules may address specific conflicts of interest, Regulation Best Interest establishes a broader obligation to address conflicts both at the firm level and at the associated person level.690 As to commenters’ concerns that the policies and procedures requirement provides too much flexibility and as

687 See Rule 206(4)-7 under the Advisers Act. See also Section 15(g) of the Exchange Act; 15E(g) of the Exchange Act. 688 These components could include, among other things: policies and procedures outlining how the firm identifies conflicts, identifying such conflicts and specifying how the broker-dealer intends to address each conflict; robust compliance and monitoring systems; processes to escalate identified instances of noncompliance for remediation; procedures that designate responsibility to business line personnel for supervision of functions and persons, including determination of compensation; processes for escalating conflicts of interest; processes for periodic review and testing of the adequacy and effectiveness of policies and procedures; and training on policies and procedures. Proposing Release at Section II.D.3.b. 689 See supra footnote 682. 690 “While FINRA has repeatedly emphasized the importance of identifying and managing conflicts and has a number of rules that address discrete conflicts of interest, there is currently no similarly broad conflicts provision in FINRA rules, including the suitability rule.” See FINRA 2018 Letter.

discussed in more detail below, the Commission has changed the specific requirements to be addressed by the policies and procedures pursuant to the Conflict of Interest Obligation to provide more certainty to firms on which conflicts of interest should be addressed through disclosure, mitigation or elimination. While the Commission also understands concerns related to compliance costs, we believe that the revisions to the Conflict of Interest Obligation, including the greater specificity in the rule text, as well as the guidance provided below, will ease the adjustment of broker-dealers’ existing supervisory and compliance systems and streamline compliance with Regulation Best Interest. b. Conflicts of Interest The Proposing Release distinguished between material conflicts of interest in general and material conflicts of interest arising from financial incentives. Under the Proposing Release, broker-dealers would be required to establish, maintain, and enforce policies and procedures to identify and, in the case of material conflicts of interest, disclose or eliminate, and in the case of financial incentives, disclose and mitigate, or eliminate material conflicts of interest arising from financial incentives.691 The Commission proposed to interpret a material conflict of interest as a conflict of interest that a reasonable person would expect might incline a broker—consciously or

691 See Proposing Release at Section II.D.3.

unconsciously—to make a recommendation that is not disinterested.
692 For material conflicts of interest arising from financial incentives associated with a recommendation, the Proposing Release discussed compensation practices established by the broker-dealer, including fees and other charges for the services provided and products sold; employee compensation or employment incentives (e.g., quotas, bonuses, sales contests, special awards, differential or variable compensation, incentives tied to appraisals or performance reviews); compensation practices involving third-parties, including both sales compensation and compensation that does not result from sales activity, such as compensation for services provided to third-parties (e.g., sub-accounting or administrative services provided to a mutual fund); receipt of commissions or sales charges, or other fees or financial incentives, or differential or variable compensation, whether paid by the retail customer or a third-party; sales of proprietary products or services, or products of affiliates; and transactions that would be effected by the broker-dealer (or an affiliate thereof) in a principal capacity. In addition, the Commission proposed to limit conflicts of interest to those associated with recommendations as broker-dealers may provide a range of services not involving a

692 Proposing Release at 21602.
693 Id.

recommendation, and such services are subject to general antifraud liability and specific requirements to address associated conflicts of interest.694 Recognizing the phrase “financial incentives” could be interpreted broadly, the Commission solicited comment on the proposed requirement and the distinction between the different requirements under the Conflict of Interest Obligation. In response, many commenters suggested that the scope of the description of financial incentives be narrowed as it was too broad and requested guidance or examples of material conflicts of interest that would not fall within the description of financial incentives.695 Specifically, a number of commenters suggested that the mitigation obligation should focus on financial incentives at the registered representative level as opposed to the firm level.696 A number of commenters suggested that the distinction between material conflicts and financial incentives should be removed altogether.697 Commenters also stated that the mitigation requirement is a higher standard of conduct than the

694 See Proposing Release at 21617. In including this limitation, the Commission explained that it was not intending to change the disclosure obligations associated with these services under the general antifraud provisions of the federal securities laws. 695 See, e.g., SIFMA August 2018 Letter; Primerica Letter; BISA Letter; Committee of Annuity Insurers Letter; IPA Letter; CFA Institute Letter. 696 See, e.g., Primerica Letter; TIAA Letter; ICI Letter; Invesco Letter; Money Management Institute Letter; Committee of Annuity Insurers Letter. 697 See, e.g., CFA August 2018 Letter; CFA Institute Letter; Morgan Stanley Letter; SIFMA August 2018 Letter; CCMC Letters.

investment adviser fiduciary duty which allows for conflicts to be addressed through disclosure sufficient for informed consent. In consideration of comments and as discussed in more detail below, the Commission has restructured the Conflict of Interest Obligation to: (1) create an overarching obligation to establish, maintain and enforce written policies and procedures that are reasonably designed to identify and at a minimum disclose (pursuant to the Disclosure Obligation), or eliminate, all conflicts of interest associated with the recommendation; and (2) adopt specific requirements with respect to such policies and procedures for the mitigation and elimination of identified conflicts of interest. In particular, we have revised the proposed policies and procedures requirement for mitigation to focus on conflicts of interest that create an incentive for an associated person to place his or her interests ahead of the interest of the retail customer as described below, by eliminating the distinction between material conflicts of interest and material conflicts of interest

698 See Franklin Templeton Letter (stating that by including this heightened requirement for financial conflicts of interest, Regulation Best Interest would impose a higher standard on broker-dealers than is required of investment advisers with respect to such conflicts); Primerica Letter (stating that by requiring broker-dealers to disclose and mitigate or eliminate conflicts resulting from financial incentives, the standard is actually higher than the standard that applies under the Advisers Act); CCMC Letters (stating that the requirement to mitigate or eliminate material conflicts of interest arising from financial incentives effectively subjects broker-dealers to a higher standard than investment advisers, who are generally able to disclose conflicts of interest). See also UBS Letter; ASA Letter. Some commenters also suggested that the obligation to address conflicts of interest should be harmonized between broker-dealers and investment advisers. See, e.g., Schwab Letter.

arising from financial incentives, and removing the affirmative mitigation requirement at the firm level. However, in light of this change, we are adding a new provision requiring brokerdealers to establish, maintain, and enforce written policies and procedures to specifically require broker-dealers to identify and disclose material limitations, and any associated conflicts of interest a broker-dealer places on the securities or investment strategies involving securities that may be recommended to the retail customer, such as recommendations being based on limited product menus (i.e., only make recommendations of proprietary or other limited range of products) and prevent such limitations and associated conflicts of interest from causing the broker-dealer to make recommendations that place its interest ahead of the retail customer. We believe the policies and procedures need to address those certain conflicts of interest inherent in the broker-dealer business model by heightened measures in order to prevent recommendations that are not in the best interest of the retail customer. Therefore, we are adding a provision requiring broker-dealers to establish, maintain, and enforce written policies and procedures reasonably designed to identify and to eliminate any conflicts of interest associated with sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sale of specific securities or specific types of securities within a limited period of time. For purposes of Regulation Best Interest, and for the reasons described in more detail in the context of the Disclosure Obligation, we have also amended the rule text by eliminating

“material” from “conflict of interest” and codified the definition of a conflict of interest699 to mean an interest that might incline a broker-dealer—consciously or unconsciously—to make a recommendation that is not disinterested.700 While “material” has been eliminated, pursuant to the Disclosure Obligation, broker-dealers are required to disclose all material facts relating to conflicts of interest associated with recommendations, consistent with the Proposing Release’s intent of facilitating disclosure to assist retail customers in making informed investment decisions.701 Regarding the application of the Conflict of Interest Obligation only to those conflicts of interest associated with recommendations, one commenter stated that given the lack of detail in the Proposing Release, broker-dealers may have difficulty determining whether material conflicts are associated with a recommendation and how to adequately address such conflicts, which could create inconsistent application of Regulation Best Interest. 702 We continue to

699 See Section II.D.1. To provide clarity that the interpretation of “conflict of interest” is limited to Regulation Best Interest, the Commission has revised the rule text to include a definition of the term. 700 See id. 701 Id. 702 See State Attorneys General Letter. (“Given the lack of detail in the Proposed Rule, broker-dealers may have difficulty determining whether material conflicts are (1) “associated with recommendations” and therefore subject to disclosure or elimination; or (2) “arising from financial incentives associated with such recommendations” and therefore subject to disclosure and mitigation, or elimination. This ambiguity, while designed to give maximum flexibility to broker-dealers, may in fact result in inconsistent application of the Proposed Rule nationwide and further add to the existing confusion.”)

believe this approach is appropriate, for the reasons discussed in the Proposing Release703 and also believe that our revised Conflict of Interest Obligation provides more specificity about how to address specific conflicts of interest, in conjunction with our Disclosure Obligation, which should address commenters’ concerns.
c. Identifying Conflicts of Interest
In the Proposing Release, the Commission stated that having a process to identify and appropriately categorize conflicts of interest is a critical first step to ensure that broker-dealers have reasonably designed policies and procedures to address conflicts of interest in order to comply with the Conflict of Interest Obligation. As stated in the Proposing Release, reasonably designed policies and procedures to identify conflicts of interest generally should do the following: (i) define such conflicts in a manner that is relevant to a broker-dealer’s business (i.e., conflicts of both the broker-dealer entity and the associated persons of the broker-dealer), and in a way that enables employees to understand and identify conflicts of interest; (ii) establish a structure for identifying the types of conflicts that the broker-dealer (and associated persons of the broker-dealer) may face; (iii) establish a structure to identify conflicts in the broker-dealer’s business as it evolves; (iv) provide for an ongoing (e.g., based on changes in the broker-dealer’s business or organizational structure, changes in compensation incentive structures, and introduction of new products or services) and regular, periodic (e.g., annual) review for the

703 See Proposing Release at 21618.

identification of conflicts associated with the broker-dealer’s business; and (v) establish training procedures regarding the broker-dealer’s conflicts of interest, including conflicts of natural persons who are associated persons of the broker-dealer, how to identify such conflicts of interest, as well as defining employees’ roles and responsibilities with respect to identifying such conflicts of interest.704 Most commenters did not express a view on such guidance relating to the process of identifying conflicts of interest. Therefore, for the reasons discussed in the Proposing Release, we are reiterating this guidance here. d. Overarching Obligation Related to Conflicts of Interest As proposed, the first component of the Conflict of Interest Obligation would have required a broker-dealer to establish, maintain, and enforce written policies and procedures reasonably designed to identify, and disclose, or eliminate, all material conflicts of interest that are associated with recommendations covered by Regulation Best Interest. In guidance, the Commission stated that reasonably designed policies and procedures should establish a clearly defined and articulated structure for: determining how to effectively address material conflicts of interest identified (i.e., whether to eliminate or disclose (and mitigate, as required) the material conflict); and setting forth a process to help ensure that material conflicts are effectively addressed as required by the policies and procedures.

704 Id.

As such, the requirement was intended to provide flexibility to broker-dealers regarding how to address conflicts of interest, whether through disclosure pursuant to the Disclosure Obligation, or elimination. The Commission also indicated that there may be situations in which disclosure alone is not sufficient, and broker-dealers may need to establish policies and procedures designed to eliminate the conflict or both disclose and mitigate it.705 The Commission also provided examples of how a broker-dealer could eliminate a conflict.706 As discussed above, we received many comments generally on the Conflict of Interest Obligation, requesting clarification on which conflicts needed to be disclosed, versus those that should be mitigated or eliminated.707 Some commenters suggested that disclosure and informed consent should be considered to effectively address conflicts, similar to the approach taken under the Advisers Act. 708 Some commenters suggested that disclosure alone was sufficient to address conflicts arising from financial incentives. 709 For example, a few commenters identified specific types of conflicts they believed could be addressed by appropriate disclosure, such as third-party

705 See Proposing Release at 21619-21620.
706 Id.
707 See supra footnote 672.
708 See IPA Letter; Morgan Stanley Letter; ASA Letter.
709 See, e.g., Committee of Annuity Insurers Letter; Stifel Letter; Mass Mutual Letter; SIFMA August 2018 Letter; HD Vest Letter; Primerica Letter.

payments.710 A few commenters requested that the examples of how to eliminate conflicts of interest in the Proposing Release be removed.711 After carefully considering comments, we are adopting, similar to the Proposing Release, an overarching requirement to establish, maintain, and enforce reasonably designed policies and procedures to identify and, at a minimum, disclose, in accordance with the Disclosure Obligation, or eliminate all conflicts of interest associated with the recommendation. However, as discussed in the following sections, we are otherwise revising the Conflict of Interest Obligation in response to these comments. Subparagraphs (a)(2)(iii)(B)-(D) of the rule text will now require policies and procedures that are reasonably designed to address specific conflicts of interest in areas that we believe create greater incentives for, and increased risk that, the broker-dealer or associated person may place its or his or her own interest ahead of the retail customer’s interest, specifically conflicts of interest that: (1) create certain incentives to associated persons; (2)

710 See, e.g., Invesco Letter; Transamerica August 2018 Letter; Primerica Letter. 711 See, e.g., ICI Letter (“This example suggests a firm that offers proprietary funds should consider relinquishing the advisory fees the firm or its affiliate receives for managing those funds as a means to address conflicts that selling such funds creates. This example is inconsistent with the SEC’s explicit statements elsewhere in the Best Interest Proposal that Regulation Best Interest would not preclude a firm from offering proprietary products….The SEC should clarify in any adopting release that firms selling proprietary funds are not obligated to credit fund advisory fees against other broker-dealer charges. The ability to charge fees to manage proprietary funds is critical to preserve the ability of firms to offer both proprietary and third-party funds.”); Committee of Annuity Insurers Letter (“This suggested method for elimination of material conflicts of interest relating to affiliated mutual funds presents a number of problematic issues….This example is exacerbated in the context of variable annuities.”).

conflicts of interest associated with material limitations on the securities or investment strategies involving securities, such as, limited product menus; and (3) sales contests, sales quotas, bonuses, and non-cash compensation based on the sales of specific securities or type of security within a limited period of time. In adopting this overarching requirement, we are reaffirming guidance in the Proposing Release on establishing a process to identify and determine how to address a conflict, as discussed above. 712 Further, similar to the Proposing Release, while we are not requiring brokerdealers to develop policies and procedures to disclose and mitigate all conflicts of interest, we are requiring that broker-dealers develop policies and procedures reasonably designed to “at a minimum disclose, or eliminate” all conflicts.713 We continue to believe that where a brokerdealer cannot fully and fairly disclose a conflict of interest in accordance with the Disclosure Obligation, the broker-dealer should eliminate the conflict or adequately mitigate (i.e., reduce) the conflict such that full and fair disclosure in accordance with the Disclosure Obligation is possible. In some cases, conflicts of interest may be of a nature and extent that it would be difficult to provide disclosure that adequately conveys to a retail customer the material facts or the nature, magnitude and potential effect of the conflict for informed decision-making or where disclosure may not be sufficiently specific or comprehensible for the retail customer to

712 See Section II.C.3.c.
713 Proposing Release at 21620.

understand whether and how the conflict will affect the recommendations he or she receives. Also, in certain situations, a broker-dealer, even if not required, may determine that in addition to addressing a conflict through disclosure, to take additional steps beyond disclosure to also mitigate the conflict of interest. The Commission acknowledges commenters’ concerns regarding the examples of how to eliminate conflicts of interest that were provided in the Proposing Release. The Commission’s intent was not to prevent firms from offering certain products to the extent that they are in a retail customer’s best interest. In order to avoid confusion and to respond to commenters, we are not including these examples as final guidance here as we have instead decided to focus the rule text on specific conflicts of interest associated with certain sales practices based on the sale of specific securities that we require to be eliminated and thus such examples are not necessary. In discussing the separate mitigation and elimination requirements below, we provide guidance on the specific conflicts for which we are requiring these heightened measures beyond disclosure. However, while we have removed the examples of potential conflicts of interest that may be more appropriately avoided, we emphasize that pursuant to the overarching obligation, elimination of conflicts of interest is one method of addressing the conflict, in lieu of disclosure,

714 See id.; see also Fiduciary Interpretation (stating that where an investment adviser cannot fully and fairly disclose a conflict such that the client can provide informed consent, the adviser should eliminate the conflict or adequately mitigate (i.e., modify practices to reduce) the conflict such that full and fair disclosure and informed consent are possible).

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