"UNRECOVERABLE: Timeout During Enrichment"

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 broker-

dealer standard of conduct beyond existing suitability obligations, and aligns the standard of 

conduct with retail customers’ reasonable expectations by requiring broker-dealers, among other 

things, to: 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 



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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. 

 



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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 



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 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 17a-

3(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-



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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 broker-

dealer standard of conduct beyond existing suitability obligations, and aligns the standard of 

conduct with retail customers’ reasonable expectations by requiring broker-dealers, among other 

things, to: (1) 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 



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both retail and institutional customers.1  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.2   

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”). 



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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.4  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).5  

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 

 

 



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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.   



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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.   



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approximately 3,000 are unique comment letters, from a variety of commenters including 

individual investors, consumer advocacy groups, financial services firms (including broker-

dealers, 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”).   



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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-form-
crs-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-committee-
2012/iac110718-investor-as-purchaser-subcommittee-recommendation.pdf (“IAC 2018 
Recommendation”).  Generally, a majority of the IAC made the following 

 

 



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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. 



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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 broker-

dealer 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”).16    

                                                                                                                                                             

 

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 

 

 



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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 broker-

dealer 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. 



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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 broker-

dealer 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. 



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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. 



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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).  



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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 broker-
dealers and investment advisers when providing personalized investment advice about 
securities to retail customers.  The staff’s recommended standard would require firms “to 
act in the best interest of the customer without regard to the financial or other interest of 
the broker, dealer or investment adviser providing the advice.”  The staff made a number 
of specific recommendations for implementing the uniform fiduciary standard of conduct, 
including that the Commission should: (1) require firms to eliminate or disclose conflicts 

 

 



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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. 



20 

 

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21 

 

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-the-
DOL-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 

 

 



22 

 

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 commission-
based 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 self-
directed 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.” 

 



23 

 

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.   



24 

 

but nearly all commenters suggested modifications to proposed Regulation Best Interest.37  

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 

 

 



25 

 

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”). 



26 

 

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  “broker-
dealer 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. 



27 

 

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”). 



28 

 

with other existing disclosure requirements.46  In particular, several commenters recommended 

that the Commission require broker-dealers provide “full and fair” disclosure.47  

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. 



29 

 

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 AFL-
CIO 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”). 



30 

 

recommendations of specific categories of securities, such as variable annuities or leveraged 

exchange-traded products.52   

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”). 



31 

 

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.56   

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”). 



32 

 

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.58 

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.61   

                                                                                                                                                             

 

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; Great-
West 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. 



33 

 

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 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. 



34 

 

agreement will result in buy, sell or hold recommendations subject to Regulation Best 

Interest, even when the recommendation to hold is implicit.63   

• 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. 



35 

 

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.   



36 

 

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 broker-

dealers 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. 



37 

 

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 broker-

dealer 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. 



38 

 

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. 



39 

 

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 broker-

dealer 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 

 

 



40 

 

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 broker-

dealer 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.41 

 

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 broker-

dealer 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. 



42 

 

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.78   

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.79   

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. 



43 

 

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 anti-
manipulation 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.  

 



44 

 

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 



45 

 

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 



46 

 

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 

 

 



47 

 

The views of commenters on the approach to an enhanced standard of conduct for broker-

dealers 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. 



48 

 

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. 



49 

 

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.   



50 

 

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 broker-

dealers 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 broker-

dealer’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). 



51 

 

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 

 

 



52 

 

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.”). 



53 

 

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 “self-

promotion.”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. 



54 

 

“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.      

1. 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. 



55 

 

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-advisory-
committee-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.   



56 

 

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 broker-

dealer 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 



57 

 

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 

 

 



58 

 

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. 



59 

 

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 broker-

dealer 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.   



60 

 

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 broker-

dealer 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.61 

 

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 broker-

dealer’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 



62 

 

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. 



63 

 

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, Dodd-

Frank Act Section 913(g) expressly provides that the receipt of commission-based 
 

 



64 

 

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 broker-
dealers.  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. 

 



65 

 

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…”). 



66 

 

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.134 

                                                                                                                                                             

 

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.”). 



67 

 

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.135  

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).   



68 

 

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 

 

 



69 

 

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 dual-
registrants 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.   



70 

 

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.   



71 

 

(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).141 

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). 



72 

 

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 broker-

dealer 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.   



73 

 

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 principles-

based 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-and-

circumstances 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 



74 

 

of Interest Obligations, if any recommendation was predominantly motivated by the broker-

dealer’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.   



75 

 

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 broker-

dealer 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. 



76 

 

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. 



77 

 

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 

1. 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. 



78 

 

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.157 

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.158  

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. 



79 

 

applied and would maintain efficiencies for broker-dealers that have already established 

infrastructures to comply with suitability obligations, which are recommendation-based.159  

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”). 



80 

 

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81 

 

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). 

 



82 

 

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 agreed-
upon 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 

 

 



83 

 

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 broker-
dealer 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.  



84 

 

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.171   

                                                                                                                                                             

 

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 

 

 



85 

 

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 

 

 



86 

 

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 

 

 



87 

 

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.177   

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 broker-
dealer 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. 



88 

 

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). 



89 

 

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.”). 



90 

 

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. 



91 

 

• 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.183  

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 broker-
dealer 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. 



92 

 

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.184  

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. 



93 

 

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”). 



94 

 

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. 



95 

 

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.   



96 

 

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.  



97 

 

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. 



98 

 

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. 



99 

 

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.   



100 

 

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101 

 

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. 



102 

 

on the facts and circumstances.206  Other commenters suggested that the Commission not impose 

a duty to monitor brokerage accounts.207  

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 broker-

dealer agrees to provide.209  We believe that any monitoring service agreed to by the broker-

dealer, 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. 



103 

 

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. 



104 

 

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.   



105 

 

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 broker-

dealer’s agreement to monitor the customer’s account.216   

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. 



106 

 

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.   



107 

 

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.  



108 

 

3. 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.224   

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. 



109 

 

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.226  

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. 



110 

 

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). 



111 

 

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.  



112 

 

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.238 

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). 



113 

 

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.240   

In addition, we view a “legal representative” of a natural person to only cover non-

professional 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-study-
part2.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.   



114 

 

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 non-

professional 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. 



115 

 

retained to represent the assets of natural persons from their own obligations to retail 

customers.244  

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. 



116 

 

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 tax-
favored 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. 



117 

 

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 

 

 



118 

 

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 after-
the-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.    
 



119 

 

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 broker-

dealer 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.   



120 

 

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.121 

 

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.259   

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).   



122 

 

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.260  

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. 



123 

 

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. 



124 

 

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.     



125 

 

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 dual-

registrant 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. 



126 

 

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 dual-

registrants.  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 dual-

registrant 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. 



127 

 

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.276   

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. 



128 

 

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 broker-

dealer 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 dual-
registrants 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). 



129 

 

Obligation), provides a recommendation of a securities transaction or investment strategy 

involving securities to the family in the course of the holistic review.282 

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. 



130 

 

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.   

1. 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 



131 

 

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. 



132 

 

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, broker-

dealers 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). 



133 

 

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. 



134 

 

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. 



135 

 

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 broker-

dealers 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. 



136 

 

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 



137 

 

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 broker-

dealers 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.   



138 

 

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.   



139 

 

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 

 

 



140 

 

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).141 

 

not only the broker-dealer entity, but also individuals who are associated persons of a broker-

dealer (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.   



142 

 

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. 



143 

 

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)). 



144 

 

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). 



145 

 

  Capacity In Which the Broker-Dealer is Acting 

 In the Proposing Release, the Commission identified that the capacity in which a broker-

dealer 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.316  

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). 



146 

 

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 15l-

1(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. 



147 

 

with the Relationship Summary.320  Form CRS requires a firm to state the name of the broker-

dealer or investment adviser and whether the firm is registered with the Commission as a broker-

dealer, 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. 



148 

 

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 broker-
dealer and investment adviser may offer services through a dual-registrant, affiliated 
firms, or unaffiliated firms, or only offer one type of service notwithstanding their dual 
licensing.  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.   



149 

 

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 

 

 



150 

 

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/public-
statement/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”). 



151 

 

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 broker-
dealers/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 … 

 

 



152 

 

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 broker-
dealers 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.  



153 

 

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).”) 

 

 



154 

 

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.  



155 

 

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.’”) 



156 

 

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 broker-

dealer 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.  



157 

 

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 broker-
dealers is more appropriate than a restriction.  



158 

 

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 dual-
registrant 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). 



159 

 

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.  



160 

 

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 broker-

dealers, 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.161 

 

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.)  



162 

 

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.  



163 

 

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. 



164 

 

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. 



165 

 

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.366   

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). 



166 

 

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 per-

transaction 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).   

 



167 

 

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.   



168 

 

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.373 

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. 



169 

 

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.375   

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. 



170 

 

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. 



171 

 

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 product-

level 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. 



172 

 

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. 



173 

 

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 



174 

 

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 broker-

dealers 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. 



175 

 

 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.386  

 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 dual-

registrants 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). 



176 

 

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).   



177 

 

 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 broker-

dealer 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). 



178 

 

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.391   

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). 



179 

 

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 broker-

dealer 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. 



180 

 

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.394   

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).181 

 

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 broker-

dealer, 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. 



182 

 

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.   



183 

 

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.402 

 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). 



184 

 

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 agreed-

upon 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 broker-

dealers 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 



185 

 

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. 



186 

 

 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. 



187 

 

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). 



188 

 

products are available with different features rather than require firms specify why the broker-

dealer recommended one product over another.413 

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).  



189 

 

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 broker-

dealer, 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 



190 

 

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.” 



191 

 

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 broker-

dealer’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 



192 

 

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. 



193 

 

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.418   

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”). 



194 

 

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 dual-

registrants 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’”).  



195 

 

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. 



196 

 

 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.   



197 

 

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. 



198 

 

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 

 

 



199 

 

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.  



200 

 

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.440 

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.201 

 

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.445 

 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. 



202 

 

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 non-
cash compensation, and the conflicts of interest those payments create.”).  



203 

 

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. 



204 

 

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. 



205 

 

  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 

 

 



206 

 

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. 



207 

 

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 broker-
dealer 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). 



208 

 

 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 broker-

dealer 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. 



209 

 

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.460   

 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, broker-
dealers 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.   



210 

 

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 broker-

dealers 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 

 

 



211 

 

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.466   

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 

 

 



212 

 

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.469 

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).  



213 

 

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.471   

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. 



214 

 

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.  



215 

 

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).  



216 

 

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-by-

case 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. 



217 

 

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 broker-

dealers 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. 



218 

 

taken this position in other contexts where full and fair disclosure is required, including under the 

fiduciary duty under the Advisers Act.480      

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. 



219 

 

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). 



220 

 

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 broker-

dealers 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”).221 

 

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.489  

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.) 



222 

 

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. 



223 

 

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.495    

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).  



224 

 

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. 



225 

 

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 broker-

dealer 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. 



226 

 

 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). 



227 

 

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 product-
level 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 

 

 



228 

 

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,506 

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. 



229 

 

under the circumstances outlined in Section II.C.1, Oral Disclosure or Disclosure After a 

Recommendation.509 

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. 



230 

 

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).    



231 

 

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 web-

based 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)). 



232 

 

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/recommendation-
promotion-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). 



233 

 

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.523   

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. 



234 

 

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). 



235 

 

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. 



236 

 

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.530 

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 broker-
dealer 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). 



237 

 

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). 



238 

 

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. 



239 

 

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 broker-
dealer 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. 



240 

 

supplemented by more detailed information provided either at the same time or subsequently.538  

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 principles-
based 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241 

 

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 broker-

dealers 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).  



242 

 

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. 



243 

 

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 broker-

dealers 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.546   

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. 



244 

 

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 

 

 



245 

 

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). 



246 

 

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 principles-

based 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”). 



247 

 

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. 



248 

 

 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 broker-

dealer 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. 



249 

 

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. 



250 

 

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.565   

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, broker-

dealers 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-circumstances-
based.  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.”). 



251 

 

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.567   

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. 



252 

 

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.569   

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….”). 



253 

 

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.571   

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 broker-

dealer’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. 



254 

 

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.573 

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 broker-
dealer’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. 



255 

 

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 

 

 



256 

 

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.578  

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. 



257 

 

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 

 

 



258 

 

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. 



259 

 

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.587 

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. 



260 

 

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.261 

 

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). 



262 

 

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). 



263 

 

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”).  

 



264 

 

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.598     

                                                                                                                                                             

 

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 Exchange-
Traded 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 

 

 



265 

 

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”).  



266 

 

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 Broker-
Dealer 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 



267 

 

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 broker-

dealer’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. 



268 

 

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 broker-

dealers 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. 



269 

 

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. 



270 

 

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. 



271 

 

 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.609       

 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. 



272 

 

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 broker-

dealer 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 



273 

 

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 risk-
based 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, 

 

 



274 

 

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.  



275 

 

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. 



276 

 

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 broker-

dealer’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. 



277 

 

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. 



278 

 

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.622  

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.624    

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. 



279 

 

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. 



280 

 

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.281 

 

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 

 

 



282 

 

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. 



283 

 

facts and circumstances of the particular recommendation and the particular retail customer at 

the time the recommendation is made.636      

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.  



284 

 

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.638    

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. 



285 

 

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. 



286 

 

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-and-
circumstances 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. 



287 

 

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 



288 

 

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.645    

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 broker-
dealer, this limitation may constitute a material limitation placed on the securities or 
investment strategies involving securities that may be recommended, which the broker-
dealer (or an associated person) would need to disclose and address as provided in the 
Disclosure and Conflict of Interest Obligations.   



289 

 

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 

 

 



290 

 

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 broker-

dealer 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. 



291 

 

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 broker-

dealer’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.647  

Application of Care Obligation to Account Type Recommendations 
 
As discussed above, Regulation Best Interest will apply to recommendations by a broker-

dealer 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.648   

                                                                                                                                                             

 

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.   

 

 



292 

 

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. 



293 

 

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. 



294 

 

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. 



295 

 

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). 



296 

 

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.   



297 

 

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. 

 

 



298 

 

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. 



299 

 

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 broker-

dealer 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. 



300 

 

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.666  

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.301 

 

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). 



302 

 

3. 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. 



303 

 

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.672    

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 broker-

dealers 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. 



304 

 

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.673 

 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.”). 



305 

 

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 

 

 



306 

 

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). 



307 

 

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.684   

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. 



308 

 

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.688   

The Commission is not providing a safe harbor to Regulation Best Interest for broker-

dealers 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. 



309 

 

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. 



310 

 

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.693   

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. 



311 

 

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. 



312 

 

investment adviser fiduciary duty which allows for conflicts to be addressed through disclosure 

sufficient for informed consent.698 

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. 



313 

 

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 broker-

dealers 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 



314 

 

“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.”) 

 

 



315 

 

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.  



316 

 

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. 



317 

 

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. 



318 

 

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.”). 



319 

 

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 broker-

dealers 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 broker-

dealer 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.  



320 

 

understand whether and how the conflict will affect the recommendations he or she receives.714  

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).321 

 

which broker-dealers may find appropriate in certain circumstances even when not required by 

Regulation Best Interest. 

e. Mitigation of Certain Incentives to Associated Persons 

We proposed to require firms to 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 with such recommendations.  In proposing 

this requirement, we recognized the importance of the brokerage model as a potentially cost-

effective option for investors, acknowledging that the compensation structures and arrangements 

within the business model create inherent conflicts715 but that such compensation may be 

appropriate in light of the time and experience necessary to understand investments.  As such, we 

aimed to promote investor choice and access to products and instead of requiring broker-dealers 

to establish policies and procedures to eliminate compensation structures and arrangements,716 

required policies and procedures to mitigate those conflicts of interest. 

                                                                                                                                                             

 

715  See Proposing Release at II.D.3.e.  See also Tully Report. 
716  While the Commission’s goal is to promote access and choice to investors, as discussed 

in more detail in Section II.C.3.g, Elimination of Certain Conflicts of Interest, the 
Commission believes it is in the public interest and will enhance investor protection to 
require broker-dealers to reasonably design policies and procedures to eliminate certain 
conflicts of interest as we believe such conflicts create too strong of an incentive for a 
broker-dealer to make a recommendation that places the broker-dealer’s interest ahead of 
the retail customer’s interest. 



322 

 

We proposed a principles-based approach to provide flexibility to firms to develop and 

tailor policies and procedures that included conflict mitigation measures based on each firm’s 

circumstances, for example, the size, retail customer base, nature and significance of the conflict, 

and complexity of the product.717  We stated that, depending on the conflict and the firm’s 

assessment, more or less demanding measures may be appropriate.718  We provided examples of 

situations in which heightened mitigation measures may be appropriate and also suggested that 

broker-dealers assess their policies and procedures as they may be reasonably designed at the 

outset but may later cease to be reasonably designed based on subsequent events or 

information.719  Finally, we provided a non-exhaustive list of potential practices that we believe 

broker-dealers should consider including in their policies and procedures, and as discussed 

above, suggested that some practices may be more appropriately avoided as they may be difficult 

to mitigate.720 

As discussed above, many commenters expressed concern with the breadth of the 

mitigation requirement and requested that mitigation be limited to certain types of 

                                                                                                                                                             

 

717  Proposing Release at II.D.3.e.   
718  Id. 
719  Id. 
720  Id. 



323 

 

compensation721 or solely to financial incentives to the individual registered representative.722  

Many commenters were also concerned about what they described as ambiguities in the 

Proposing Release, including the lack of a definition of the term “mitigate”723 and requested 

further guidance surrounding conflicts that needed to be mitigated versus those that can be 

disclosed.724  Some commenters suggested that supervision should be adequate mitigation and 

requested clarification on whether their existing supervisory practices, if compliant, were 

sufficient.725  As discussed above under Section II.C.3.b, a number of commenters expressed 

                                                                                                                                                             

 

721  See, e.g., Cetera August 2018 Letter; SIFMA August 2018 Letter.  But see CFA August 
2018 Letter (stating that the Commission has proposed an appropriately broad definition 
of material conflicts that arise out of financial incentives and that it should not be 
narrowed but a cleaner approach would be to eliminate the artificial distinction between 
those material conflicts of interest that arise from financial incentives and those that do 
not, and to apply the same obligation to disclose and mitigate all material conflicts, 
whatever the source). 

722  See, e.g., Primerica Letter; Committee of Annuity Insurers Letter; Cetera August 2018 
Letter. See also Wells Fargo Letter (stating that receipt of fees and other revenue that 
does not otherwise result in a direct financial incentive at the registered representative 
level should be disclosed); ICI Letter (recommending revisions to the proposed conflict 
of interest obligation to focus the mitigation obligation on the fees, revenue, or other 
financial incentives that may influence the recommendation of a broker-dealer 
representative  ̶  the individual making the recommendation); Invesco Letter. 

723  See, e.g., UVA Letter. 
724  See, e.g., CFA August 2018 Letter; Wells Fargo Letter; Committee of Annuity Insurers 

Letter; NASAA August 2018 Letter; Cetera August 2018 Letter; Morningstar Letter. 
725  See, e.g., BISA Letter; AALU Letter; Primerica Letter; Committee of Annuity Insurers 

Letter.   



324 

 

concern that the mitigation requirement is a higher standard of conduct than the investment 

adviser fiduciary duty and requested that it be aligned with the fiduciary duty.726 

Many commenters expressed concern over some of the examples, and in particular 

neutral compensation factors, described as a potential mitigation measure.727  Similarly, some 

commenters suggested that the Commission should take more of a principles-based approach as 

they viewed the Proposing Release as too prescriptive because it incorporated examples from the 

DOL Fiduciary Rule.728  One commenter expressed concern over the suggestion that heightened 

mitigation may be appropriate if a retail customer has a less sophisticated understanding, stating 

that it is unclear how mitigation would be measured and could create heightened costs and risks 

for firms.729  Finally, some commenters requested confirmation that certain practices are 

                                                                                                                                                             

 

726  Supra footnote 698.   
727  See, e.g., SIFMA August 2018 Letter; ICI Letter; Edward Jones Letter; Morgan Stanley 

Letter; Transamerica August 2018 Letter; Ameriprise Letter; Capital Group Letter; 
Cetera August 2018 Letter; CCMC Letters; Letter from Michelle Bryan Oroschakoff, 
Chief Legal Officer, LPL Financial (Dec. 18, 2018) (“LPL December 2018 Letter”) 
(requesting confirmation that the non-exhaustive list of potential practices was intended 
merely as a list of examples and are not required mitigation practices); Mass Mutual 
February 2019 Letter.  But see NASAA August 2018 Letter (stating that neutral 
compensation across products could constitute appropriate mitigation), State Attorneys 
General Letter (suggesting differential compensation be permitted based solely on neutral 
factors).  

728  See, e.g., LPL August 2018 Letter; Cetera August 2018 Letter; Davis Harman Letter. 
729  See Primerica Letter. 



325 

 

permissible such as use of compensation grids,730 receipt of revenue sharing,731 differential 

compensation,732 recommendations based on a limited range of products and proprietary 

products,733 and use of employment benefits.734 

In response to commenters, we have revised the Proposing Release’s requirement with 

respect to mitigation to require broker-dealers to establish policies and procedures reasonably 

designed to identify and mitigate any conflicts of interest associated with such recommendations 

that create an incentive for a natural person who is an associated person of a broker- dealer to 

place the interest of the broker-dealer, or such natural person ahead of the interest of the retail 

customer.   

We agree with commenters that it is appropriate to focus on the incentives that directly 

affect the associated person making a recommendation, because we believe those conflicts are 

most likely to undermine the associated person’s ability to make a recommendation that is in the 

best interest of the retail customer, and thus present heightened risk of recommendations that are 

                                                                                                                                                             

 

730  See, e.g., SIFMA August 2018 Letter; Committee of Annuity Insurers Letter; Primerica 
Letter. 

731  See, e.g., SIFMA August 2018 Letter; Cetera August 2018 Letter. 
732  See, e.g., Cetera August 2018 Letter; Transamerica August 2018 Letter; Ameriprise 

Letter. 
733  See, e.g., NY Life Letter; Fidelity Letter; ICI Letter; T.Rowe Letter.  These commenters 

suggested that disclosure would be an appropriate way to address conflicts of interest 
associated with limited product menus and proprietary products. 

734  See, e.g., AALU Letter. 



326 

 

not in a retail customer’s best interest and that place the associated person’s or firm’s interests 

ahead of the retail customer’s interest.  

While disclosure can be an effective tool for retail customers to increase awareness of a 

conflict of interest,735 in certain cases, we do not believe that disclosure alone sufficiently 

reduces the potential effect that these conflicts of interest may have on recommendations made to 

retail customers.736  Instead, we believe that broker-dealers are most capable of identifying and 

addressing the conflicts that may affect the obligations of their associated persons with respect to 

the recommendations they make, and therefore are in the best position, to affirmatively reduce 

the potential effect of these conflicts of interest such that they do not taint the recommendation.  

We are persuaded by commenters737 that expressed concern that requiring broker-dealers 

to establish policies and procedures reasonably designed to mitigate all financial incentives, 

including any compensation, may result in broker-dealers narrowing their product shelf and 

                                                                                                                                                             

 

735  See Section II.C.1, Disclosure Obligation; Relationship Summary Adopting Release.   
736  See, e.g., Tully Report; CFA August 2018 Letter; AARP August 2018 Letter; Warren 

Letter (“the [Commission] should not rely on disclosure alone to protect consumers.”).  
See also DOL Fiduciary Rule Release at 20950.  “Disclosure alone has proven ineffective 
to mitigate conflicts in advice.”  

737  See, e.g., Primerica Letter (“The SEC’s current formulation of the conflicts obligation 
thus inappropriately, and we believe unintentionally, preferences advisory models over 
brokerage models.”); Transamerica August 2018 Letter (expressing concern that the 
proposed interpretation of financial incentives is overbroad and may result in broker-
dealers narrowing their product shelf, which seems inconsistent with the SEC’s stated 
goal of preserving the broker-dealer model to protect an investor’s right to choose 
between brokerage and advisory accounts).   



327 

 

compensation practices which would be inconsistent with the Commission’s stated goal.738  As 

stated in the Proposing Release, while the Commission’s goal in adopting Regulation Best 

Interest is to enhance investor protection by reducing the potential harm to retail customers from 

conflicts of interest that may affect broker-dealer recommendations, we want to do so while 

preserving, to the extent possible, access and choice for investors who prefer to pay for 

investment recommendations on a transaction-by-transaction basis, which is the “pay as you go” 

model that broker-dealers generally provide, as well as preserving retail customer choice of the 

level and types of advice provided and the products available.739  As such, transaction based-

compensation need not be eliminated pursuant to Regulation Best Interest. 

                                                                                                                                                             

 

738  The Commission recognizes that a broker-dealer’s financial or other interest can and will 
inevitably exist.   

739  We are persuaded by commenters regarding the competitive issues for broker-dealers that 
could arise if we require mitigation of firm-level financial incentives, which is not 
required by an investment adviser’s fiduciary duty, and could further encourage 
migration from the broker-dealer to investment adviser model and result in a loss of 
choice for retail customers.  See Section I; CCMC Letters (“Imposing a standard on 
broker-dealers with respect to managing conflicts of interest that is greater than that 
imposed on investment advisers, on top of the additional regulatory obligations to which 
broker-dealers are subject that are not imposed on investment advisers, threatens to 
undermine the SEC’s objective of preserving retail customer choice and access to the 
brokerage advice model and may introduce a new source of confusion when it comes to 
investors’ understanding of the duties they are owed.”); AALU Letter (“Overly-rigid 
mitigation requirements could limit consumer choice of products and access to 
professional financial advice”).  See also 913 Study; Proposing Release at 21575. 

 



328 

 

Accordingly, rather than requiring mitigation of all firm-level financial incentives, we 

have determined to refine our approach by generally allowing firm-level conflicts to be generally 

addressed through disclosure.740  At the same time, we are persuaded by commenters741 that 

there are some conflicts that should be addressed through mitigation at the firm level due to the 

potential impact that we believe certain conflicts of interest (either at the associated person or 

firm level) may have on recommendations to retail customers; therefore we are requiring policies 

and procedures for mitigation or elimination of those conflicts (as identified in the rule text) and 

are not leaving it to the broker-dealer to determine whether disclosure alone is sufficient.742  We 

believe that this approach appropriately balances our goal of reducing the potential harm 

conflicts of interest may have on broker-dealers’ recommendations to retail customers and 

preserving retail access (in terms of choice and cost) to brokerage products and services. 

i. Guidance on Covered Incentives  

                                                                                                                                                             

 

740  As discussed above in the section about the Disclosure Obligation, the Commission 
believes that compliance with the Disclosure Obligation, including disclosure of the 
material facts relating to the scope and terms of the relationship with the retail customer 
and all conflicts of interest, should give sufficient information to enable a retail customer 
to make an informed decision with regard to the recommendation.  See II.D.1.  

Nevertheless, as noted, there may be situations in which disclosure alone may not be 
sufficient to provide “full and fair” disclosure in accordance with the Disclosure 
Obligation discussed above, and the broker-dealer may need to take additional steps to 
mitigate or eliminate the conflict, consistent with an investment adviser’s fiduciary duty.  
See Section II.C.3.d.  

741  See, e.g., CFA August 2018 Letter. 
742  See Section II.C.3.f and g.   



329 

 

The Commission interprets this requirement to establish, maintain, and enforce 

reasonably designed policies and procedures to identify and mitigate any conflicts of interest that 

create an incentive for the associated person to place the interest of the broker-dealer or such 

associated person ahead of the interest of the retail customer, to only apply to incentives 

provided to the associated person, whether by the firm or third-parties that are within the control 

of or associated with the broker-dealer’s business.743  It would not cover external interests of the 

associated person not within the control of or associated with the broker-dealer’s business.744  In 

the case of a dually registered individual, this requirement would generally only apply to 

incentives provided to the associated person when making a recommendation in a brokerage 

                                                                                                                                                             

 

743  The ability to control the compensation of associated person, including incentives, is an 
important mechanism by which broker-dealers exercise supervisory control over sales 
practices.      

744  For example, if an associated person of a broker-dealer participates in a securities 
transaction outside of the broker-dealer and receives compensation, although the broker-
dealer would need to approve the transactions and record it in its books and records under 
FINRA Rule 3280 (Private Securities Transaction of an Associated Person), as described 
in more detail above, this requirement to mitigate certain incentives to an associated 
person would not apply to compensation that is not an incentive provided by or in the 
control of the broker-dealer.  

 Nevertheless,  additional registration, disclosure or other obligations, and antifraud 
liabilities may apply to any other firm through which an associated person may have such 
external interests under federal or state law (for example, as a state-registered adviser).  
We also note that an associated person of a broker-dealer who receives transaction-based 
compensation and participates in a private securities transactions that is not in accordance 
with FINRA Rule 3280 should be mindful of the broker-dealer registration requirements 
under Section 15 of the Exchange Act. 



330 

 

capacity and not when making a recommendation in an investment advisory capacity as the 

investment adviser fiduciary duty would apply to the advice given in that instance.745  

The Commission generally considers the following as examples of incentives to an 

associated person that would need to be addressed under this revised provision: (i) compensation 

from the broker-dealer or from third-parties, including fees and other charges for the services 

provided and products sold; (ii) employee compensation or employment incentives (e.g., 

incentives tied to asset accumulation and not prohibited under (a)(2)(iii)(D), as discussed below, 

special awards, differential or variable compensation, incentives tied to appraisals or 

performance reviews); and (iii) commissions or sales charges, or other fees or financial 

incentives, or differential or variable compensation, whether paid by the retail customer, the 

broker-dealer or a third-party.  These examples focus on compensation that varies based on the 

advice given, such as commissions, markups/markdowns, loads, revenue sharing, and Rule 12b-1 

fees.   

ii. Guidance on Mitigation Methods 

By requiring that a broker-dealer establish policies and procedures reasonably designed 

to “mitigate” these conflicts of interest, we mean the policies and procedures must be reasonably 

designed to reduce the potential effect such conflicts may have on a recommendation given to a 

retail customer.  Thus, whether or not a broker-dealer’s policies and procedures are reasonably 

                                                                                                                                                             

 

745   See Fiduciary Interpretation; Section II.B.3. 



331 

 

designed to mitigate such conflicts will be based on whether they are reasonably designed to 

reduce the incentive for the associated person to make a recommendation that places the 

associated person’s or firm’s interests ahead of the retail customer’s interest. 

As noted in the Proposing Release, in lieu of mandating specific mitigation measures or a 

“one-size fits all” approach, we are providing broker-dealers with flexibility to develop and tailor 

reasonably designed policies and procedures that include conflict mitigation measures, based on 

each firm’s circumstances.746  Reasonably designed policies and procedures should include 

mitigation measures that depend on the nature and significance of the incentives provided to the 

associated person and a variety of factors related to a broker-dealer’s business model (such as the 

size of the broker-dealer, retail customer base (e.g., diversity of investment experience and 

financial needs), and the complexity of the security or investment strategy involving securities 

that is being recommended), some of which may be weighed more heavily than others.  For 

example, more stringent mitigation measures may be appropriate in situations where the 

characteristics of the retail customer base in general displays less understanding  of the 

                                                                                                                                                             

 

746  See Proposing Release at 21618.  See also Letter from Steven W. Stone, Morgan, Lewis 
& Bockius LLP (May 3, 2019) (“Morgan Lewis Letter”) (“The Commission should 
recognize that firms may appropriately employ only some—or various combinations—of 
these approaches depending on their businesses and business models, compensation 
structures, and related conflicts of interest, and should not prescribe a one-size-fits-all 
approach to mitigating compensation-related conflicts.”). 



332 

 

incentives associated with particular securities or investment strategies;747  where the 

compensation is less transparent (for example, an incentive from a third-party or charge built into 

the price of the product or a transaction versus a straight commission); or in a situation involving  

a complex security or investment strategy.748  A broker-dealer could reasonably determine 

through its policies and procedures that the same mitigation measures could apply to a particular 

type of retail customer, type of security or investment strategy, or type of incentive across the 

board; or in some instances a broker-dealer may reasonably determine that some conflicts create 

incentives that may be more difficult to mitigate, and are more appropriately avoided in their 

entirety or for certain categories of retail customers.749   

As noted in the Proposing Release, policies and procedures may be reasonably designed 

at the outset, but may later cease to be reasonably designed based on subsequent events or 

information obtained (for example, such as through supervision (e.g., exception testing) of 

associated person recommendations), and the actual experience of a broker-dealer should be used 

                                                                                                                                                             

 

747  FINRA’s heightened suitability requirements for options trading accounts require that a 
registered representative have “a reasonable basis for believing, at the time of making the 
recommendation, that the customer has such knowledge and experience in financial 
matters that he may reasonably be expected to be capable of evaluating the risks of the 
recommended transaction, and is financially able to bear the risks of the recommended 
position in the complex product.” FINRA Rule 2360(b)(19). 

748  See Proposing Release at 21620-21621.  
749  Id. 



333 

 

to revise the broker-dealer’s measures as appropriate.750  Further, what are considered reasonable 

mitigation measures may vary based on the size of the firm.751  While many broker-dealers have 

programs currently in place to manage conflicts of interest, each broker-dealer will need to 

carefully consider whether its existing framework complies with this provision.752 

In response to commenters’ concerns regarding the potential mitigation methods 

described in the Proposing Release, and, in particular, the references to neutral factors,753 we 

would like to emphasize that this non-exhaustive list of factors is purely illustrative and the 

factors are not required elements.754  In providing these examples, we did not intend to take a 

prescriptive approach, as suggested by some commenters, but a principles-based approach 
                                                                                                                                                             

 

750  Id.  
751  In the FINRA Conflicts Report, FINRA identified certain mitigation measures firms 

implemented that we believe highlight differences in conflict management frameworks, 
based on the size of the firm.  For example, large firms may address conflicts of interest 
through enterprise management or operational risk frameworks, and components of such 
programs, for example, risk and control self-assessments, may provide an opportunity to 
identify and evaluate possible impacts.  By contrast, small firms selling basic products 
may have a conflicts management framework that relies largely on the tone set by the 
firm owner coupled with required supervisory controls, particularly related to suitability, 
and the firm’s compensation structure. See FINRA Conflicts Report. An effective 
practice FINRA observed at a number of firms is implementation of a comprehensive 
framework to identify and manage conflicts of interest across and within firms’ business 
lines that is scaled to the size and complexity of their business. See FINRA Conflicts 
Report at 5.   

752  See Proposing Release at 21621.  
753  See, e.g., Mass Mutual February 2019 Letter; Edward Jones Letter; IRI Letter; Capital 

Group Letter; SIFMA August 2018 Letter; Committee of Annuity Insurers Letter. 
754  See Proposing Release at 21621. 



334 

 

designed to provide flexibility to broker-dealers, depending on their business model, level of 

conflicts, and the retail customers they serve.755    

Among other things, firms may adopt a range of reasonable alternatives to meet the 

mitigation requirement of the Conflict of Interest Obligation.  As noted above, we recognize that 

there are a number of different kinds of incentives and that, depending on the specific 

characteristics of an incentive, different levels and types of mitigation measures may be 

necessary.  For example, incentives tied to asset accumulation generally would present a 

different risk and require a different level or kind of mitigation, than variable compensation for 

similar securities, which in turn may present a different level or kind of risk and may require 

different mitigation methods than differential or variable compensation or financial incentives 

tied to firm revenues.  In certain instances, we believe that compliance with existing supervisory 

requirements and disclosure may be sufficient, for example, where a firm may develop a 

surveillance program to monitor sales activity near compensation thresholds.756   

As discussed above, while not required elements, the Commission believes the following 

non-exhaustive list of practices could be used as potential mitigation methods for firms to 

comply with (a)(2)(iii)(B) of Regulation Best Interest:   

                                                                                                                                                             

 

755  See Proposing Release at 21622. 
756  FINRA Conflicts Report at 30-31.   



335 

 

• avoiding compensation thresholds that disproportionately increase compensation 

through incremental increases in sales;  

• minimizing compensation incentives for employees to favor one type of account 

over another; or to favor one type of product over another, proprietary or 

preferred provider products, or comparable products sold on a principal basis, for 

example, by establishing differential compensation based on neutral factors;757  

• eliminating compensation incentives within comparable product lines by, for 

example, capping the credit that an associated person may receive across mutual 

funds or other comparable products across providers;  

• implementing supervisory procedures to monitor recommendations that are: near 

compensation thresholds; near thresholds for firm recognition; involve higher 

compensating products,758 proprietary products or transactions in a principal 

capacity; or, involve the roll over or transfer of assets from one type of account to 

                                                                                                                                                             

 

757  As noted above, we are not requiring firms to establish differential compensation based 
on neutral factors but do believe firms could choose to do so as potential practice to 
promote compliance with the requirement to establish, maintain, and enforce written 
policies and procedures reasonably designed to identify and mitigate any conflicts of 
interest that create an incentive for an associated person to place its interest ahead of the 
interest of the retail customer. 

758  See Morgan Lewis Letter (suggesting, among other things, that firms can conduct 
surveillance (whether transactions, periodic, or forensic) to identify activity that appears 
to be driven by compensation considerations—whether at the representative, team, or 
business level—rather than a customer’s interest). 



336 

 

another (such as recommendations to roll over or transfer assets in an ERISA 

account to an IRA)
 
or from one product class to another;759  

• adjusting compensation for associated persons who fail to adequately manage 

conflicts of interest; and  

• limiting the types of retail customer to whom a product, transaction or strategy 

may be recommended.760   

While the Commission is providing flexibility so that broker-dealers can determine the 

nature and extent of mitigation, whether a broker-dealer has developed policies and procedures 

reasonably designed to mitigate a conflict is not measured against industry practice (although 

such practice could be a useful point of reference).  Each firm must look at the facts and 

circumstances surrounding the mitigation methods, the particular broker-dealer’s business model, 

and whether or not the policies and procedures were reasonably designed for the particular firm 

to reduce the impact of the incentive in a manner to prevent the incentive from causing the 

associated person to place the broker-dealer’s or the associated person’s interest ahead of the 

retail customer’s interest. 

                                                                                                                                                             

 

759  See FINRA Exam Report 2017. FINRA observed a variety of effective practices in 
recommending the purchase and sale of UITs, including tailoring supervisory systems to 
products’ features and sources of risk to customers.   

760  See, e.g., supra footnote 747; FINRA Regulatory Notice 12-03, Heightened Supervision 
of Complex Products (Jan. 2012). 



337 

 

In response to a commenter’s concern that we suggested in the Proposing Release that 

some compensation conflicts may be more appropriately avoided for certain categories of retail 

customers,761 we would like to clarify that such a suggestion is an example and not a requirement. 

Nevertheless, we are adopting a requirement to establish, maintain, and enforce written policies 

and procedures reasonably designed to eliminate the incentives that we believe create the most 

problematic conflicts, namely incentives to associated persons that are tied to recommendations 

of specific securities or specific types of securities within a limited period of time as we believe 

these incentives cannot be adequately mitigated, and are likely to result in recommendations that 

place the interest of the broker-dealer or associated person ahead of the interests of the retail 

customer.  Furthermore, in accordance with the Care Obligation, a broker-dealer, when making a 

recommendation, is required to, among other things, have a reasonable basis to believe that the 

recommendation is in the best interest of the particular retail customer.762  In particular, and 

consistent with existing suitability obligations, a broker-dealer is required to exercise “reasonable 

diligence” to ascertain (and consider) the retail customer’s investment profile which, among 

                                                                                                                                                             

 

761  See Primerica Letter (“The SEC’s statements in the Proposals regarding the additional 
protections broker-dealers should afford ‘less sophisticated’ retail customers could create 
a sub-class of retail customers that broker-dealers would have to identify based on 
subjective and poorly defined criteria, and potentially further restrict access to help with 
saving and investing for customers who need it most.”). 

762  See Section II.C.2.   



338 

 

other things, includes the retail customer’s investment experience and risk tolerance.763  A 

broker-dealer that has established reasonably designed policies and procedures to mitigate the 

conflicts associated with the incentives provided to the associated person would nevertheless 

violate Regulation Best Interest if the recommendation does not comply with the Care Obligation.   

Finally, in response to commenters’ questions regarding the permissibility of specific 

practices, the Commission believes the revised, explicit requirements related to: mitigation of 

incentives to associated persons as discussed herein; mitigation of any material limitations placed 

on the securities or investment strategies that may be recommended to retail customers; and 

elimination of certain practices, as discussed below, sufficiently address these comments.  To the 

extent the Commission has not identified a practice that needs to be eliminated, it would be 

permitted, subject to compliance with the requirements of Regulation Best Interest.   

f. Mitigation of Material Limitations on Recommendations to Retail Customers 

As part of the proposed requirement to manage conflicts of interest arising from financial 

incentives through mitigation, firms would have been required to establish policies and 

procedures reasonably designed to mitigate the conflicts of interest associated with offering a 

limited range of products and proprietary products.   

We also solicited comment on information related to the magnitude of conflicts of 

interest when broker-dealers recommend, among other things, proprietary products and a limited 

                                                                                                                                                             

 

763  Id.  



339 

 

range of products.  In response, several commenters requested that the Commission confirm that 

a product menu limited to appropriate alternative investments offered by the broker-dealer would 

not violate Regulation Best Interest.764  Some commenters requested we clarify that, for certain 

customers, a firm can limit its offerings to proprietary products or products for which the firm 

receives revenue sharing payments if the limitation is properly disclosed and appropriate to meet 

the retail customer’s needs.765 

                                                                                                                                                             

 

764  See, e.g., SIFMA August 2018 Letter (requesting clarification on how a broker-dealer 
could satisfy the Conflict of Interest Obligation if the platform is limited to certain bond 
offerings); Fidelity Letter (stating that given the vast array of readily available investment 
options and the breadth of securities typically available to customers through broker-
dealers, some limitation of the universe of investment options must be undertaken in 
order for a broker-dealer to adequately understand, compare and formulate a 
recommendation); Prudential Letter (“It is unclear what ‘significantly limits’ means for 
firms that offer predominantly, but not exclusively, proprietary products.  It is also 
unclear what constitutes a ‘small choice of investments.’  Additional examples or more 
prescriptive instructions regarding when firms must disclose such limitations would be 
helpful.”).  See also Guardian August 2018 Letter; LPL August 2018 Letter; LPL 
December 2018 Letter. 

765  See, e.g., SIFMA August 2018 letter; CFA Institute Letter; Letter from Emanuel Alves, 
Senior Vice President and General Counsel, John Hancock Life Insurance Company 
(Aug. 3, 2018) (“John Hancock Letter”); Ameriprise Letter.  See also NY Life Letter 
(recommending the Commission require disclosure of the limits on the universe of 
available products, while allowing further context so that firms describe the full scope 
and impact of those limits); SPARK Letter (recognizing that the SEC did not want to 
mandate specific mitigation procedures or a “one-size-fits” all” approach but requesting 
further guidance in the case of, among other things, broker-dealers who only offer 
proprietary products or only offer limited investment menus). But see CFA August 2018 
Letter (suggesting that simply stating that a firm offers a limited selection of investments 
may not be enough for an investor to understand the limitations). 



340 

 

In consideration of these comments, and our revisions to remove firm-level conflicts 

from the proposed mitigation provision discussed above, we are adopting a new requirement to 

specifically address the conflicts of interest presented when broker-dealers place any material 

limitations on the securities or investment strategies that may be recommended to a retail 

customer (i.e., only make recommendations of proprietary or other limited ranges of products).  

While we generally believe that most firm-level conflicts of interest can be addressed through 

appropriate disclosure, this new provision focuses on the specific firm-level conflicts—namely, 

the conflicts associated with the establishment of a product menu—which we believe are most 

likely to affect recommendations made to retail customers and have the greatest potential to 

result in recommendations that place the interest of the broker-dealer or associated person ahead 

of the interest of the retail customer.766  Given the potential impact on recommendations to retail 

customer, we believe these conflicts should not be left to the broker-dealer to determine whether 

disclosure alone is sufficient, and are requiring broker-dealers to establish, maintain, and enforce 

written policies and procedures reasonably designed to (1) identify and disclose any material 

limitations broker-dealers place on their securities offerings or investment strategies involving 

                                                                                                                                                             

 

766  See CFA August 2018 Letter (“[M]any broker-dealers currently restrict choice by only 
recommending from a limited menu of proprietary funds or by only recommending 
products from companies that make revenue sharing payments. If limits on investor 
choice are of concern to the Commission, surely such limits deserve equal scrutiny. After 
all, evidence suggests that the limited menus offered by some firms consist entirely of 
low quality products that impose excessive costs, deliver inferior returns, and expose 
investors to excessive risk.”)341 

 

securities and any associated conflicts of interest and (2) prevent such limitations and associated 

conflicts of interest from causing the broker-dealer to make recommendations that place the 

broker-dealer’s interest ahead of the interest of the retail customer.   

While we believe broker-dealers should be permitted to limit their product offerings from 

which they make recommendations to retail customers, provided that they comply with 

Regulation Best Interest,767 we are also concerned that without requiring a broker-dealer to have 

a process in place to disclose and address negative effects of such limitations, retail customers 

may be unaware that a broker-dealer offers only a limited set of products and therefore would be 

unable to make an informed investment decision.768  We are also concerned that retail customers 

may be harmed by such limitations if they are more likely to result in recommendations that are 

not in the best interest of the retail customer.769 

                                                                                                                                                             

 

767  See Section II.C.2 for a related discussion of the application of the Care Obligation to 
such limitations.  See also AFL-CIO April 2019 Letter (recommending that the 
Commission make clear that it will hold firms accountable for developing a product 
menu that complies with the first prong of the proposed best interest standard and that 
under such approach, firms would periodically assess their product offerings against other 
products available in the marketplace in order to ensure that their offerings are 
competitive). 

768  See Disclosure Obligation at Section II.C.1.   
769  We believe that by including this requirement to address material limitations to product 

menus, which does not rely on disclosure alone, coupled with the requirements under the 
Care Obligation, we are addressing a commenter’s concern that product limitations can 
limit investor choice which in turn harms investors.  See CFA August 2018 Letter. 



342 

 

Broker-dealers will be required to establish, maintain and enforce written policies and 

procedures reasonably designed to: (i) identify and disclose any material limitations placed on 

the securities or investment strategies involving securities that may be recommended to a retail 

customer and any conflicts of interest associated with such limitations, in accordance with the 

Disclosure Obligation, and (ii) 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. 

As discussed in the context of the Disclosure Obligation and the Relationship Summary, 

for purposes of this requirement, a “material limitation”770 placed on the securities or investment 

strategies involving securities would include, for example, recommending only proprietary 

products (i.e., any product that is managed, issued, or sponsored by the financial institution or 

any of its affiliates), a specific asset class, or products with third-party arrangements (i.e., 

revenue sharing).771  In addition, the fact that the broker-dealer recommends only products from 

a select group of issuers could also be a material limitation.   

                                                                                                                                                             

 

770  As discussed in Section II.C.1, Disclosure Obligation, a limitation is “material” if there is 
“a substantial likelihood that a reasonable shareholder would consider it important.”  
Basic, Inc. v. Levinson, 485 U.S. 224, 224 (1988).  In the context of this Regulation Best 
Interest, this standard would apply in the context of retail customers, as defined.  

771  See II.C.1.; Relationship Summary Adopting Release.   



343 

 

We recognize, however, that, as a practical matter, almost all broker-dealers limit their 

offerings of securities and investment strategies to some degree.  We do not believe that 

disclosing the fact that a broker-dealer does not offer the entire possible range of securities and 

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.772  Rather, 

consistent with the examples of a “material limitation” provided above, whether the limitation is 

material will depend on the facts and circumstances of the extent of the limitation. 

Adopting this revised requirement is critical to ensuring that retail customers are aware of 

any material limitations associated with a broker-dealer’s recommendation and associated 

conflicts of interest and that broker-dealers, through their policies and procedures, establish 

processes to evaluate whether or not such a limited range of products is consistent with making 

recommendations that are in the retail customer’s best interest and that do not place the interests 

of the broker-dealer or associated person ahead of the retail customer’s interest, consistent with 

Care Obligation.773  Broker-dealers would be able to satisfy paragraph (a)(2)(iii)(C)(1) by 

identifying any material limitations and complying with the Disclosure Obligation which, as 

discussed above, requires disclosure of “the type and scope of services provided to the retail 

                                                                                                                                                             

 

772  See Basic, Inc. v. Levinson, 485 U.S. 224, 224 (1988).   
773  See Section II.C.2 and infra footnote 779. 



344 

 

customer, including any material limitations on the securities or investment strategies involving 

securities that may be recommended to the retail customer.”774   

Similar to the requirement to establish, maintain, and enforce written policies and 

procedures reasonably designed to mitigate certain incentives to associated persons, firms will 

have flexibility to develop and tailor reasonably designed policies and procedures to prevent 

such limitations and the associated conflicts from causing the broker-dealer or associated person 

from placing their interest ahead of the retail customer’s interest.  In developing such policies 

and procedures, the Commission believes that firms should, for example, consider establishing 

product review processes for products that may be recommended, including establishing 

procedures for identifying and mitigating the conflicts of interests associated with the product, or 

declining to recommend a product where the firm cannot effectively mitigate the conflict, and 

identifying which retail customers would qualify for recommendations from this product 

menu.775  As part of this process, firms may consider evaluating the use of “preferred lists,” 776 

                                                                                                                                                             

 

774  Section II.C.1. 
775  For example, in its Conflicts Report, FINRA identified the following as effective 

practices to identify and manage conflicts of interest for new products: (i) a product 
review process to identify and mitigate conflicts of interest that may be associated with a 
product; (ii) evaluation of whether to decline to offer products to customers when the 
conflicts associated are too significant to be mitigated effectively; (iii) differentiation of  
product eligibility between institutional and retail clients; (iv) post-launch reviews of  
products to identify potential problems; (v) evaluation of registered representatives’ 
ability to understand a product, provide training where necessary, and limit access to 
products for which they cannot demonstrate sufficient understanding to perform a 

 

 



345 

 

restricting the retail customers to whom a product may be sold, prescribing minimum knowledge 

requirements for associated persons who may recommend  certain products,777 and conducting 

periodic product reviews to identify potential conflicts of interest, whether the measures 

addressing conflicts are working as intended, and to modify the mitigation measures or product 

selection accordingly.778  The Commission’s intent is not to prevent firms from offering 

proprietary products or other limited range of products so long as firms comply with the 

Disclosure, Care,779 and Conflict of Interest Obligations.  In fact, we believe that these 

limitations can be beneficial, such as by helping ensure that a broker-dealer and its associated 
                                                                                                                                                             

 

suitability analysis and effectively explain a product and its risks to customers; and (vi) 
disclosure of product conflicts and risks.  See FINRA Conflicts Report at 3, 18-25.   

776  See FINRA Conflicts Report at 24. 
777  Cf. FINRA Conflicts Report at 19 (stating that as an effective practice in evaluating new 

products, a product review committee may engage in these activities to address conflicts 
of interest).   

778  Cf., e.g., NASD Notice to Members 03-71, Non-Conventional Investments – NASD 
Reminds Members of Obligations When Selling Non-Conventional Investments (Nov. 
2003).  Similarly, under the Compliance Obligation, we suggest that compliance policies 
and procedures’ adequacy and effectiveness should be reviewed as frequently as 
necessary in connection with changes in business activities, affiliations, or regulatory and 
legislative developments.  See Section II.D.4, Compliance Obligation. 

779  In particular, consistent with the Care Obligation and as discussed further in Section 
II.C.2, Care Obligation, 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, 
broker-dealers generally need to evaluate reasonably available alternatives offered by the 
broker-dealer.  When a broker-dealer materially limits is product offerings or offers only 
a limited menu of products, it must still comply with the Care Obligation, and could not 
use its limited menu to justify recommending a product that does not satisfy this 
obligation.  See Section II.C.2. 



346 

 

persons understand the securities they are recommending, as required by the Care Obligation.780  

This requirement is designed to allow firms to determine whether and how to restrict their menu 

of investment options based, among other things, on their retail customer base and area of 

expertise, while protecting the interests of retail customers when recommendations are made 

from such limited menus by requiring firms have a reasonably designed process to identify, 

disclose, and prevent the conflicts of interest associated with such limitations from resulting in 

recommendations that place the broker-dealer’s interests ahead of the retail customer’s interest.   

We also note that the risk that limited product menus result in recommendations that are 

not in the retail customer’s best interest is also addressed through the Care Obligation781 and 

required disclosure pursuant to the Disclosure Obligation.782  

g.  Elimination of Certain Conflicts of Interest 

Under Section 15(l)(2) of the Exchange Act, the Commission may examine and, where 

appropriate, promulgate rules prohibiting or restricting certain sales practices, conflicts of 

interest, and compensation schemes for brokers, dealers, and investment advisers that the 

                                                                                                                                                             

 

780  See also supra footnote 775. 
781  See id. 
782  Material limitations are material facts that need to be disclosed pursuant to the Disclosure 

Obligation.  The Commission is concerned about the potential effect that such limitations 
have on the securities or investment strategies involving securities recommended to a 
retail customer, and any associated conflicts of interest, could have on the ability of a 
broker-dealer to make a recommendation in the best interest of the retail customer.  See 
Disclosure Obligation at Section II.C.1. 



347 

 

Commission deems contrary to the public interest and protection of investors.  As discussed 

below, the Commission finds that it is in the public interest and consistent with the protection of 

investors to require that broker-dealers establish, maintain, and enforce 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 sales of specific securities or specific 

types of securities within a limited period of time.     

In the Proposing Release, the Conflict of Interest Obligation would have required the 

establishment of policies and procedures reasonably designed to at a minimum disclose or 

eliminate all material conflicts of interest related to the recommendation (or to disclose and 

mitigate or eliminate those material conflicts of interest arising from financial incentives).  We 

did not mandate the absolute elimination of, or policies and procedures reasonably designed to 

eliminate any particular conflicts.783  We were concerned that the absolute elimination of 

specified particular conflicts could mean a broker-dealer may not receive compensation for its 

services.784  Our intent, rather, was to identify certain practices that may be more appropriately 

                                                                                                                                                             

 

783  See Proposing Release at 21619.   
784  Id.   



348 

 

avoided for certain categories of retail customers, including, for example, sales contests, trips, 

prizes, and other similar bonuses based on sales of certain securities or accumulation of AUM.785   

We also provided examples of how a broker-dealer could eliminate conflicts of 

interest.786  We requested comment on elimination, including suggestions of whether certain 

conflicts should be required to be eliminated and how broker-dealers could eliminate conflicts of 

interest.  Specifically, we requested comment on whether the Commission should explicitly 

prohibit receipt of certain non-cash compensation (e.g. sales contests, trips, prizes, and other 

bonuses based on sales of certain securities, accumulation of AUM or any other factor).787   

In response, several commenters requested greater certainty as to whether certain 

conflicts of interest should be eliminated and if so, which ones.788  Some commenters generally 

                                                                                                                                                             

 

785  See id.  FINRA rules also establish restrictions on the use of non-cash compensation in 
connection with the sale and distribution of certain types of products.  See FINRA Rules 
2310, 2320, 3221, and 5110. 

786  Proposing Release at 21621-21622. 
787  Id. 
788  See TIAA Letter (“If the SEC were to provide more specific direction as to which 

conflicts are significant enough to warrant complete elimination, broker-dealers would be 
better able to effectively address material conflicts of interest in a manner consistent with 
the SEC’s goals and preferred approach.”); Wells Fargo Letter (“Rather than leaving 
broker-dealers vulnerable to second-guessing, the SEC should either provide more 
guidance on how such conflicts may be mitigated or simply identify a set of financial 
incentives that are prohibited.”); AXA Letter (“In the absence of clear guidance from the 
Commission as to which financial incentives must be eliminated, and not just mitigated 
and disclosed, broker-dealers may be forced to curtail otherwise legitimate practices and 
the sale of certain products and services out of an abundance of caution—thereby 

 

 



349 

 

requested that certain sales contests and financial incentives be prohibited.789  Of these 

commenters, many expressed concern that product-based incentives could lead to 

recommendations that are not in a customer’s best interest, with some commenters stating that 

firms could find ways to mitigate these conflicts790 and others advocating that they should be 

                                                                                                                                                             

 

depriving investors of choice of offerings for which they might otherwise be suited… It 
would also be helpful if the Commission could provide additional examples 
of the types of conflicts (besides “sales contests, trips, prizes . . . based on sales of certain 
securities”) that likely require elimination.”); see also Money Management Institute 
Letter; Northwestern Mutual Letter; AALU Letter.   
 

789  See, e.g., PIABA Letter (favoring a prohibition on compensation structures that would 
incentivize a broker to: recommend a proprietary product or recommend one type of 
product line over another; and/or which would reward the sale of certain products within 
a product line”), Americans for Financial Reform (recommending prohibiting brokers 
from adopting practices, such as sales quotas and contests, that clearly incentivize their 
representatives to base their recommendations on their own financial interests rather than 
the customer’s best interests); NASAA August 2018 Letter (“[W]e encourage the 
Commission to proceed further by declaring these two practices  ̶  sales contests and 
preferential treatment of allocations  ̶  per se impermissible under Regulation Best 
Interest.”); Galvin Letter (identifying the following practices as per se violations of the 
standard as they are contrary to the requirement to provide advice that is in the true best 
interest of customers:  sales contests; sales quotas (especially for in-house products); and 
incentives to sell high-cost and high-risk products); See also Warren Letter; Better 
Markets August 2018 Letter; CFA August 2018 Letter.  But see Primerica Letter (“The 
SEC should recognize that sales contests, trips, prizes, awards, and similar bonuses can 
be used to incentivize positive behavior and clarify there is no per se requirement to 
eliminate such incentives.”). 

790  See, e.g., SIFMA August 2018 Letter (“With respect to product-based sales contests, we 
agree that instances where a firm cannot adequately mitigate incentives that are 
misaligned with the customer’s best interest, the firm should eliminate such sales contests.  
A firm, however, may be able to mitigate such conflicts through several methods…under 
a principles-based regime, we ask that the SEC allow firms to decide whether to mitigate 
or eliminate such conflicts.”); Cetera August 2018 Letter (“A commonly-cited example is 

 

 



350 

 

prohibited in their entirety.791 Other commenters requested clarification that incentives not tied 

to a particular investment product would be permitted and would not need to be eliminated.792  A 

number of commenters requested clarification that incentives based on asset growth would be 

                                                                                                                                                             

 

sales contests or incentives that are focused on sales of a single product. While we agree 
that such arrangements may be per se inappropriate and Cetera does not permit them, this 
judgment is largely subjective. We suggest that reaching consensus on what other 
practices fall into this category would be well-nigh impossible. So long as a broker-dealer 
can demonstrate that it has made a good faith determination regarding identification and 
management of conflicts, it should not be subject to either regulatory action or private 
litigation based on those determinations.”); CFA Institute Letter (“Our view is that 
recommendations aimed at winning sales contests and meeting internal quotas are 
irreconcilable with the concept of a best interest standard and should not be allowed.”). 

  
791  See, e.g., PIABA Letter; CFA August 2018 Letter.  See also Fidelity Letter (“The SEC 

has properly pointed out that certain conflicts of interest can be so problematic that it 
simply may not be possible to mitigate them effectively. For example, we agree that sales 
contests improperly favoring certain investment products over others involve uniquely 
troubling conflicts and should generally be impermissible.”); NY Life Letter (In this 
context, the proposal notes that single product sales contests create conflicts that may best 
be eliminated. We agree that it is inappropriate to use a contest or other non-cash 
compensation to incentivize the sale of a specific investment or variable insurance 
product over other available alternatives, irrespective of a consumer's situation and 
needs.”)  But see AALU Letter (finding that the Commission should not prohibit 
currently-compliant compensation arrangements and business models, including non-cash 
compensation). 

 
792  See, e.g., SIFMA August 2018 Letter; Edward Jones Letter; NY Life Letter; Prudential 

Letter; LPL August 2018 Letter; Transamerica August 2018 Letter; Northwestern Mutual 
Letter; Letter from Eric R. Dinallo, Executive Vice President, General Counsel, Guardian 
Life (Feb. 6, 2019) (“Guardian February 2019 Letter”) ; Primerica Letter; Cambridge 
Letter.  Some of these commenters stated that FINRA’s rules and supervisory practices 
appropriately cover these incentives.  See Transamerica August 2018 Letter; NY Life 
Letter; Northwestern Mutual Letter; Guardian August 2018 Letter; Primerica Letter. 



351 

 

permitted as they do not raise the same types of conflicts present with product-based sales.793  A 

number of commenters expressed concern that provisions requiring elimination of certain 

conflicts could be in conflict with current treatment under the Internal Revenue Code governing 

certain employee benefits.794 

After considering comments, we are modifying the rule text of the Conflict of Interest 

Obligation to include new paragraph (a)(2)(iii)(D), which requires the broker or dealer to 

establish, maintain, and enforce 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 sales of specific securities or specific types of securities within a limited period of 

time.  In adopting this new requirement, the Commission believes it will provide certainty to 

broker-dealers regarding the types of practices where conflicts of interest are so pervasive such 

that they cannot be reasonably mitigated and must be eliminated in their entirety, as we believe 

they create too strong of an incentive for the associated persons to make a recommendation that 

                                                                                                                                                             

 

793  Generally these commenters believed that programs tied to assets under management, 
total production or revenue growth do not give associated persons an incentive to 
recommend specific securities that may be inconsistent with a customer’s best interest.  
See, e.g., SIFMA August 2018 Letter; Bank of America Letter; Edward Jones Letter; 
Transamerica August 2018 Letter; ASA Letter; UBS Letter; Fidelity Letter; NY Life 
Letter; Money Management Institute Letter; IPA Letter.   

794  See AALU Letter; NY Life Letter; Guardian February 2019 Letter; Northwestern Mutual 
Letter. 



352 

 

places their financial or other interest ahead of the interest of retail customers’ interests and 

therefore would be inconsistent with Regulation Best Interest.795  

The requirement is designed to eliminate sales contests, sales quotas, bonuses and non-

cash compensation that are based on the sales of specific securities and specific types of 

securities within a limited period of time.  We believe that these practices, particularly when 

coupled with a time limitation, create high-pressure situations for associated persons to engage in 

sales conduct contrary to the best interest of retail customers.  For purposes of this requirement, 

we interpret non-cash compensation to mean any form of compensation received in connection 

with the sale and distribution of specific securities or specific types of securities that is not cash 

compensation, including but not limited to merchandise, gifts and prizes, travel expenses, meals 

and lodging except we do not intend it to cover certain employee benefits, including healthcare 

and retirement benefits.796  We recognize that some associated persons may focus their business 

on certain general categories of securities (e.g., mutual funds, variable annuities, bonds, or 

equities) and that broker-dealers may provide compensation or other incentives related to such 

sales.  As discussed further herein, this requirement is not designed to prohibit broker-dealers 

                                                                                                                                                             

 

795  See Section I.  See also AFL-CIO April 2019 Letter (“The Commission must provide 
greater clarity regarding how the obligation to eliminate or mitigate conflicts would apply 
to different types of conflicts.  In particular, it must make clear that conflicts cannot be 
addressed through disclosure alone and that firms would be prohibited from artificially 
creating harmful incentives that undermine compliance with the best interest standard.”). 

796  Infra footnote 803 and accompanying text. 



353 

 

from providing such incentives, provided that they do not create high-pressure situations to sell a 

specifically identified type of security (e.g., stocks of a particular sector or bonds with a specific 

credit rating) within a limited period of time, such that the associated person cannot make a 

recommendation in the retail customer’s best interest.   

We believe the conflicts created by these practices are in direct opposition to our goal of 

reducing the effect of conflicts of interest on broker-dealer recommendations to retail 

customers.797  We agree with many commenters that broker-dealers cannot reasonably be 

expected to make recommendations in a particular retail customer’s best interest consistent with 

the requirements of the Care Obligation, if they are motivated to “push” certain securities or 

types of securities in order to win a contest or reach a target in order to receive a bonus or other 

non-cash compensation.  We are also persuaded that it would be difficult, if not impossible, for a 

firm to establish reasonably designed policies and procedures to sufficiently mitigate the 

incentive created to put the broker-dealer’s interest ahead of the retail customer’s interest, as 

discussed above, as the point of these practices is simply to increase the sale a particular security 

or type of security, for example, in the context where a broker-dealer is attempting to reduce its 

inventory of or exposure to that security.  Accordingly, we believe that these practices should be 

                                                                                                                                                             

 

797  See Section I. 



354 

 

eliminated in order to enhance investor protection798 and achieve the goals of Regulation Best 

Interest.  

By explicitly requiring broker-dealers to establish, maintain, and enforce written policies 

and procedures reasonably designed to eliminate certain practices, we believe we are responding 

to commenters who requested certainty as to which specific incentives are prohibited.799 Also in 

response to commenters requesting clarification as to what practices would be permitted, the 

requirement to have reasonably designed written policies and procedures to eliminate sales 

contests, sales quotas, bonuses, and non-cash compensation applies only to those that are based 

on the sales of specific securities or types of securities, and does not apply to compensation 

practices based on, for example, total products sold, or asset growth or accumulation,800 and 

customer satisfaction.  In addition, this elimination requirement would not prevent firms from 

offering only proprietary products, placing material limitations on the menu of products, or 

incentivizing the sale of such products through its compensation practices, so long as the 
                                                                                                                                                             

 

798  See Chairman Jay Clayton, Statement on Investor Roundtables Regarding Standards of 
Conduct for Investment Professionals Rulemaking (Aug. 22, 2018), available at 
https://www.sec.gov/news/public-statement/statement-clayton-082218. See also CFA 
Institute; CFA. 

799  See supra footnote 788 and accompanying text. 
800  See CCMC Letters (asserting that increasing assets under management is a natural 

outgrowth of serving clients well and is fundamentally different from sales contests based 
on a particular product); UBS Letter (stating that compensation and other rewards based 
on the growth of overall revenues or assets under management should continue to be 
permitted as they do not incent sales of one product over another but instead simply 
reward overall business growth).   



355 

 

incentive is not based on the sale of specific securities or types of securities within a limited 

period of time.801  While conflicts of interest are also associated with sales contests, sales quotas, 

bonuses and non-cash compensation that apply to, among other things, total products sold, or 

asset accumulation and growth, we agree with commenters802 these conflicts present less risk 

that the incentive would compromise compliance with the Care Obligation and Conflict of 

Interest Obligation such that a recommendation could be made that is in a retail customer’s best 

interest and that does not place the place the interest of the broker-dealer or associated person 

ahead of the interest of the retail customer.   

We also recognize that certain production requirements may exist for other reasons, 

specifically to maintain a contract of employment.803 As discussed above, we do not intend to 

                                                                                                                                                             

 

801  Although we are not defining what would constitute a “limited period of time,” as noted 
above, we are concerned about time limitations that create high-pressure situations for 
associated persons to increase the sales of specific securities or specific types of 
securities which compromise the best interests of their customers.   

802  See, e.g., Ameriprise Letter (“We believe such concerns around incentives do not exist 
with respect to programs that reward asset growth or asset flows, or recruitment bonuses 
tied to assets under management or revenue growth because these programs do not give 
associated persons an incentive to recommend specific securities that may not be 
consistent with a customer's best interest.“); Empower Letter (“We also believe asset-
gathering or account-retention incentives should not be subject to the same level of 
scrutiny as incentives aimed at increasing sales of particular securities. The potential for a 
conflict of interest to result in a bad outcome for a retail investor is much higher when a 
recommendation is related to individual securities rather than the type of account in 
which such securities should be held.”) 

 
803  See Prudential Letter; NY Life Letter; Guardian February 2019 Letter; AALU Letter.  

Under the Internal Revenue Code, statutory employees are eligible for certain employee 
 

 



356 

 

prohibit the receipt of certain employee benefits by statutory employees, and do not believe this 

provision would apply, as we do not consider these benefits to be non-cash compensation for 

purposes of Regulation Best Interest.  In addition, we do not intend to prohibit training or 

education meetings, including attendance at company-sponsored meetings such as annual 

conferences,804 provided that these meetings are not based on the sale of specific securities or 

type of securities within a limited time period.   

We emphasize that prohibiting certain incentives does not mean that all other incentives 

are presumptively compliant with Regulation Best Interest.  As discussed above, 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, and the broker-dealer and its associated persons comply with the Care 

Obligation.  Nevertheless, if the firm determines that the conflicts associated with these practice 

are too difficult to disclose and mitigate, the firm should consider carefully assessing whether it 

is able to satisfy its best interest obligation in light of the identified conflict and in certain 

circumstances, may wish to avoid such practice entirely.   

                                                                                                                                                             

 

benefits such as 401(k) and health insurance.  In order to qualify under this definition, 
full time life insurance sales agents must devote their principal business to the solicitation 
of life insurance or annuities primarily for one company.  See Department of Treasury, 
Internal Revenue Service, Employer’s Supplemental Tax Guide, Publication 15-A 
(2018), available at https://www.irs.gov/pub/irs-pdf/p15a.pdf. 

804  See Guardian August 2018 Letter; NY Life Letter. 



357 

 

4. Compliance Obligation 

As proposed, under the Conflict of Interest Obligation, a broker-dealer entity805 would be 

required 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.  As discussed above, in response to commenters, we have made modifications 

to the Conflict of Interest Obligation to more appropriately focus on the conflicts of interest that 

create an incentive for broker-dealers and their associated persons to place the interest of the 

broker-dealer or the associated person ahead of the interest of the retail customer.   

We solicited comment on the proposed requirement to establish, maintain, and enforce 

certain policies and procedures as part of the Conflict of Interest Obligation, including whether 

we should require policies and procedures specifically to assist compliance with Regulation Best 

Interest.  While commenters generally viewed the requirement to adopt policies and procedures 

as an effective means of addressing conflicts of interest,806 some commenters suggested 

broadening this requirement to a general policies and procedures obligation that would be 

                                                                                                                                                             

 

805  See supra footnote 671. 
806  See CFA August 2018 Letter; Fidelity Letter; Vanguard Letter; FPC Letter. 



358 

 

reasonably designed to ensure that recommendations are made in the customer’s best interest or 

reasonably designed to ensure compliance with Regulation Best Interest as a whole.807   

After considering the comments received, we are adopting the Compliance Obligation, 

which requires, in addition to the policies and procedures required by the Conflict of Interest 

Obligation, that broker-dealer entities808 establish, maintain and enforce written policies 

procedures reasonably designed to achieve compliance with Regulation Best Interest.  The 

Compliance Obligation creates an affirmative obligation under the Exchange Act with respect to 

the rule as a whole,809 while providing sufficient flexibility to allow broker-dealers to establish 

                                                                                                                                                             

 

807  See CFA August 2018 Letter; UBS Letter.  
808  Similar to the Conflict of Interest Obligation, the Compliance Obligation 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 Compliance Obligation, the term 
“broker-dealer” refers only to the broker-dealer entity, and not to such individuals.  See 
footnote 671 and accompanying text. 

809  As noted in the Proposing Release, broker-dealers are currently subject to supervisory 
obligations under Section 15(b)(4)(E) of the Exchange Act and SRO rules, including the 
establishment of policies and procedures reasonably designed to prevent and detect 
violations of, and to achieve compliance with, the federal securities laws and regulations, 
as well as applicable SRO rules.  See Proposing Release at 21622.  Specifically, the 
Exchange Act authorizes the Commission to sanction a broker-dealer or any associated 
person that fails to reasonably supervise another person subject to the firm’s or the 
person’s supervision that commits a violation of the federal securities laws.  Exchange 
Act Sections 15(b)(4)(E) and (b)(6)(A).  The Exchange Act provides an affirmative 
defense against a charge of failure to supervise where reasonable procedures and systems 
for applying the procedures have been established and effectively implemented without 
reason to believe those procedures and systems are not being complied with.  Id.  While 
the Compliance Obligation creates an explicit requirement, we believe that broker-dealers 
would likely establish policies and procedures to comply with Regulation Best Interest 

 

 



359 

 

compliance policies and procedures that accommodate a broad range of business models.810  The 

Commission believes that the Compliance Obligation is important to help ensure that broker-

dealers have strong systems of controls in place to prevent violations of Regulation Best Interest, 

including the component Disclosure and Care Obligations, in addition to the policies and 

procedures required pursuant to the Conflict of Interest Obligation, and to protect the interests of 

retail customers.811  

As with the policies and procedures requirement included in the Conflict of Interest 

Obligation, whether policies and procedures are reasonably designed to comply with Regulation 

                                                                                                                                                             

 

pursuant to Section 15(b)(4)(E).  In order to comply, broker-dealers could adjust their 
current systems of supervision and compliance, as opposed to creating new systems.   

810  This approach is similar to the one taken under rule 206(4)-7 under the Advisers Act 
which requires policies and procedures reasonably designed to prevent violations of the 
Advisers Act, which should be tailored to address compliance considerations relevant to 
the operations of each adviser.  See Compliance Programs of Investment Companies and 
Investment Advisers, Advisers Act Release No. 2204 (Dec. 17, 2003) (“Advisers Act 
Release 2204”).  See also Questions Advisers Should Ask While Establishing or 
Reviewing Their Compliance Programs (May 2006), available at 
https://www.sec.gov/info/cco/adviser_compliance_questions.htm (“No one standard set 
of policies and procedures will address the requirements established by the Compliance 
Rule for all advisers because each adviser is different, has different business relationships 
and affiliations, and therefore, has different conflicts of interest.”). 

811  Similar to the discussion included under Section II.C.3.a, we believe that policies and 
procedures to comply with Regulation Best Interest 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.     



360 

 

Best Interest will depend on the facts and circumstances of a given situation.812  As such, the 

Compliance Obligation does not enumerate specific requirements that broker-dealers must 

include in their policies and procedures as broker-dealers are too varied in their operations for 

rules to impose a single set of universally applicable specific required elements.  Each broker-

dealer when adopting policies and procedures should consider the nature of that firm’s 

operations and how to design such policies and procedures to prevent violations from occurring, 

detect violations that have occurred, and to correct promptly any violations that have occurred.813   

A firm’s compliance policies and procedures should be reasonably designed to address 

and be proportionate to the scope, size, and risks associated with the operations of the firm and 

the types of business in which the firm engages.814  As such, the Commission is not mandating 

specific requirements pursuant to the Compliance Obligation.  In addition to the required policies 

and procedures, depending on the size and complexity of the firm, we believe a reasonably 

designed compliance program generally would also include:815 controls; remediation of non-

compliance;816 training;817 and periodic review and testing.818    

                                                                                                                                                             

 

812  See Section II.C.3. 
813  See Advisers Act Release 2204. 
814  See Section II.C.3.a. 
815  Cf. FINRA Conflicts Report at 6 (identifying supporting structures, policies, processes, 

controls and training as critical to protect customers and the firm). 
816  Id. at 10 (“Most firms’ policies describe an escalation process for handling those conflicts 

of interest that cannot be handled through other firm policies….”).361 

 

D. Record-Making and Recordkeeping 

In connection with proposed Regulation Best Interest, we proposed new record-making 

and recordkeeping requirements for broker-dealers with respect to certain information collected 

from or provided to retail customers.  Specifically, we proposed amendments to Exchange Act 

Rules 17a-3 and 17a-4, which specify minimum requirements with respect to the records that 

broker-dealers must make, and how long those records and other documents must be kept, 

respectively.  We received several comments on the proposed new requirements and are adopting 

them substantially as proposed with additional clarifications and guidance to address 

commenters’ concerns. 

 We proposed amending Rule 17a-3819 to add a new paragraph (a)(25), which would 

require, for each retail customer to whom a recommendation of any securities transaction or 

investment strategy involving securities is or will be provided, a record of all information 

collected from and provided to the retail customer pursuant to Regulation Best Interest, as well 

as the identity of each natural person who is an associated person of a broker or dealer, if any, 

                                                                                                                                                             

 

817  “For firms, training is an important vehicle to communicate firm culture, specific 
requirements of a firm’s code of conduct and its conflicts management framework.”  Id. 
at 15. 

818  Cf. Questions Advisers Should Ask While Establishing or Reviewing Their Compliance 
Programs (May 2006), available at 
https://www.sec.gov/info/cco/adviser_compliance_questions.htm; FINRA Conflicts 
Report. 

819  See Exchange Act Rule 17a-3. 



362 

 

responsible for the account.  The new paragraph would specify that the neglect, refusal, or 

inability of a retail customer to provide or update any such information would excuse the broker-

dealer from obtaining that information.   

We are adopting the provision substantially as proposed but redesignating it as new 

paragraph (a)(35) of Rule 17a-3.820  We are also amending the text of paragraph (ii) of the 

amendment as adopted to refer to “any information described in paragraph (a)(35)(i) of this 

section” rather than the proposed “any information required under paragraph (a)(25)(i) of this 

section.”  This is a non-substantive change reflecting the fact that paragraph (i) of the new 

provision requires a record of the information collected from a retail customer by the broker-

dealer pursuant to Regulation Best Interest; it does not require the information itself directly as 

implied by the original wording of paragraph (i) of the proposed amendment.  It is therefore 

more accurate to refer in paragraph (ii) to the information “described in,” rather than “required 

under,” paragraph (i), as well as to update the reference in paragraph (ii) to “paragraph (a)(35)(i) 

of this section.” 

Several commenters expressed concern that the proposed rule amendment would 

significantly expand recordkeeping requirements.821  One commenter expressed concern that the 

record retention requirements of the proposed new paragraph to Rule 17a-3 would apply to each 

                                                                                                                                                             

 

820  The Commission is also reserving paragraphs (a)(24) through (a)(34) of Rule 17a-3 for 
use in connection with future rulemakings. 

821  See SIFMA August 2018 Letter; Edward Jones Letter; Primerica Letter. 



363 

 

recommendation made by the broker-dealer rather than to each account (as required by existing 

paragraph (a)(17) of Rule 17a-3, which operates on a per-account basis).  Another commenter 

requested clarification that “the current books and records requirement is sufficient to meet 

record-keeping requirements to satisfy Reg BI,” adding that the Commission should “affirm that 

Reg BI does not create new record-keeping requirements to prove that an advisor acted in a 

client’s best interest.”822  

The Commission notes that the proposed new requirements of Rule 17a-3 are not 

designed to create additional, standalone burdens for broker-dealers but instead to provide a 

means by which they can demonstrate, and Commission examiners can confirm, their 

compliance with the new substantive requirements of Regulation Best Interest.  In response to 

commenter concerns that the proposed requirements would significantly expand their 

recordkeeping obligations, we reiterate that, as stated in the Proposing Release, broker-dealers 

should already be attempting to collect much of the information that would be required under 

Regulation Best Interest pursuant to the FINRA suitability rule and existing Exchange Act books 

and records rules.  For example, we note that under existing Rule 17a-3(a)(17), broker-dealers 

that make recommendations for accounts with a natural person as customer or owner are already 

required to create and periodically update customer account information, although as part of 

developing a “retail customer’s investment profile,” Regulation Best Interest may require broker-

                                                                                                                                                             

 

822  See Raymond James Letter. 



364 

 

dealers to seek to obtain certain retail customer information that is currently not required by Rule 

17a-3(a)(17).823  In addition, Regulation Best Interest would require broker-dealers to disclose in 

writing the material facts relating to the scope and terms of their relationship with the retail 

customer and the material facts relating to conflicts of interest that are associated with the 

investment recommendations provided to the retail customer.  As such, it would not be accurate 

to state, as suggested by the commenter, that the Commission’s current books and records 

requirements for broker-dealers are sufficient to meet recordkeeping requirements to satisfy 

Regulation Best Interest.  The additional books and records requirements the Commission is 

adopting today are designed to allow firms to demonstrate compliance with the substantive 

requirements of Regulation Best Interest. 

We further note that the new record-making requirements would not require the 

duplication of existing records.  Rather, if a broker-dealer relied upon previously existing records 

to demonstrate its compliance with Regulation Best Interest for a given recommendation, it 

would not be required to create and preserve duplicate copies but instead could create a new 

record noting which pre-existing documents were provided to the customer, or what customer 

                                                                                                                                                             

 

823  See Exchange Act Rule 17a-3(a)(17).  As explained in the Proposing Release, Rule 17a-
3(a)(17) applies to each account with a natural person as a customer or owner, while 
proposed Regulation Best Interest would apply to each recommendation of any securities 
transaction or investment strategy involving securities to a retail customer.  Because of 
this difference, the Commission believes it would be appropriate to locate the record-
making requirements related to Regulation Best Interest in a new paragraph of Rule 17a-
3 rather than in an amendment to paragraph (a)(17). 



365 

 

information already being preserved by the broker-dealer was relied upon, to meet the 

obligations of Regulation Best Interest.  However, reliance upon previously existing records 

would only be permissible so long as such records are preserved—a record noting that a 

document was relied upon would no longer meet the recordkeeping obligations of Regulation 

Best Interest if such document was no longer preserved by the broker-dealer.  

Commenters also requested that the Commission limit new recordkeeping requirements 

to customer profile information itself, not the “related and underlying communications.”824  In 

response to these concerns, the Commission clarifies that new paragraph (a)(35) of Rule 17a-3 as 

adopted requires a record of all information collected from and provided to the retail customer 

pursuant to Regulation Best Interest.  Regulation Best Interest does not reference, and the 

Commission does not intend that it require, “related and underlying communications”—rather, it 

applies only to the information that is actually provided to or obtained from the customer 

pursuant to Regulation Best Interest.  Once again, the purpose of the new record-making 

provision is to allow broker-dealers to demonstrate their compliance with the substantive 

requirements of Regulation Best Interest.  Complying with those substantive requirements will 

require broker-dealers to obtain from and provide to customers certain information, and new 

paragraph (a)(35) of Rule 17a-3 requires a record of such information.  In response to comments 

received requesting clarification as to whether information provided to or obtained from a 

                                                                                                                                                             

 

824  See SIFMA August 2018 Letter; Morgan Stanley Letter. 



366 

 

customer orally would be covered by the new record-making requirements,825 the Commission 

clarifies that the requirements of new paragraph (a)(35) of Rule 17a-3 apply to all information 

collected from or provided to a retail customer pursuant to Regulation Best Interest, whether 

provided orally or in writing (electronically or otherwise).826 

Several commenters requested clarification that, except with respect to the specific 

recordkeeping requirements in the rule text, Regulation Best Interest does not require additional 

records (e.g., records to evidence best interest determinations on a recommendation-by-

recommendation basis).827  One commenter also stated that, as drafted, there are significant 

obstacles and costs, including increased privacy and cybersecurity risks, that would result from 

implementing the proposed new rule, in particular with respect to the “all information collected 

from….the retail customer” requirement.828   

In response, the Commission clarifies that while the substantive requirements of 

Regulation Best Interest apply on a recommendation-by-recommendation basis, consistent with 

our approach elsewhere, we are not requiring that broker-dealers create and maintain records to 

                                                                                                                                                             

 

825  See SIFMA August 2018 Letter; Primerica Letter. 
826  In the case of information provided orally under the circumstances outlined in Section 

II.C.1, Disclosure Obligation, Oral Disclosure or Disclosure After a Recommendation, 
the broker-dealer must maintain a record of the fact that oral disclosure was provided to 
the retail customer. 

827  See SIFMA August 2018 Letter; Edward Jones Letter; Morgan Stanley Letter; CCMC 
Letters. 

828  See Primerica Letter. 



367 

 

evidence best interest determinations on a recommendation-by-recommendation basis.  Nor have 

we determined to require broker-dealers to provide information to retail customers relating to the 

basis for each particular recommendation (i.e., disclose such information), and thus did not 

envision this information to come within the scope of Rule 17(a)(35).     

 Rather, in order to demonstrate compliance with Regulation Best Interest, a broker-dealer 

must be able to demonstrate that it had a reasonable basis to believe that each particular 

recommendation made to a retail customer was in the best interest of the customer at the time of 

the recommendation based on the customer’s investment profile and the potential risks, rewards, 

and costs associated with the recommendation.  As noted above, the Commission does not intend 

this to require, in practice, the creation of extensive new and potentially duplicative records for 

each and every recommendation to a retail customer.  Instead, broker-dealers should be able to 

explain in broad terms the process by which the firm determines what recommendations are in its 

customers’ best interests, and similarly to explain how that process was applied to any particular 

recommendation to a retail customer.  However, we are not mandating that broker-dealers create 

and maintain a record of each such determination.  Nonetheless, as noted above we are providing 

guidance suggesting that firms may wish to adequately document an evaluation of a 

recommendation and the basis for that recommendation in particular contexts, such as the 



368 

 

recommendation of a complex product, or where a recommendation may seem inconsistent with 

a retail customer’s investment objectives on its face.829      

In addition, in response to requests from commenters for confirmation that the proposed 

record-making requirements do not contemplate broker-dealers needing to create and maintain 

records of why certain products were recommended over others on a recommendation-by-

recommendation basis,830 we confirm that broker-dealers are not expected to maintain records 

comparing potential investments to one another so long as they are able to demonstrate that each 

individual recommendation actually made to a customer meets the requirements of Regulation 

Best Interest on its own.  Regulation Best Interest applies to recommendations made to a retail 

customer, rather than to potential recommendations considered by the broker-dealer but not 

actually made to the customer. 

In response to the commenter’s privacy and cybersecurity concerns with respect to the 

proposed requirement to make a record of all information collected from the customer pursuant 

to Regulation Best Interest, as noted in the Proposing Release831 and Section II.C above, 

although a broker-dealer’s customer obligations under Regulation Best Interest (e.g., the Care 

Obligation) go beyond those set forth in the FINRA’s suitability rule, the concept of the 

                                                                                                                                                             

 

829  See supra footnote 610 and accompanying text. 
830  See SIFMA August 2018 Letter; CCMC Letters. 
831  Proposing Release at 21611 (noting that Retail Customer Investment Profile is consistent 

with FINRA Rule 2111(a) (Suitability)). 



369 

 

“customer’s investment profile” that a broker-dealer would be required to compile—that is, the 

customer information it would be required to obtain—pursuant to Regulation Best Interest is 

consistent with that under FINRA’s suitability rule.  As such, we believe that since broker-

dealers are already required to seek to obtain identical types of retail customer information 

pursuant to the FINRA suitability rule, broker-dealers should already have in place policies and 

procedures, including training programs, to address such privacy and cybersecurity concerns. 

We also proposed an amendment to paragraph (e)(5) of Rule 17a-4, which currently 

requires broker-dealers to maintain and preserve in an easily accessible place all account 

information required by paragraph (a)(17) of Rule 17a-3 for at least six years after the earlier of 

the date the account was closed or the date on which the information was replaced or updated.832  

The proposed amendment would require broker-dealers to retain any information that the retail 

customer provides to the broker-dealer or the broker-dealer provides to the retail customer 

pursuant to the proposed amendment to Rule 17a-3 being adopted today as Rule 17a-3(a)(35), in 

addition to the existing requirement to retain information obtained pursuant to Rule 17a-3(a)(17).  

As a result, broker-dealers would be required to retain all records of the information collected 

from or provided to each retail customer pursuant to Regulation Best Interest for at least six 

years after the earlier of the date the account was closed or the date on which the information 

was replaced or updated.  The Commission is adopting this amendment to Rule 17a-4(e)(5) 

                                                                                                                                                             

 

832  See Exchange Act Rule 17a-4(e)(5). 



370 

 

substantially as proposed, with the proposed reference to paragraph (a)(25) of Rule 17a-3 

replaced with a reference to paragraph (a)(35) to reflect the redesignation of the latter new rule 

provision as discussed above. 

The Commission received several comments regarding the proposed amendment to Rule 

17a-4 requesting clarification as to what communications would be required to be retained 

pursuant to the proposed rule amendment beyond those already required to be retained by 

existing paragraph (b)(4) of Rule 17a-4.833  Rule 17a-4(b)(4) requires broker-dealers to retain 

originals of all communications received and copies of all communications sent by the broker-

dealer relating to its business as such for a period of not less than three years, the first two in an 

easily accessible place. 

In response, the Commission notes that while the records that a broker-dealer would be 

required to make in connection with Regulation Best Interest under new paragraph (a)(35) of 

Rule 17a-3 may be “business as such” records, the Commission believes it is important, 

including for examination purposes, that broker-dealers separately retain records that specifically 

demonstrate compliance with Regulation Best Interest and new paragraph (a)(35) of Rule 17a-3 

rather than simply including them in the much broader “business as such” category required to 

be retained under Rule 17a-4(b)(4).  Rule 17a-3(e)(5) currently serves the purpose of allowing 

broker-dealers to demonstrate compliance with the customer information records required to be 
                                                                                                                                                             

 

833  See Exchange Act Rule 17a-4(b)(4); SIFMA August 2018 Letter; Edward Jones Letter; 
Prudential Letter. 



371 

 

made pursuant to Rule 17a-3(a)(17), and the amendment to Rule 17a-3(e)(5) being adopted today 

will serve the same purpose with respect to records required to be retained by broker-dealers to 

demonstrate compliance with Regulation Best Interest and new paragraph (a)(35) of Rule 17a-3.  

Finally, as noted in the Proposing Release, the written policies and procedures that 

broker-dealers will be required to create pursuant to Regulation Best Interest are already 

currently required to be retained pursuant to Exchange Act Rule 17a-4(e)(7),834 which requires 

broker-dealers to retain compliance, supervisory, and procedures manuals (and any updates, 

modifications, and revisions thereto) describing the policies and practices of the broker-dealer 

with respect to compliance with applicable laws and rules, and supervision of the activities of 

each natural person associated with the broker-dealer, for a specified period of time.  As such, 

we did not propose, and are not adopting, any additional recordkeeping requirements with 

respect to the written policies and procedures that broker-dealers will be required to create 

pursuant to Regulation Best Interest. 

E. Compliance Date 

We are providing a compliance date of June 30, 2020, consistent with the transition 

provisions described in the Relationship Summary Adopting Release.835  In light of the 

importance of the protections provided by Regulation Best Interest, we believe that this 

                                                                                                                                                             

 

834  See Exchange Act Rule 17a-4(e)(7). 
835  See Relationship Summary Adopting Release.   



372 

 

compliance date will provide adequate notice and opportunity for broker-dealers to comply with 

Regulation Best Interest, including by creating or updating the necessary disclosures and to 

developing, updating or establishing their policies and procedures and systems, as appropriate, to 

achieve compliance with Regulation Best Interest.  On and after the Compliance Date, broker-

dealers that provide recommendations of securities transactions or investment strategies that 

register with the Commission would be required to comply with Regulation Best Interest as of 

the date of registration. 

While most commenters requested an implementation period of 18-24 months,836 one 

commenter requested an implementation period of 12-18 months.837  We believe the operational 

capability needed to develop processes to comply with Regulation Best Interest is sufficiently 

established by firms of all sizes and resources.  While we understand commenters’ requests for 

periods longer than 12 months after effectiveness, the Commission has determined, in light of the 

importance of the protections afforded by Regulation Best Interest to retail customers, that a 

Compliance Date of one year after effectiveness is an appropriate timeframe for firms to conduct 

                                                                                                                                                             

 

836  See Cetera August 2018 Letter; SIFMA August 2018 Letter; HD Vest Letter 
(recommending that the Commission adopt a 24-month implementation period); 
Northwestern Mutual Letter; IRI Letter (recommending that the Commission adopt an 
18-to-24-month implementation period); CCMC Letters; AXA Letter (recommending 
that the Commission adopt at least an 18-month implementation period); ACLI Letter; 
TIAA Letter (recommending that the Commission adopt an 18-month implementation 
period). 

837  See Raymond James Letter (recommending that the Commission adopt a 12-18-month 
implementation period). 



373 

 

the requisite operational changes to their systems to establish internal processes to comply with 

Regulation Best Interest.838    

The Commission also believes that it is important to coordinate the transition dates of the 

Relationship Summary requirements with those of Regulation Best Interest to ensure that all 

retail investors receive the full suite of protections and benefits afforded by the amended and 

new rules.  Finally, the Commission staff intends to 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. 

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 

Regulation Best Interest enhances the broker-dealer standard of conduct beyond existing 

suitability obligations and aligns the standard of conduct with retail customers’ reasonable 

expectations.  

Under Regulation Best Interest, broker-dealers and their associated persons will be 

required 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 an associated person 

                                                                                                                                                             

 

838  See footnote 809 and accompanying text. 



374 

 

making the recommendation ahead of the interests of the retail customer.  They also will be 

required to 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 the Commission has determined that disclosure is 

insufficient to reasonably address the conflict, to mitigate or, in certain instances, eliminate the 

conflict.  As a result, Regulation Best Interest should enhance the efficiency839 of 

recommendations that broker-dealers provide to retail customers, allow retail customers to better 

evaluate the recommendations received, improve retail customer protection when receiving 

recommendations from broker-dealers, and, ultimately, reduce agency costs840 and other costs.  

Importantly, Regulation Best Interest is designed to preserve, to the extent possible, (1) access 

and choice for investors who may prefer the transaction-based model that broker-dealers 

generally provide, or the fee-based model that investment advisers generally provide, or a 

combination of both types of arrangements, and (2) retail customer choice of the level and types 

of services provided and the securities available.  For example, retail customers who intend to 

buy and hold a long-term investment on a non-discretionary basis may find that paying a one-

time commission to a broker-dealer who recommends such an investment is more cost effective 

than paying an ongoing advisory fee to an investment adviser merely to hold the same 

                                                                                                                                                             

 

839  See infra footnote 846 and accompanying text. 
840  See infra footnote 855 and accompanying text. 



375 

 

investment.841  Retail customers who would prefer advisory accounts but have not yet 

accumulated sufficient assets to qualify for investment advisory accounts, which may require 

customers to have a minimum amount of assets, may similarly benefit from recommendations 

from broker-dealers.  Other retail customers who hold a variety of investments, or prefer 

different levels of services from financial professionals, may benefit from having access to both 

brokerage and advisory accounts. 

The Commission is mindful of the costs imposed by, and the benefits obtained from our 

rules.  Whenever the Commission engages in rulemaking under the Exchange Act and is required 

to consider or determine whether an action is necessary or appropriate in the public interest. 

Section 3(f) of the Exchange Act also requires the Commission to consider, in addition to the 

protection of investors, whether the action would promote efficiency, competition, and capital 

formation.842  Also, when making rules pursuant to the Exchange Act, S the Commission is 

required under Section 23(a)(2) to consider, among other matters, the impact any rule  would 

have on competition and is prohibited from adopting any rule that would impose a burden on 

competition not necessary or appropriate in furtherance of the purposes of the Exchange Act.843  

The following analysis considers, in detail, the economic effects that the Commission believes 

are likely to or may result from Regulation Best Interest.  The analysis includes consideration of 
                                                                                                                                                             

 

841  See infra footnote 1354 and accompanying text. 
842  See 15 U.S.C. 77b(b) and 15 U.S.C. 78c(f).   
843  See 15 U.S.C. 78w(a)(2).   



376 

 

the benefits and costs to retail investors and broker-dealers, and also takes into account the 

broader implications of Regulation Best Interest for efficiency, competition, and capital 

formation.   

Where possible, the Commission has sought to quantify the likely economic effects of 

Regulation Best Interest.  The Commission is providing both a qualitative assessment and 

quantified estimates of the potential effects of Regulation Best Interest, where feasible.  The 

Commission has incorporated data and other information provided by commenters to assist it in 

the analysis of the economic effects of Regulation Best Interest.844 However, as explained below 

in more detail, because the Commission does not have, has not received, and, in certain cases, 

does not believe it can reasonably obtain data that may inform on certain economic effects, the 

Commission is unable to quantify certain economic effects.  The Commission further notes that 

even in cases where it has some data or it has received some data regarding certain economic 

effects, the quantification of these effects is particularly challenging due to the number of 

assumptions that it would need to make to forecast how broker-dealers will respond to 

Regulation Best Interest, and how those responses will, in turn, affect the broader market for 

investment advice and the retail customers’ participation in financial markets.    

                                                                                                                                                             

 

844  See infra Section III.A.3. 



377 

 

2. Broad Economic Considerations 

Investors generally derive utility from consuming goods and services over their lifetime 

and from bequeathing wealth to others.845  The amount of goods and services that an investor can 

consume or the amount of wealth the investor can bequeath is limited by the value of the 

resources available to the investor over his or her lifetime.  These resources generally vary across 

market and economic conditions and over time.  An investor generally seeks to allocate his or 

her resources across market and economic conditions and over time to achieve the highest 

expected utility possible over his or her lifetime.  For example, an investor may decide to save, 

and therefore allocate, a proportion of his or her wages to maximize his or her expected utility 

from bequeathing wealth toward his or her children’s future education.      

 Capital markets facilitate this allocation and reallocation of resources.  An investor can 

allocate available resources across financial assets available to them in the capital markets, such 

that these resources become available to the investor at the times, and in the market and 

economic conditions, when he or she needs them.  There may be many combinations of financial 

assets or investment strategies that achieve an investor’s allocation goals, but each of these 

strategies may not necessarily provide the investor with the same benefits or cause the investor to 

bear the same costs.  The expected benefit of allocating resources to an investment strategy 

depends on the expected utility to the investor from the expected payoff of the strategy and from 
                                                                                                                                                             

 

845  See, e.g., Irving Fisher, THE THEORY OF INTEREST, AS DETERMINED BY IMPATIENCE TO 
SPEND INCOME AND OPPORTUNITY TO INVEST IT (1930).   



378 

 

whether this strategy pays off in the market and economic conditions and at the times that the 

investor cares about.  Importantly, the various costs of allocating resources to any strategy reduce 

the resources available for consumption and saving.  

A rational investor seeks out investment strategies that are efficient in the sense that they 

provide the investor with the highest possible expected net benefit, in light of the investor’s 

investment objective that maximizes expected utility.846  From the discussion above, an efficient 

investment strategy may depend on the investor’s utility from consumption, including: (1) his or 

her risk tolerance; (2) time available for the funds to be invested, and not consumed; (3) the 

resources that the investor has currently available (e.g., current wealth) or anticipates to become 

available at some point in the future (e.g., future income); and (4) the cost to the investor of 

implementing the strategy. An investor’s efficient investment strategy may change over time 

because the investor’s preferences, as well as market conditions and investment performance, 

may change over time. 

In general, a typical investor may not have the knowledge or the time to identify efficient 

strategies on his or her own.  In addition, investors may be limited in their access to information 

and their human computational capacity when evaluating choices.847 As an alternative to 

                                                                                                                                                             

 

846  See, e.g., Andreu Mas-Colell, Michael D. Whinston, & Jerry R. Green, MICROECONOMIC 
THEORY (1995), specifically Chapter 10: Competitive Markets for a discussion of 
efficient allocations of resources.   

847  See, e.g., Herbert A. Simon, A Behavioral Model of Rational Choice, 69 Q. J. ECON. 99 
(1955) for one of the first works on bounded rationality. See also Richard H. Thaler, 

 

 



379 

 

attempting to identify efficient strategies on his or her own, an investor may solicit advice from 

financial professionals.   

While there are many types of financial professionals848 that can provide advice related to 

a retail customer’s finances, we focus here (and in Regulation Best Interest) on a type of 

professional that retail customers commonly access, namely broker-dealers and their associated 

persons.  

A broker is any person engaged in the business of effecting transactions in securities for 

the account of others.849 A dealer is any person engaged in the business of buying and selling 

securities for its own account, through a broker or otherwise.850 Within the scope of these 

definitions, a “broker-dealer” (or, a firm that fits both definitions) may offer a wide variety of 

services to retail customers. These services include buying and selling securities for the retail 

customer as well as providing limited personalized investment advice in the form of 

                                                                                                                                                             

 

Behavioral Economics: Past, Present, and Future, 106 AM. ECON. REV. 1577 (2016) for 
a discussion of the evolution of bounded rationality in economics. 

848  The list of financial professionals that can provide advice related to a retail customer’s 
finances includes broker-dealers and their associated persons, investment advisers, banks, 
and insurance agents.  

849  See Section 3(a)(4)(A) of the Securities Exchange Act. 
850  See Section 3(a)(5)(A) of the Securities Exchange Act. 



380 

 

recommendations of whether or not to engage in securities transactions or investment strategies 

involving securities.851 

Federal securities laws and SRO rules govern broker-dealers’ conduct of business. 

Among other things, they require that a broker-dealer or associated person “have a reasonable 

basis to believe that a recommended transaction or investment strategy involving a security or 

securities is suitable for the customer, based on the information obtained through the reasonable 

diligence of the [firm] or associated person to ascertain the customer’s investment profile.”852 

While a suitable recommendation must take into account the elements of a retail customer’s 

investment profile that make securities transactions or an investment strategy efficient for that 

particular retail customer, this requirement for suitability may not lead to an efficient result for 

the retail customer.   

The efficiency of a recommendation to a retail customer may depend on: (1) the menu of 

securities transactions and investment strategies the broker-dealer or its associated persons 

considers and makes available to the retail customer; (2) the return distribution and the costs of 

these securities transactions and strategies; (3) the associated person’s understanding of these 

                                                                                                                                                             

 

851  We focus our discussion on recommendations that are the focus of Regulation Best 
Interest but note that broker-dealers and their representatives provide a wide variety of 
“agency services” as described in footnote 1 of the Proposing Release. See, e.g., 913 
Study.  See also infra Section III.B.1.a. 

852  See FINRA Rule 2111 (Suitability); see also infra Section III.B.2.b.381 

 

investment options and the retail customer’s objectives, such as the retail customer’s risk 

tolerance and time preference; and (4) the retail customer’s resource constraints. 

A recommendation provided by an associated person of the broker-dealer may be 

influenced by the conflicts of interest that the associated person may have or the conflicts of 

interest that the broker-dealer may have at the time of the recommendation.  These conflicts can 

arise as a result of how broker-dealers generate revenue from various securities or investment 

strategies that they make available to retail customers and how broker-dealers compensate their 

associated persons for providing recommendations to retail customers.  In the United States, 

broker-dealers may earn transaction-based compensation that is commonly paid either directly 

by the retail customer (e.g., commissions and markups or markdowns) or indirectly through the 

investment sponsor (e.g., 12b-1 fees or revenue sharing).  Broker-dealers may compensate their 

associated persons that provide recommendations to retail customers with a portion of the 

commissions and markups or markdowns these persons generate through their recommendations. 

Such financial incentives can vary depending on the investment product line, account type, or 

other factors (e.g., amount of customer assets brought into the broker-dealer or revenue 

generated from customer accounts).  



382 

 

A retail customer generally chooses to accept or reject a recommendation supplied by the 

associated person of the broker-dealer.853  Some retail customers may base their decisions on an 

assessment of whether the recommendations they receive would result in securities transactions 

or investment strategies that are efficient for them.  These customers’ assessment may depend on 

factors such as their perception of the associated person’s ability to properly understand and 

account for the customer’s objectives, any information they have about the associated person’s or 

firm’s conflicts of interest with respect to that recommendation, and the extent to which these 

conflicts are expected to result in less than efficient recommendations for the retail customer.  

However, other retail customers may rely in full or in part on factors less directly related to the 

recommendation at hand. Instead, they might rely on factors such as their level of trust with the 

associated person or firm, and in certain circumstances might be inclined to simply accept all of 

the associated person’s recommendations without evaluating for themselves whether the 

recommendations are efficient.854 

                                                                                                                                                             

 

853  Note, however, that a retail customer may receive automated advice without involvement 
of an associated person of the broker-dealer. For example, a broker-dealer may generate 
recommendations through an asset allocation model. FINRA Regulatory Notice 12-25; 
See also FINRA Report on Digital Investment Advice (Mar. 2016). 

854  See, e.g., the discussion on investor trust in the markets for financial advice in Section 
III.B.4.a, infra.  See also Gross Letter.  See also Roman Inderst & Marco Ottaviani, How 
(not) to pay for advice: A framework for consumer financial protection, 105 J. FIN. ECON 
393 (2012) for a discussion of the economic surplus extracted by broker-dealers that 
provide recommendations to retail customers, and how this surplus relates to the factors 
that determine a retail customer’s decision to accept or reject a recommendation. 



383 

 

As noted above, broker-dealers or their associated persons may have conflicts of interest 

that could influence their recommendations to retail customers at the time when they are 

provided.     

A retail customer’s choice to accept a particular recommendation often directly affects 

the compensation that an associated person or broker-dealer itself receives.  For example, an 

associated person may receive greater compensation from selling certain securities or strategies 

relative to other securities or strategies.  Differences in compensation across the securities or 

strategies offered by a broker-dealer may add complexity to an associated person’s incentives 

and may create conflict between the interests of the associated person, who desires to maximize 

his or her compensation, and the interests of the retail customer, who expects the recommended 

transaction to be efficient for him or her.   

In general, this conflict of interest may result in a broker-dealer recommending securities 

or investment strategies that are less efficient for the retail customer.  For instance, the 

recommended securities or strategies may be enhancing the associated person’s compensation at 

the expense of the retail customer.  Put another way, because of the financial incentives, broker-

dealers and their associated persons may be motivated to recommend certain types or quantities 

of securities or strategies, and those recommendations may place the interests of the broker-

dealer or its associated persons ahead of the interests of the retail customer, which may not result 

in the retail customer maximizing his or her expected net benefit.  An inefficient 

recommendation may lead to various results for the retail customer, including inferior investment 

outcomes, such as risk-adjusted expected returns that are lower relative to other similar 

investments or investment strategies.   



384 

 

A retail customer may accept a recommendation that is less efficient if he or she is unable 

to assess correctly the efficiency of the recommendation..   

The difference between the net benefit to the retail customer from accepting a less than 

efficient recommendation about a securities transaction or investment strategy, where the 

associated person or broker-dealer puts its interests ahead of the interests of the retail customer, 

and the net benefit the retail customer might expect from a similar securities transaction or 

investment strategy that is efficient for him or her, as defined above, is an agency cost.855  As 

discussed in the Proposing Release and above, this agency cost arises because of the conflicts of 

interest of the broker-dealer and its associated persons, and the differences between the 

information sets available to the broker-dealer and the retail customer at the time of the 

recommendation.   

In certain principal-agent relationships, the principal may be able to reduce the agency 

costs that he or she is facing in various ways, including by structuring the agent’s compensation 

in a way that better aligns the interest of the agent with that of the principal.856 A feature of the 

agency relationship between a retail customer (the principal) and a broker-dealer (the agent) that 

is common in many principal-agent relationships (including the investment adviser-client 

                                                                                                                                                             

 

855  See, e.g., Michael C. Jensen, and William. H. Meckling, Theory of the Firm: Managerial 
Behavior, Agency Costs and Ownership Structure, 3 J. FIN. ECON. 305 (1976) for a more 
general discussion of agency costs.  

856  See, e.g., Stephen A. Ross, The Economic Theory of Agency: The Principal’s Problem, 
63 AM. ECON. REV. (PAPERS & PROC.) 134 (1973).  



385 

 

relationship) is that the retail customer generally does not have full transparency about the 

agent’s compensation for providing advice and the sources of the agent’s compensation.  Thus, 

the retail customer, through the decision to accept or reject a recommendation received, has 

generally limited understanding of and control over the compensation that the broker-dealer and 

its associated person obtains from providing the recommendation.  These limitations restrict the 

retail customer’s ability to reduce the agency costs that he or she is facing.   

We also recognize that even if the retail customer were to have full transparency about 

the broker-dealer’s and its associated person’s compensation from providing advice, the retail 

customer’s ability to reduce the agency costs may be constrained in other ways.  For example, if 

the menu of securities from which the associated person of the broker-dealer offers 

recommendations is limited, the retail customer’s and the associated person’s ability to identify 

and select a more efficient investment may be constrained.   

Different retail customers may face different agency costs depending on whether they 

base their decision to act on a recommendation on an assessment of the efficiency of the 

recommendation.  Specifically, as noted above, a retail customer that evaluates and uses a 

recommendation received based on an assessment about the efficiency of that recommendation 

may be more successful in identifying and controlling, albeit in a limited fashion, the 

compensation that the broker-dealer and its associated person receive from the 

recommendation—such as by being more likely to reject a less than efficient recommendation—

compared to a retail customer that makes this decision without forming an assessment of the 

efficiency of the recommendation.  Thus, the agency costs may be higher for those retail 

customers that make their decision of whether to act on a recommendation received without an 

assessment of the efficiency of the recommendation. 



386 

 

While the discussion above focuses on the actions that the principal (i.e., the retail 

customer) can take to reduce the agency costs that he or she is facing, the agent can also take 

actions to reduce the agency costs to the principal. For example, in the agency paradigm, when 

the principal may forgo sharing a potentially large surplus with the agent because of the high 

agency costs, the agent may have an incentive to structure the terms of the relationship in a way 

that reduces the agency costs to the principal.857 In the agency relationship between a retail 

customer and a broker-dealer, given the features of the compensation that the broker-dealer and 

its associated persons receive for providing recommendations (e.g., this compensation does not 

depend on the value of the assets in a principal’s account), the broker-dealer and its associated 

persons may not have sufficient incentive to take actions voluntarily that would reduce agency 

costs to the retail customer, such as voluntarily increasing transparency with respect to 

compensation.858   

                                                                                                                                                             

 

857  See, e.g., Sanford J. Grossman & Oliver D. Hart, The Costs and Benefits of Ownership: A 
Theory of Vertical and Lateral Integration, 94 J. POL. ECON. 691 (1986) for a discussion 
of the actions that agents can take to reduce the agency costs to the principal in the 
context of the relationship between an owner (the principal) and a manager (the agent) 
when the agent that has a valuable investment opportunity that can only be financed by 
the principal. 

858  Limited transparency with respect to how broker-dealers and their associated persons are 
compensated from recommending a security and what constrains their  menus of 
securities may make it difficult for retail customers to grasp the size of the agency costs 
that they are facing at the time when they receive the recommendation.  As a result, this 
limited transparency may allow broker-dealers and their associated persons to extract 
informational rents (i.e., in the context of a transaction, compensation in excess of what is 
competitively feasible that stems solely from the informational advantage of one party 

 

 



387 

 

Although the dynamics of the agency relationship between a retail customer and a 

broker-dealer may not cause the broker-dealer to take steps to increase transparency, competitive 

factors in the broker-dealer industry such as steps toward transparency taken by other broker-

dealers may cause increased transparency in that relationship.  Competitive dynamics are more 

effective in areas where comparisons can be more easily made.  For example, in the market for 

mutual funds — particularly index funds —comparability and competition, among other factors, 

have driven down fees significantly.859     

                                                                                                                                                             

 

over another) from the retail customers when providing recommendations.  The adviser 
business model also has its own set of conflicted incentives to gather assets (based on 
AUM fees) or maximize the time that it takes to complete a job (if paid an hourly fee).  
Dual-registrants also have an incentive to recommend the type of account that is most 
profitable to the firm.  See AFL-CIO April 2019 Letter.  See also Morgan Lewis Letter 
(describing investment adviser compensation and conflicts disclosure in Form ADV); 
Bruce Ian Carlin & Gustavo Manso, Obfuscation, Learning, and the Evolution of Investor 
Sophistication, 24 REV. FIN. STUD. 754 (2011) for a discussion about the relationship 
between informational rents and the opacity of recommended investments (e.g., securities 
with complex payoff structures).      

859  Comparability among index funds that follow the same market index is facilitated in part 
by their passive style of investing. Actively managed funds that follow the same 
investment strategy can show different performance due to, among other things, the 
“skill” of the manager of outperforming the market (or any other benchmark). This skill 
is unobservable and generally hard to measure, which makes comparisons across actively 
managed funds difficult. In contrast, comparisons across index funds that follow the same 
market index and that have passive investment styles are based more on observable 
variables, such as fees, rather than unobservable variables, such as managerial skill. In 
this context, disclosure that is more salient with respect to these observable variables may 
facilitate comparisons across index funds.    



388 

 

While we do not have evidence to establish the degree to which broker-dealers can 

extract large informational rents from retail customers under the current legal and regulatory 

regime that governs the broker-dealers’ standard of conduct, the existing agency costs of the 

relationship between the retail customer and the broker-dealer would likely be larger, absent the 

current legal and regulatory regime.860  In general, standards and regulation are effective means 

of reducing agency costs when principals (e.g., retail customers) and agents (e.g., broker-dealers) 

cannot reduce the agency costs on their own by negotiating to address the market frictions in 

their relationship through mechanisms available to them, such as bilateral contracting861 or “side 

payments.”862  

                                                                                                                                                             

 

860  See, e.g., Matthew L. Kozora, Security Recommendations and the Liabilities of Broker-
Dealers (U.S. Sec. & Exch. Comm’n, Working Paper, May 1, 2016), available at 
https://www.sec.gov/files/Kozora_BD-Liability_05-2016.pdf, which provides evidence 
from investor awards in FINRA arbitrations that the author interprets as indicative of 
informational rents being nonzero. See also our more comprehensive discussion in 
Section III.B.3.c, infra, about potential investor harm associated with investment advice, 
including from potential informational rents.   

861  See Proposing Release at 21643. 
862  Another way principals and agents negotiate around market frictions is through “side 

payments.”  In  a transaction between two parties, a side payment is a monetary exchange 
from one party to another that is not part of the transaction.  This mechanism is discussed 
in the literature on bilateral externalities, which focuses on how the actions of one party 
can affect the well-being of the other party.  This mechanism also applies to the 
relationship between a broker-dealer and a retail customer because the action taken by a 
broker-dealer, namely providing a recommendation, may affect the well-being of the 
retail customer receiving that recommendation.  In the literature on bilateral externalities, 
if the party taking these externality actions is unconstrained, the allocation of resources 
across the two parties may be inefficient.  However, in certain circumstances, the parties 

 

 



389 

 

Regulation Best Interest enhances the current standard of conduct for broker-dealers and 

codifies it in an Exchange Act rule.  Regulation Best Interest is designed to: (1) enhance the 

current standard of conduct applicable to broker-dealers and associated persons when they make 

a recommendation to a retail customer of any securities transaction or investment strategy 

involving securities;  (2) reduce conflicts of interest that currently exist between retail customers 

and broker-dealers and their associated persons; and (3) reduce information asymmetries that 

currently limit the ability of retail customers to evaluate the efficiency of recommendations they 

receive from broker-dealers and their associated persons.  In each of these three ways, 

Regulation Best Interest is designed to reduce the agency costs in the relationship between 

broker-dealers and their retail customers, including in situations where the existing legal and 

regulatory regime that governs broker-dealers’ standard of conduct has had limited effectiveness.   

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 

The economic analysis in the Proposing Release characterized the relationship between a 

retail customer and a broker-dealer as one between a principal (the retail customer) and an agent 

(the broker-dealer).863  The analysis noted that the potential conflict between interests and the 

                                                                                                                                                             

 

can avoid this inefficient outcome through side payments that neutralize the effect of the 
externality on the allocations. See, e.g., Mas-Colell et al. (1995), supra footnote 846, 
specifically Part 3: Market Equilibrium and Market Failure for a discussion of bilateral 
externalities.      

863  See Proposing Release at 21629-21631.   



390 

 

differences between the information sets available to the agent and the principal may result in 

agency costs.  It further noted that the inability of the broker-dealers and retail customers to 

overcome the market frictions underlying these agency costs may result in inefficient allocations 

of resources.  An inability of the principal and the agent to efficiently negotiate around the 

frictions that produce agency costs and take actions that would increase the efficiency of their 

allocations is what economists refer to as a “market failure” of the principal-agent 

relationship,864 generally, and of the agency relationship between the retail customer and the 

broker-dealer, specifically.865    

The analysis in the Proposing Release recognized that while the Commission cannot provide a 

quantified estimate of the magnitude of this agency cost, the existence of these costs and their 

persistence justifies regulatory intervention.866   

A number of commenters questioned this approach.  Certain of these commenters stated 

that the Commission needs to more fully identify the market failure that needs to be addressed, 

and certain commenters stated that the Commission did not provide a quantitative assessment of 

                                                                                                                                                             

 

864  See, e.g., Mas-Colell et al. (1995), supra footnote 846. 
865  In general, because frictions such as asymmetric information are ever present, all markets 

and agency relationships have some degree of market failure.  
866  See Proposing Release at 21631.   



391 

 

the severity of the market failure that would prompt the need for regulatory intervention.867  We 

address these concerns below.    

With respect to the issue of appropriately identifying the market failure, one commenter 

questioned whether the relationship between the retail customer and the broker-dealer is a 

principal-agent relationship.868  This commenter stated that in many instances, a broker-dealer’s 

                                                                                                                                                             

 

867  See, e.g., CFA August 2018 Letter at 105, noting that “[c]orrectly diagnosing the problem 
requires identifying and analyzing the market failure that has occurred in investment 
advice securities markets, as well as assessing the significance of that problem”; See also, 
e.g., Letter from Charles Cox, Former SEC Chief Economist, et al. (Feb. 6, 2019) 
(“Former SEC Senior Economists Letter”) at 2, noting that “the Commission confronts 
important questions about advisers balancing their own compensation against the effect 
of that compensation on the customer’s expected returns. We wonder if the extreme 
asymmetry of information and financial sophistication between advisers and many of 
their clients constitutes a market failure that the April proposals are intended to 
ameliorate.” In addition, the Former SEC Senior Economists Letter raised three main 
concerns with the economic analysis in the Proposing Release: 1) the discussion of the 
potential problems in the customer-adviser relationship was incomplete and identified 
other features of the market for ongoing retail investment advice that might be 
problematic; 2) there was inadequate discussion and analysis of the existing economic 
literature on financial advice; and 3) there were questions of whether the disclosure 
requirements in the Proposing Release would provide meaningful information for 
customers. The economic analysis addresses these concerns. For instance, with respect to 
1), Section III.A.2 provides a more in depth discussion of the potential problems that may 
arise when a broker-dealer provides recommendations to a retail customer. With respect 
to 2), Section III.B.3 engages more fully with the economic literature on financial advice. 
Finally, with respect to 3), Sections III.B.4, III.C.2, and III.C.4 provide discussions on the 
effectiveness of the disclosure requirements of Regulation Best Interest.      

868  See CFA August 2018 Letter at 107, noting that “[t]he Commission’s economic analysis 
gets off to a faulty start by mischaracterizing, or at least over-simplifying, the broker-
customer ‘advice’ relationship, as a principal-agent relationship. While there are certainly 
instances where a broker and its customer can exhibit features of a bona fide principal-
agent relationship—for example when executing a customer’s order—it’s not clear that, 

 

 



392 

 

provision of recommendations to a retail customer resembles an arm’s length transaction (e.g., 

purchasing a car) that benefits the more informed broker-dealer at the expense of the less 

informed retail customer.  This commenter disagreed with the Commission’s broader view that 

the market failure stems from the agency costs of the relationship between a broker-dealer and a 

retail customer,869 and instead stated that the market failure is due to conflicts of interest caused 

by the way broker-dealers and their associated persons are generally compensated for providing 

recommendations to retail customers.870  Similarly, another commenter stated that the 

Commission failed to discuss how the current compensation practices associated with providing 

recommendations to retail customers creates incentives for the broker-dealer and its associated 

persons to favor one securities transaction or investment strategy over another when making 

recommendations to retail customers.871  This commenter further questioned whether the 

                                                                                                                                                             

 

in the context of receiving investment recommendations, those same characteristics are 
present. Certainly, the brokerage industry expressly refutes this characterization, having 
argued successfully in the Fifth Circuit that brokers engage in nothing more than an arm’s 
length commercial sales transaction, no different from a car dealer soliciting interest in 
inventory.”   

869  See CFA August 2018 Letter at 108, noting that “[t]ypically, principal-agent relationships 
don’t involve third party payments to the agent, which can adversely affect the level of 
loyalty the agent provides to the principal.” 

870  See CFA August 2018 Letter at 107, noting that the Commission “fails to acknowledge 
that conflicts of interest are a real problem that result in real harm to investors […]” and 
“[…] the Release fails to make clear whether the Commission is truly seeking to address 
the underlying problem of conflicts’ harmful impact on investors.” 

871  See Former SEC Senior Economists Letter at 3, noting that “[n]owhere does the EA 
emphasize that an adviser’s compensation provides numerous opportunities for her to 

 

 



393 

 

information asymmetry and the discrepancy in the level of financial sophistication between 

broker-dealers and their retail customers constitute a market failure.872 One commenter noted 

that the poor performance of actively managed funds that are being recommended by broker-

dealers to small retail customers reflects a principal-agent problem that causes an “enormous” 

wealth transfer from retail customers to the financial industry, including broker-dealers.873  This 

commenter stated that this problem arises because of the broker-dealer’s commission-based 

compensation for providing recommendations and because of the information asymmetries 

between the broker-dealer and the retail customer at the time of the recommendation.874  This 

                                                                                                                                                             

 

favor one investment over another on the basis of the compensation it pays to her or to 
her firm.” 

872  See Former SEC Senior Economists Letter at 2.  See also supra footnote 867 that 
describes in more detail the concerns raised by this commenter. 

873  See Letter from Monique Morrissey, Economist and Heidi Shierholz, Senior Economist 
and Director of Policy, EPI (Aug. 7, 2018) (“EPI Letter”) at 6, noting that “[i]n an 
equilibrium with knowledgeable investors, we would expect returns from active and 
passive strategies to be equal.  The fact that actively-managed funds marketed to small 
investors tend to perform poorly reflects a market distortion—naiveté—or a ‘principal-
agent problem’ in economics parlance, which results in enormous transfers from 
investors to the financial industry.” 

874  See EPI Letter at 2, noting that “[c]onflicts of interest between buyers and sellers are 
commonplace.  Many salesmen, including brokers and car dealers, are paid on 
commission.  However, it has long been recognized that markets for professional advice 
are different from markets for automobiles because information asymmetries are inherent 
in these transactions.” 



394 

 

commenter also stated that recommendations subject to conflicts of interest may have no value 

for retail customers.875  

 As an initial matter, in response to comments regarding the need to discuss fully the 

existing market failure, it is important to recognize that the Commission has been studying and 

carefully considering the issues related to the broker-dealer-client relationship and the related 

standard of conduct for broker-dealers for many years, which led to the development of the 

Proposing Release and the economic analysis therein.876  In light of the comments on the 

Proposing Release, the extensive outreach by the Commission and staff, as well as investor 

testing, the Commission has more specifically and fully described the relationship between the 

broker-dealer and the client, the related market failure, and the resulting potential economic 

effects of Regulation Best Interest in addressing the market failure.877   

The Commission continues to believe that agency costs are at the root of existing 

allocative inefficiencies in the market for broker-dealer advice.  Moreover, this economic 

analysis recognizes that a proper understanding of the economic fundamentals of an investor’s 
                                                                                                                                                             

 

875  See EPI Letter at 8, noting that “the SEC never considers that ‘advice’ offered may not 
just be of lower quality than expected, but worse than no advice at all” and that “much of 
the ‘advice’ provided by broker-dealers not only lacks value, but is actually harmful, 
steering savers to higher-cost products and costly services that will reduce their future 
standard of living compared to how they would fare in the absence of this ‘advice.’ This 
may be true whether or not, in the absence of conflicted ‘advice,’ investors would have 
availed themselves of more paid or free advice from more impartial sources.” 

876  See Proposing Release at 21579-21583. 
877  See supra Section III.A.2. 



395 

 

decision to allocate resources across market and economic conditions and over time is central to 

identifying the frictions that cause inefficiencies in the agency relationship between a broker-

dealer and a retail customer.   

In response to the commenter that stated that in a principal-agent relationship agents do 

not receive compensation from third parties (e.g., investment sponsors), the Commission notes 

that the compensation that the investment sponsor provides to the agent is ultimately funded by 

the principal (i.e., the retail customer).878  In addition, in response to the commenter’s concern 

that a broker-dealer’s provision of recommendations to retail customers resembles an arm’s 

length transaction that is “no different from a car dealer soliciting interest in inventory,”879 the 

Commission notes that under the current regulatory regime broker-dealers and their associated 

persons are subject to a suitability standard of conduct that has been interpreted to “be consistent 

with [the] customer’s best interests.”880  In contrast, in an arm’s length transaction, the parties 

involved are generally not subject to a standard of conduct that would constrain the more 

informed party from acting solely in its own interest.881  Finally, in response to the commenter’s 

                                                                                                                                                             

 

878  See supra footnote 869. 
879  See supra footnote 868. 
880  See infra footnote 979 and accompanying text. 
881  However, in certain markets, there may be market mechanisms in place that would 

prevent the more informed party to a transaction from acting solely in its own interest.     



396 

 

concern with respect to the identification of the market failure,882 the Commission notes that 

while conflicts of interest arise in many types of transactions, in certain instances the parties 

involved can negotiate an arrangement between themselves that would reduce the effect of 

conflicts of interest on the allocation of resources across the parties and improve the efficiency of 

this allocation.  The Commission further notes that agency costs may deter the parties from 

engaging in privately negotiated arrangements that would improve the efficiency of the 

allocation of resources between the parties.  From this perspective, the Commission believes that 

it is the agency costs rather than the conflicts of interest themselves that should be viewed as the 

source of the market failure.  

In response to the commenter that noted that the Commission did not discuss how the 

compensation received by the broker-dealer and its associated persons creates incentives to favor 

one security or investment strategy over another when making recommendations to retail 

customers,883 the Commission has incorporated into this economic analysis a detailed discussion 

of the incentives created by the current compensation practices associated with providing 

recommendations to retail customers.884  In addition, in response to the commenter’s concerns 

about whether the information asymmetry and the discrepancy in the level of financial 

sophistication between retail customers and a broker-dealer and its associated persons are the 
                                                                                                                                                             

 

882  See supra footnote 870. 
883  See supra footnote 871. 
884  See infra Section III.C.4. 



397 

 

source of market failure, the Commission notes that this economic analysis establishes a more 

clear link between bounded rationality, including access to information and financial literacy of 

retail customers, and agency costs, and reflects our conclusion that the agency costs are at the 

root of the market failure. 

The Commission further notes that the so-called “informational rent” that a broker-dealer 

may be incentivized to extract from a retail customer to take advantage of the information 

asymmetry or the discrepancy in the level of financial sophistication is one component of the 

agency costs associated with the relationship between a retail customer and a broker-dealer.  In 

addition, the Commission notes that the evidence on the size of the agency costs associated with 

such informational rents is limited.885  This evidence is not generally supportive of a 

commenter’s assessment that the wealth transfer from retail customers to broker-dealers is 

“enormous.”886  The Commission agrees with this commenter, who stated that the way broker-

dealers are compensated for providing recommendations and the information asymmetry 

between retail customers and broker-dealers are important determinants of the agency costs. 

However, based on the evidence discussed below, the Commission disagrees with this 

                                                                                                                                                             

 

885  See supra Section III.A.2 and infra Section III.B.3. 
886  See supra footnote 873. 



398 

 

commenter’s assessment that the advice provided by the associated persons of the broker-dealer 

has no value.887 

 With respect to the issue of measuring the severity of the market failure, some 

commenters stated that the Commission failed to take into account existing academic literature 

that provides evidence of investor harm caused by accepting advice from the associated persons 

of the broker-dealer.  A subset of these commenters believed that the evidence provided in some 

of these academic studies is compelling and that the Commission should use it to quantify the 

severity of the market failure.888  One commenter also urged the Commission to supplement the 

academic evidence on investor harm with evidence from data available to the Commission from 

regulatory oversight.889  

 In response to these comments, the Commission maintains that the existence of 

misconduct that commenters requested the Commission to document does not render the 

approach taken in Regulation Best Interest irrational, inappropriate, or unreasonable, nor does it 

suggest that an alternative approach would be more effective in fulfilling the Commission’s 

mission.  The Commission is aware and understands the concerns raised by the commenters with 
                                                                                                                                                             

 

887  See infra Section III.B.3.b. 
888  See, e.g., CFA August 2018 Letter; EPI Letter; AARP August 2018 Letter; Better 

Markets August 2018 Letter; Former SEC Senior Economists Letter.   
889  See CFA August 2018 Letter at 112.  This commenter suggested that we present 

additional information about the existence and frequency of the potential harm to 
investors “that results from conflicted brokerage ‘advice’,” which may collectively be 
seen as misconduct by financial professionals. 



399 

 

regards to the evidence on investor harm and the extent to which such evidence can inform on 

our understanding of the severity of the market failure in the market for broker-dealer advice.  As 

discussed in the Proposing Release and reiterated in this economic analysis, the Commission 

believes that retail investors can be harmed when they accept recommendations from a broker-

dealer that places the financial or other interest of the broker-dealer or its associated persons 

ahead of the interests of the retail customers.  In addition, this economic analysis engages more 

fully with the economic literature on financial advice and considers these studies in analyzing the 

costs and benefits associated with Regulation Best Interest.890   

B. Economic Baseline 

This section discusses, as it relates to this rulemaking, the current state of the broker-

dealer and investment adviser markets; the current regulatory environment and market practices 

surrounding the provision of recommendations by broker-dealers; evidence on the potential 

value and harm of investment advice; and how issues related to trust, financial literacy, and 

disclosure effectiveness affect conflicts between investors and financial professionals.  The 

economic baseline has been revised and expanded relative to the Proposing Release to address 

comments, discussed more fully below. 

                                                                                                                                                             

 

890  See infra Section III.B.3.c. 



400 

 

1. Providers of Financial Services891 

a. Broker-Dealers 

Regulation Best Interest will affect the market for broker-dealer services, including firms 

that are dually registered as broker-dealers and investment advisers892 and broker-dealers 

affiliated with an investment adviser.893  The market for broker-dealer services encompasses a 

                                                                                                                                                             

 

891  In addition to broker-dealers and Commission-registered investment advisers discussed 
below in the baseline, there are a number of other entities, such as state-registered 
investment advisers, commercial banks and bank holding companies, and insurance 
companies, which also provide financial advice services to retail customers; however, 
because of unavailability of data, the Commission is unable to estimate the number of 
some of those other entities that are likely to provide financial advice to retail customers 
as well as their size and the scope of services they provide.  A number of broker-dealers 
(see infra footnote 899) have non-securities businesses, such as insurance or tax services.  
As of December 2018, there were approximately 17,300 state-registered investment 
advisers.  The Department of Labor in its Regulatory Impact Analysis identifies 
approximately 398 life insurance companies that could provide advice to retirement 
investors.  See infra footnote 1002.  

892  Not all firms that are dually registered as an investment adviser and a broker-dealer offer 
both brokerage and advisory accounts to retail investors.  For example, some dually 
registered firms offer advisory accounts to retail investors but offer only brokerage 
services, such as underwriting services, to institutional clients.  For purposes of the 
discussion of the baseline in this economic analysis, a dually registered firm is any firm 
that is dually registered with the Commission as an investment adviser and a broker-
dealer.   

893  Some broker-dealers may be affiliated with investment advisers and not dually registered.  
From Question 10 on Form BD, 2,098 (55.7%) broker-dealers report that, directly or 
indirectly, they control, are controlled by, or are under common control with an entity 
that is engaged in the securities or investment advisory business. Comparatively, 2,421 
(18.2%) SEC-registered investment advisers report an affiliate that is a broker-dealer in 
Section 7A of Schedule D of Form ADV, including 1,878 SEC-registered investment401 

 

small set of large and medium sized broker-dealers and thousands of smaller broker-dealers 

competing for niche or regional segments of the market.894 The market for broker-dealer services 

includes many different markets for a variety of services, including (1) managing orders for 

customers and routing them to various trading venues; (2) providing advice to customers that is 

in connection with and reasonably related to their primary business of effecting securities 

transactions;895 (3) holding retail customers’ funds and securities; (4) handling clearance and 

settlement of trades; (5) intermediating between retail customers and carrying/clearing brokers; 

(6) dealing in corporate debt and equities, government bonds, and municipal bonds, among other 

securities; (7) privately placing securities; and (8) effecting transactions in mutual funds that 

involve transferring funds directly to the issuer.  Some broker-dealers may specialize in just one 

narrowly defined service, while others may provide a wide variety of services.  

As of December 2018, there were approximately 3,764 registered broker-dealers with 

over 140 million customer accounts.  In total, these broker-dealers have over $4.3 trillion in total 

                                                                                                                                                             

 

advisers that report an affiliate that is a registered broker-dealer.  Approximately 77% of 
total regulatory AUM are managed by the 2,421 SEC-registered investment advisers. 

894  See Risk Management Controls for Brokers or Dealers with Market Access, Securities 
Exchange Act Release No. 63241 (Nov. 3, 2010) [75 FR 69791, 69822 (Nov. 15, 2010)]. 
For simplification, we present our analysis as if the market for broker-dealer services 
encompasses one broad market with multiple segments, even though, in terms of 
competition, it could also be discussed in terms of numerous interrelated markets. 

895  See Solely Incidental Interpretation. 



402 

 

assets, which are total broker-dealer assets as reported on Form X-17a-5.896  More than two-

thirds of all brokerage assets and close to one-third of all customer accounts are held by the 17 

largest broker-dealers, as shown in Table 1, Panel A.897  Of the broker-dealers registered with the 

Commission as of December 2018, 563 broker-dealers were dually registered as investment 

advisers.898  These firms hold over 90 million (63%) customer accounts.  Approximately 539 

broker-dealers (14%) report at least one type of non-securities business, including insurance, 

retirement planning, mergers and acquisitions, and real estate, among others.899  Approximately 

73.5% of registered broker-dealers report retail customer activity.900  

                                                                                                                                                             

 

896  Assets are estimated by Total Assets (allowable and non-allowable) from Part II of the 
FOCUS filings (Form X-17A-5 Part II, available at https://www.sec.gov/files/formx-17a-
5_2.pdf) and correspond to balance sheet total assets for the broker-dealer.  The 
Commission does not have an estimate of the total amount of customer assets for broker-
dealers.  We estimate broker-dealer size from the total balance sheet assets as described 
above. 

897  Approximately $4.24 trillion of total assets of broker-dealers (98%) are at broker-dealers 
with total assets in excess of $1 billion.  Of the 33 dual-registrants in the group of broker-
dealers with total assets in excess of $1 billion, total assets for these dual-registrants are 
$2.32 trillion (54%) of aggregate broker-dealer assets.  Of the remaining 99 broker-
dealers with total assets in excess of $1 billion that are not dual-registrants, 91 have 
affiliated investment advisers. 

898  This number includes the number of broker-dealers who are also registered as state 
investment advisers.  For purposes of the discussion of the baseline in this economic 
analysis, a dual-registrant is any firm that is dually registered with either the Commission 
or a state as an investment adviser and a broker-dealer. Excluding state registered 
advisers, there are 359 entities that are dually registered with the Commission as an 
investment adviser and a broker-dealer.    

899  We examined Form BD filings to identify broker-dealers reporting non-securities 
business.  For the 393 broker-dealers reporting such business, staff analyzed the narrative 

 

 



403 

 

Panel B of Table 1 is limited to the broker-dealers that report some retail investor activity.  

As of December 2018, there were approximately 2,766 broker-dealers that served retail investors, 

with over $3.8 trillion in total assets (89% of total broker-dealer assets) and almost 139 million 

(97%) customer accounts.901  Of those broker-dealers serving retail investors, 452 were dually 

registered as investment advisers.902  The number of broker-dealers that serve retail customers 

                                                                                                                                                             

 

descriptions of these businesses on Form BD, and identified the most common types of 
businesses: insurance (202), management/financial/other consulting (99), 
advisory/retirement planning (71), mergers and acquisitions (70), foreign 
exchange/swaps/other derivatives (28), real estate/property management (30), tax 
services (15), and other (146).  Note that a broker-dealer may have more than one line of 
non-securities business. 

900  The value of customer accounts is not available from FOCUS data for broker-dealers.  
Therefore, to obtain estimates of firm size for broker-dealers, we rely on the value of 
broker-dealers’ total assets as obtained from FOCUS reports.  Retail sales activity is 
identified from Form BR, which categorizes retail activity broadly (by marking the 
“sales” box) or narrowly (by marking the “retail” or “institutional” boxes as types of sales 
activity).  We use the broad definition of sales as we preliminarily believe that many 
firms will just mark “sales” if they have both retail and institutional activity.  However, 
we note that this may capture some broker-dealers that do not have retail activity, 
although we are unable to estimate that frequency.   

901  Total assets and customer accounts for broker-dealers that serve retail customers also 
include institutional accounts.  Data available from Form BD and FOCUS data is not 
sufficiently granular to identify the percentage of retail and institutional accounts at 
firms. 

902  Excluding state registered advisers, there are 359 entities that are dually registered with 
the Commission as an investment adviser and a broker-dealer. Of the 31 dual-registrants 
in the group of retail broker-dealers with total assets in excess of $500 million, total 
assets for these dual-registrants are nearly $2.01 trillion (53%) of aggregate retail broker-
dealer assets (Table 1, Panel B).  Of the remaining 81 retail broker-dealers with total 
assets in excess of $500 million that are not dual-registrants, 76 have affiliated 
investment advisers. 



404 

 

(i.e., 2,766) likely overstates the number of broker-dealers that will be subject to Regulation Best 

Interest, because not all broker-dealers that serve retail investors provide recommendations to 

retail investors.  We do not have reliable data to determine the precise number of broker-dealers 

that provide recommendations (and the extent to which broker-dealers that provide 

recommendations do so, as opposed to executing unsolicited trades), and as a result, we have 

assumed, for purposes of this Section III and Sections IV (Paperwork Reduction Act Analysis) 

and V (Final Regulatory Flexibility Act Analysis) that 2,766 broker-dealers will be subject to 

Regulation Best Interest. 



405 

 

Table 1, Panel A: Registered Broker-Dealers as of December 2018903 

Cumulative Broker-Dealer Total Assets and Customer Accounts904 

Size of Broker-Dealer  
(Total Assets) 

Total Num. of 
BDs 

Num. of Dually 
Registered BDs 

Cumulative 
Total Assets  

Cumulative 
Number of 
Customer 

Accounts905 

> $50 billion  17 10 $2,879 bil. 40,550,200 

$1 billion to $50 billion  114 23 $1,363 bil. 96,037,591 

$500 million to $1 billion  35 7 $23 bil. 397,814 

$100 million to $500 million 105 20 $23 bil. 1,603,818 

$10 million to $100 million  490 115 $17 bil. 4,277,432 

$1 million to $10 million  1,021 182 $3.6 bil. 460,748 

< $1 million 1,982 206 $0.5 bil. 5,675 

Total 3,764 563 $4,309 bil. 143,333,278 

                                                                                                                                                             

 

903  The data is obtained from FOCUS filings as of December 2018. Note that there may be a 
double-counting of customer accounts among, in particular, the larger broker-dealers as 
they may report introducing broker-dealer accounts as well in their role as clearing 
broker-dealers.  

904  In addition to the approximately 143 million individual accounts at broker-dealers, there 
are approximately 302,000 omnibus accounts (0.2% of total accounts at broker-dealers), 
with total assets of $32.1 billion, across all 3,764 broker-dealers, of which approximately 
99% are held at broker-dealers with greater than $1 billion in total assets. See also supra 
footnote 897. Omnibus accounts reported in FOCUS data are the accounts of non-
carrying broker-dealers with carrying broker-dealers.  These accounts may have 
securities of multiple customers (of the non-carrying firm), or securities that are 
proprietary assets of the non-carrying broker-dealer.  We are unable to determine from 
the data available how many customer accounts non-carrying broker-dealers may have.  
The data does not allow the Commission to parse the total assets in those accounts to 
determine to whom such assets belong.  Therefore, our estimate may be under inclusive 
of all customer accounts held at broker-dealers. 

905  Customer Accounts includes both broker-dealer and investment adviser accounts for 
dual-registrants. 



406 

 

Table 1, Panel B: Registered Retail Broker-Dealers as of December 2018 

Cumulative Broker-Dealer Total Assets and Customer Accounts 

Size of Broker-Dealer (Total 
Assets) 

Total Num. of 
BDs 

Num. of Dually 
Registered BDs 

Cumulative 
Total Assets  

Cumulative 
Number of 
Customer 
Accounts 

> $50 billion  16 8 $2,806 bil. 40,545,792 

$1 billion to $50 billion  75 18 $990 bil. 91,991,118 

$500 million to $1 billion  21 5 $13 bil. 365,632 

$100 million to $500 million 84 17 $18 bil. 1,603,818 

$10 million to $100 million  378 96 $14 bil. 3,762,620 

$1 million to $10 million  783 153 $2.8 bil. 450,132 

< $1 million 1,409 155 $0.4 bil. 5,672 

Total BDs906 2,766 452 $3,844 bil. 138,724,784 

 

Table 2 reports information on brokerage commissions,907 fees, and selling concessions 

from the fourth quarter of 2018 for all broker-dealers, including dual-registrants.908  We observe 

significant variation in the sources of revenues for broker-dealers, with large broker-dealers, on 

average, generating substantially higher levels of aggregate commission and fee revenues (on a 

nominal basis) than smaller broker-dealers.  On average, broker-dealers, including those that are 

                                                                                                                                                             

 

906  Total BDs includes all retail-facing broker-dealers, including those dual-registrants that 
have retail-facing broker-dealers. 

907  Mark-ups or mark-downs are not included as part of the brokerage commission revenue 
in FOCUS data; instead, they are included in Net Gains or Losses on Principal Trades, 
but are not uniquely identified as a separate revenue category.   

908  Source: FOCUS data.  



407 

 

dually registered as investment advisers, earn about $5.1 million per quarter in revenue from 

commissions and nearly four times that amount in fees,909 although the Commission notes that 

fees encompass various types of fees, not just fees for advisory services.910 The level of revenues 

earned by broker-dealers (including dually registered firms) for commissions and fees increases 

with broker-dealer size, but also tends to be more heavily weighted toward commissions for 

broker-dealers with less than $10 million in assets and is weighted more heavily toward fees for 

broker-dealers with assets in excess of $10 million.  For example, for the 114 broker-dealers with 

                                                                                                                                                             

 

909  Fees, as detailed in the FOCUS data, include fees for account supervision, investment 
advisory services, and administrative services.  Beyond the broad classifications of fee 
types included in fee revenue, we are unable to determine whether fees such as Rule 12b-
1 fees, sub-accounting, or other such service fees (e.g., payments by an investment 
company for personal service and/or maintenance of shareholder accounts) are included.  
The data covers both broker-dealers and dually registered firms.  FINRA’s Supplemental 
Statement of Income, Line 13975 (Account Supervision and Investment Advisory 
Services) denotes that fees earned for account supervision are those fees charged by the 
firm for providing investment advisory services where there is no fee charged for trade 
execution.  Investment Advisory Services generally encompass investment advisory work 
and execution of client transactions, such as wrap arrangements.  These fees also include 
fees charged by broker-dealers that are also registered with the Commodity Futures 
Trading Commission (“CFTC”), but do not include fees earned from affiliated entities 
(Item A of question 9 under Revenue in the Supplemental Statement of Income). 

910  With respect to the FOCUS data, additional granularity of what services comprise 
“advisory services” is not available.  See also Solely Incidental Interpretation. 



408 

 

assets between $1 billion and $50 billion, average revenues from commissions are approximately 

$45 million, while average revenues from fees are approximately $225 million.911  

In addition to revenue generated from commissions and fees, broker-dealers may also 

receive revenues from other sources, including margin interest, underwriting, research services, 

and third-party selling concessions, such as from sales of investment company (“IC”) shares.  As 

shown in Table 2, Panel A, these selling concessions are generally a smaller fraction of broker-

dealer revenues than either commissions or fees, except for broker-dealers with total assets 

between $10 million and $100 million.  For these broker-dealers, revenue from third-party 

selling concessions is the largest category of revenues and constitutes approximately 42% of 

total revenues earned by these firms. 

Table 2, Panel B below provides aggregate revenues by revenue type (commissions, fees, 

or selling concessions from sales of IC shares) for broker-dealers delineated by whether the 

broker-dealer is also a dual-registrant.  Broker-dealers dually registered as investment advisers 

have a significantly larger fraction of their revenues from fees compared to commissions or 

selling concessions, whereas broker-dealers that are not dually registered generate approximately 

42% of their advice-related revenues as commissions and only 33% of their advice-related 

revenues from fees, although we lack granularity to determine whether advisory services, in 

                                                                                                                                                             

 

911  An estimate of total fees in this size category would be 114 broker-dealers with assets 
between $1 billion and $50 billion multiplied by the average fee revenue of $225 million, 
or $25.65 billion in total fees.   



409 

 

addition to supervision and administrative services, contribute to fees at standalone broker-

dealers.   

Table 2, Panel A: Average Broker-Dealer Revenues from Revenue Generating Activities912 

Size of Broker-Dealer  
in Total Assets 

N Commissions Fees913 Sales of IC 
Shares 

> $50 billion  17 $170,336,258  $414,300,268  $23,386,192  

$1 billion - $50 billion  114 $45,203,225  $225,063,257  $53,671,602  

$500 million - $1 billion  35 $8,768,547  $30,141,270  $5,481,248  

$100 million - $500 million  105 $12,801,889  $33,726,336  $16,610,013  

$10 million - $100 million 490 $3,428,843  $8,950,892  $9,092,971  

$1 million - $10 million 1,021 $996,130  $1,037,825  $652,905  

< $1 million 1,982 $197,907  $269,459  $85,219  

Average of All Broker-Dealers 3,764 $5,092,808  $21,948,551  $4,368,823  

 

                                                                                                                                                             

 

912       The data is obtained from December 2018 FOCUS reports and averaged across size 
groups. 

913  Fees, as detailed in the FOCUS data, include fees for account supervision, investment 
advisory services, and administrative services. The data covers both broker-dealers and 
dually registered firms.  



410 

 

Table 2, Panel B: Aggregate Total Revenues from Revenue Generating Activities for 

Broker-Dealers based on Dual-Registrant Status 

Broker-Dealer Type N Commissions Fees914 Sales of IC 
Shares 

Dually Registered as IAs 563 $4.62 bil. $17.56 bil. $2.65 bil. 

Standalone Registered BDs 3,201 $4.07 bil. $3.22 bil. $2.55 bil. 

All 3,764 $8.69 bil. $20.78 bil. $5.20 bil. 

 

As shown in Table 3, based on responses to Form BD, broker-dealers’ most commonly 

provided business lines include private placements of securities (62.7% of broker-dealers); retail 

sales of mutual funds (55.4%); acting as a broker or dealer retailing corporate equity securities 

over the counter (52.0%); acting as a broker or dealer retailing corporate debt securities (47.2%); 

acting as a broker or dealer selling variable contracts, such as life insurance or annuities (41.0%); 

acting as a broker of municipal debt/bonds or U.S. government securities (39.8% and 37.4%, 

respectively); acting as an underwriter or selling group participant of corporate securities 

(31.2%); and investment advisory services (26.4%), among others.915  

                                                                                                                                                             

 

914  See id.  
915  Form BD requires applicants to identify the types of business engaged in (or to be 

engaged in) that accounts for 1% or more of the applicant’s annual revenue from the 
securities or investment advisory business. Table 3 provides an overview of the types of 
businesses listed on Form BD, as well as the frequency of participation in those 
businesses by registered broker-dealers as of December 2018.   

 



411 

 

Table 3: Lines of Business at Retail Broker-Dealers as of December 2018 

 Total 

Line of Business 
Number of 

Broker-
Dealers 

Percent of 
Broker-
Dealers 

Private Placements of Securities 1,735 62.70% 

Mutual Fund Retailer 1,533 55.40% 

Broker or Dealer Retailing:   

    Corporate Equity Securities OTC 1,438 51.97% 

    Corporate Debt Securities 1,306 47.20% 

    Variable Contracts 1,132 40.91% 

Municipal Debt/Bonds Broker 1,101 39.79% 

U.S. Government Securities Broker 1,035 37.41% 

Put and Call Broker or Dealer or Options Writer 993 35.89% 

Underwriter or Selling Group Participant - Corporate Securities 862 31.15% 

Non-Exchange Member Arranging For Transactions in Listed Securities by 
Exchange Member 

785 28.37% 

Investment Advisory Services 730 26.38% 

Broker or Dealer Selling Tax Shelters or Limited Partnerships – Primary 
Market 

619 22.37% 

Trading Securities for Own Account 614 22.19% 

Municipal Debt/Bonds Dealer 475 17.17% 

U.S. Government Securities Dealer 339 12.25% 

Solicitor of Time Deposits in a Financial Institution 308 11.13% 

Underwriter - Mutual Funds 237 8.57% 

Broker or Dealer Selling Interests in Mortgages or Other Receivables 216 7.81% 

Broker or Dealer Selling Oil and Gas Interests 207 7.48% 

Broker or Dealer Making Inter-Dealer Markets in Corporate Securities OTC 207 7.48% 

Broker or Dealer Involved in Networking, Kiosk, or Similar Arrangements 
(Banks, Savings Banks, Credit Unions) 

197 7.12% 

Internet and Online Trading Accounts 192 6.94% 

Exchange Member Engaged in Exchange Commission Business Other than 
Floor Activities 

171 6.18% 

Broker or Dealer Selling Tax Shelters or Limited Partnerships – Secondary 
Market 

164 5.93% 

Commodities 162 5.85% 

Executing Broker 107 3.87% 



412 

 

Day Trading Accounts 89 3.22% 

Broker or Dealer Involved in Networking, Kiosk, or Similar Arrangements 
(Insurance Company or Agency) 

88 3.18% 

Real Estate Syndicator 94 3.40% 

Broker or Dealer Selling Securities of Non-Profit Organizations 71 2.57% 

Exchange Member Engaged in Floor Activities 61 2.20% 

Broker or Dealer Selling Securities of Only One Issuer or Associate Issuers 43 1.55% 

Prime Broker 21 0.76% 

Crowdfunding FINRA Rule 4518(a) 21 0.76% 

Clearing Broker in a Prime Broker 14 0.51% 

Funding Portal 8 0.29% 

Crowdfunding FINRA Rule 4518(b) 5 0.18% 

Number of Retail-Facing Broker-Dealers 2,766 
  

b. Investment Advisers 

Other parties that could be affected by Regulation Best Interest are SEC- or state-

registered investment advisers, because Regulation Best Interest could affect the competitive 

landscape in the market for the provision of financial advice.916  This section first discusses SEC-

registered investment advisers, followed by a discussion of state-registered investment advisers. 

                                                                                                                                                             

 

916  In addition to SEC-registered investment advisers, which are the focus of this section, 
Regulation Best Interest could also affect banks, trust companies, insurance companies, 
and other providers of financial advice. 



413 

 

As of December 2018, there were approximately 13,300 investment advisers registered 

with the Commission.  The majority of SEC-registered investment advisers report that they 

provide portfolio management services for individuals and small businesses.917   

Of all SEC-registered investment advisers, 359 identify themselves as dually registered 

broker-dealers.918  Further, 2,421 investment advisers (18%) report an affiliate that is a broker-

dealer, including 1,878 investment advisers (14%) that report an SEC-registered broker-dealer 

affiliate.919  As shown in Panel A of Table 4 below, in aggregate, investment advisers have over 

$84 trillion in AUM.  A substantial percentage of AUM at investment advisers is held by 

institutional clients, such as investment companies, pooled investment vehicles, and pension or 

profit sharing plans; therefore, the total number of accounts for investment advisers is only 29% 

of the number of customer accounts for broker-dealers.  

Based on staff analysis of Form ADV data, approximately 62% of registered investment 

advisers (8,235) have some portion of their business dedicated to retail investors, including both 

                                                                                                                                                             

 

917  Of the approximately 13,300 SEC-registered investment advisers, 8,410 (63.24%) report 
in Item 5.G.(2) of Form ADV that they provide portfolio management services for 
individuals and/or small businesses. In addition, there are approximately 17,300 state-
registered investment advisers, of which 125 are also registered with the 
Commission.  Approximately 13,900 state-registered investment advisers are retail facing 
(see Item 5.D of Form ADV). 

918  See supra footnote 892. 
919  Item 7.A.1 of Form ADV. 



414 

 

high net worth and non-high net worth individual clients,920 as shown in Panel B of Table 4.921  

In total, these firms have approximately $41.4 trillion of AUM.922  Approximately 8,200 

registered investment advisers (61%) serve almost 32 million non-high net worth individual 

clients and have approximately $4.8 trillion in AUM, while approximately 8,000 registered 

investment advisers (60%) serve approximately 4.8 million high net worth individual clients with 

$6.15 trillion in AUM.923  

Table 4, Panel A: Registered Investment Advisers (RIAs) as of December 2018 

Cumulative RIA AUM and Accounts  

Size of Investment Adviser 
(AUM) 

Number 
of RIAs 

Number of Dually 
Registered RIAs Cumulative AUM 

Cumulative 
Number of 
Accounts 

> $50 billion  270 15 $59,264 bil. 20,655,756 

$1 billion to $50 billion  3,453 121 $22,749 bil. 13,304,154 

$500 million to $1 billion  1,635 47 $1,151 bil. 1,413,099 

                                                                                                                                                             

 

920  We note that the data on individual clients obtained from Form ADV may not be exactly 
the same as who would be a “retail customer” as defined in Regulation Best Interest 
because the data obtained from Form ADV regarding clients who are individuals does not 
involve any test of use for personal, family, or household purposes. 

921  We use the responses to Items 5.D.(a)(1), 5.D.(a)(3), 5.D.(b)(1), and 5.D.(b)(3) of Part 
1A of Form ADV. If at least one of these responses was filled out as greater than 0, the 
firm is considered as providing business to retail investors. Part 1A of Form ADV.   

922  The aggregate AUM reported for these investment advisers that have retail investors 
includes both retail AUM as well as any institutional AUM also held at these advisers. 

923  Estimates are based on IARD system data as of December 31, 2018.  The AUM reported 
here is specifically that of those non-high net worth clients.  Of the 8,235 investment 
advisers serving retail investors, 318 are also dually registered as broker-dealers.  



415 

 

$100 million to $500 million 5,927 119 $1,397 bil. 5,135,070 

$10 million to $100 million  1,070 24 $59 bil. 310,031 

$1 million to $10 million  162 3 $0.8 bil. 69,664 

< $1 million 782 30 $0.02 bil. 13,976 

Total 13,299 359 $84,621 bil. 41,081,750 

 

Table 4, Panel B: Retail Registered Investment Advisers (RIAs) as of December 2018 

Cumulative RIA AUM and Accounts  

Size of Investment Adviser 
(AUM) Num. of RIAs Num. of Dually 

registered RIAs Cumulative AUM 
Cumulative 
Number of 
Accounts 

> $50 billion  119  14 $30,291 bil. 20,592,326 

$1 billion to $50 billion  1,614  111 $9,570 bil. 13,224,188 

$500 million to $1 billion  1,007 44 $700 bil. 1,392,842 

$100 million to $500 million 4,548  113 $1,026 bil. 5,287,584 

$10 million to $100 million  706  23 $40 bil. 308,285 

$1 million to $10 million  102  3 $0.5 bil. 69,534 

< $1 million 169 10 $0.02 bil. 13,946 

Total IAs924  8,235 318 $41,434 bil. 40,887,325 

 

In addition to SEC-registered investment advisers, other investment advisers are 

registered with state regulators.925  As of December 2018, there are 17,268 state-registered 

                                                                                                                                                             

 

924  Total IAs includes all retail-facing investment advisers, including those dual-registrants 
that have retail-facing SEC-registered broker-dealers and SEC-registered investment 
advisers. 

925  Item 2.A. of Part 1A of Form ADV and Advisers Act rules 203A-1 and 203A-2 require 
an investment adviser to register with the SEC if it (1) is a large adviser that has $100 

 

 



416 

 

investment advisers,926 of which 125 are also registered with the Commission.  Of the state-

registered investment advisers, 204 are dually registered as broker-dealers, while approximately 

4.6% (786) report a broker-dealer affiliate.  In aggregate, state-registered investment advisers 

have approximately $334 billion in AUM.  Eighty-two percent of state-registered investment 

advisers report that they provide portfolio management services for individuals and small 

businesses, compared to 63% for Commission-registered investment advisers. 

Approximately 81% of state-registered investment advisers (13,927) have some portion 

of their business dedicated to retail investors,927 and in aggregate, these firms have 

                                                                                                                                                             

 

million or more of regulatory AUM (or $90 million or more if an adviser is filing its most 
recent annual updating amendment and is already registered with the SEC); (2) is a mid-
sized adviser that does not meet the criteria for state registration or is not subject to 
examination; (3) meets the requirements for one or more of the revised exemptive rules 
under section 203A; (4) is an adviser (or subadviser) to a registered investment company; 
(5) is an adviser to a business development company and has at least $25 million of 
regulatory AUM; or (6) receives an order permitting the adviser to register with the 
Commission. Although the statutory threshold is $100 million, the SEC raised the 
threshold to $110 million to provide a buffer for mid-sized advisers with AUM close to 
$100 million to determine whether and when to switch between state and Commission 
registration. Advisers Act rule 203A-1(a). 

926  There are 70 investment advisers with latest reported regulatory AUM in excess of $110 
million but that are not listed as registered with the SEC. None of these 70 investment 
advisers has exempted status with the Commission.  For the purposes of this rulemaking, 
these are considered potentially erroneous submissions. 

927  We use the responses to Items 5.D.(a)(1), 5.D.(a)(3), 5.D.(b)(1), and 5.D.(b)(3) of Part 
1A. If at least one of these responses was filled out as greater than 0, the firm is 
considered as providing business to retail investors. Form ADV Part 1A.   



417 

 

approximately $324 billion in AUM.928  Approximately 13,910 (81%) state-registered advisers 

serve 14 million non-high net worth retail clients and have approximately $137 billion in AUM, 

while over 11,497 (67%) state-registered advisers serve approximately 170,000 high net worth 

retail clients with $169 billion in AUM.929 

c. Trends in the Relative Numbers of Providers of Financial Services 

Over time, the relative number of broker-dealers and investment advisers has changed. 

Figure 1 presented below shows the time series trend of growth in broker-dealers and SEC-

registered investment advisers between 2005 and 2018.  Over the last 14 years, the number of 

broker-dealers has declined from over 6,000 in 2005 to less than 4,000 in 2018, while the 

number of investment advisers has increased from approximately 9,000 in 2005 to over 13,000 in 

2018.  This change in the relative numbers of broker-dealers and investment advisers over time 

likely is a reflection of the market for investment advice, and potentially of the choices available 

to retail investors regarding how to receive or pay for such advice, the nature of the advice, and 

the attendant conflicts of interest.   

                                                                                                                                                             

 

928  The aggregate AUM reported for these investment advisers that have retail investors 
includes both retail AUM as well as any institutional AUM also held at these advisers. 

929  Estimates are based on IARD system data as of February 10, 2018.  The AUM reported 
here is specifically that of those non-high net worth investors.  Of the 13,927 state-
registered investment advisers serving retail investors, 134 may also be dually registered 
as broker-dealers.  



418 

 

Figure 1: Time Series of the Number of SEC-Registered Investment Advisers  

and Broker-Dealers (2005 – 2018) 

 

Increases in the number of investment advisers and decreases in the number of broker-

dealers could have occurred for a number of reasons, including changes in regulation and the 

enforcement of regulation, anticipation of possible regulatory changes, technological innovation 

(e.g., the increase in automated advisers, which are often colloquially referred to as “robo-

advisors” and online trading platforms), product proliferation (e.g., index mutual funds and 

exchange-traded products), and industry consolidation driven by economic and market 

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Investment Advisers Broker-Dealers



419 

 

conditions, particularly among broker-dealers.930  Commission staff has observed the transition 

by broker-dealers from traditional brokerage services to also providing investment advisory 

services (often under an investment adviser registration, whether federal or state), and many 

firms have been more focused on offering fee-based accounts because they provide a more 

steady source of revenue than accounts that charge commissions and are dependent on 

transactions.931  Broker-dealers have indicated that the following factors have contributed to this 

                                                                                                                                                             

 

930  See Hester Peirce, Dwindling Numbers in the Financial Industry, Brookings Center on 
Markets and Regulation Report (May 15, 2017), available at 
https://www.brookings.edu/research/dwindling-numbers-in-the-financial-industry/ 
(“Brookings Report”), which notes that “SEC restrictions have increased by almost thirty 
percent [since 2000],” and that regulations post-2010 were driven in large part by the 
Dodd-Frank Act.  Further, the Brookings Report observation of increased regulatory 
restrictions on broker-dealers only reflects CFTC or SEC regulatory actions, but does not 
include regulation by FINRA, other SROs, National Futures Association (“NFA”), or the 
Municipal Securities Rulemaking Board (“MSRB”). 

931  Beyond Commission observations, the Brookings Report, supra footnote 930, also 
discusses the shift from broker-dealer to investment advisory business models for retail 
investors, in part due to the DOL Fiduciary Rule.  Declining transaction-based revenue 
due to declining commission rates and competition from discount brokerage firms has 
made fee-based securities and services more attractive to providers of such securities and 
services.  Although discount brokerage firms generally provide execution-only services 
and do not compete directly in the advice market with full service broker-dealers and 
investment advisers, entry by discount brokers has contributed to lower commission rates 
throughout the broker-dealer industry. Further, fee-based activity generates a steady 
stream of revenue regardless of the customer trading activity, unlike commission-based 
accounts. See also Angela A. Hung, et al., Investor and Industry Perspectives on 
Investment Advisers and Broker-Dealers, RAND Institute for Civil Justice Technical 
Report (2008), available at 
https://www.rand.org/content/dam/rand/pubs/technical_reports/2008/RAND_TR556.pdf 
(“2008 RAND Study”), which discusses a shift from transaction-based to fee-based 
brokerage accounts prior to recent regulatory changes.   



420 

 

migration: provision of revenue stability or increase in profitability,932 perceived lower 

regulatory burden, and provisions of more services to retail customers.933  Some firms have 

reported record profits as a result of moving clients into fee-based accounts, and cite that it 

provides “stability and high returns.”934 

                                                                                                                                                             

 

932  Commission staff examined a sample of recent Form 10-K or Form 10-Q filings of large 
broker-dealers, many of which are dually registered as investment advisers, that have a 
large fraction of retail customer accounts to identify relevant broker-dealers.  See, e.g., 
Edward Jones 3/14/2019 Form 10-K available at 
https://www.sec.gov/Archives/edgar/data/815917/000156459019007788/ck0000815917-
10k_20181231.htm; Raymond James 11/21/2018 Form 10-K available at 
https://www.sec.gov/Archives/edgar/data/720005/000072000518000083/rjf-
20180930x10k.htm;  Stifel 2/20/2019 Form 10-K available at 
https://www.sec.gov/Archives/edgar/data/720672/000156459019003474/sf-
10k_20181231.htm; Wells Fargo 2/27/2019 10-K available at 
https://www.sec.gov/Archives/edgar/data/72971/000007297119000227/wfc-
12312018x10k.htm; and Ameriprise 2/23/2018 Form 10-K available at 
https://www.sec.gov/Archives/edgar/data/820027/000082002718000008/amp12312017.h
tm.  We note that discussions in Form 10-K and 10-Q filings of this sample of broker-
dealers here may not be representative of other large broker-dealers or of small to mid-
size broker-dealers. 

933  See infra Section III.B.2.e.ii, which discusses industry trends, particularly in response to 
the DOL Fiduciary Rule. 

934  See Hugh Son, Morgan Stanley Wealth-Management Fees Climb to All-Time High, 
BLOOMBERG, Jan. 18, 2018, https://www.bloomberg.com/news/articles/2018-01-
18/morgan-stanley-wealth-management-fees-hit-record-on-stock-rally.  Morgan Stanley 
increased the percentage of client assets in fee-based accounts from 37% in 2013 to 44% 
in 2017, while decreasing the dependence on transaction-based revenues from 30% to 
19% over the same time period. See Morgan Stanley Strategic Update (Jan. 18, 2018), 
available at https://www.morganstanley.com/about-us-ir/shareholder/4q2017-strategic-
update.pdf.  See also Lisa Beilfuss & Brian Hershberg, WSJ Wealth Adviser Briefing: The 
Reinvention of Morgan and Merrill, Adviser Profile, WALL ST. J., Jan. 25, 2018,421 

 

Further, there has been a substantial increase in the number of retail clients at investment 

advisers, both high net worth clients and non-high net worth clients as shown in Figure 2.  

Although the number of non-high net worth retail customers of investment advisers dipped 

between 2010 and 2012, it increased by more than 12 million new non-high net worth retail 

clients between 2012 and 2017, and has declined since 2017.  With respect to AUM, we observe 

a similar, albeit more pronounced pattern for non-high net worth retail clients as shown in Figure 

3.  For high net worth retail clients, there has been a pronounced increase in AUM since 2012, 

although AUM has leveled off since 2015 and there also has been leveling and subsequent 

reduction in AUM for non-high net worth retail clients over a similar time period. 

                                                                                                                                                             

 

https://blogs.wsj.com/moneybeat/2018/01/25/wsj-wealth-adviser-briefing-the-
reinvention-of-morgan-and-merrill-adviser-profile/.    



422 

 

Figure 2: Time Series of the Number of Retail Clients of  

Investment Advisers (2010 – 2018) 

 

Figure 3: Time Series of the Retail Clients of  

Investment Advisers AUM (2010 – 2018) 

 



423 

 

d. Registered Representatives of Broker-Dealers, Investment Advisers, and 
Dually Registered Firms 

We estimate the number of associated natural persons of broker-dealers through data 

obtained from Form U4, which generally is filed for individuals who are engaged in the 

securities or investment banking business of a broker-dealer that is a member of an SRO 

(“registered representatives”).935  Similarly, we approximate the number of supervised persons of 

registered investment advisers through the number of registered investment adviser 

representatives (or “registered IARs”), who are supervised persons of investment advisers who 

meet the definition of investment adviser representatives in Advisers Act rule 203A-3 and are 

registered with one or more state securities authorities to solicit or communicate with clients.936 

                                                                                                                                                             

 

935  The number of associated natural persons of broker-dealers may be different from the 
number of registered representatives of broker-dealers because clerical/ministerial 
employees of broker-dealers are associated persons but are not required to register with 
FINRA.  Therefore, the registered representative number does not include such persons.  
However, we do not have data on the number of associated natural persons and therefore 
are not able to provide an estimate of the number of associated natural persons.  We 
believe that the number of registered representatives is an appropriate approximation 
because they are the individuals at broker-dealers that provide advice and services to 
customers.  

936  See Advisers Act, [17 CFR §275.203A-3 (2019)].  However, we note that the data on 
numbers of registered IARs may undercount the number of supervised persons of 
investment advisers who provide investment advice to retail investors because not all 
supervised persons who provide investment advice to retail investors are required to 
register as IARs.  For example, Commission rules exempt from IAR registration 
supervised persons who provide advice only to non-individual clients or to individuals 
that meet the definition of “qualified client.” In addition, state securities authorities may 
impose different criteria for requiring registration as an investment adviser representative.  



424 

 

We estimate the number of registered representatives and registered IARs, including 

dually -registered representatives, (together “registered financial professionals”) at broker-

dealers, investment advisers, and dual-registrants by considering only the employees of those 

firms that have Series 6 or Series 7 licenses or are registered with a state as a registered 

representative or investment adviser representative.937  We only consider employees at firms 

who have retail-facing business, as defined previously.938  We observe in Table 5 that 

approximately 60% of registered financial professionals are employed by dually registered 

entities.  The percentage varies by the size of the firm.  For example, for firms with total assets 

between $1 billion and $50 billion, 67% of all registered financial professionals in that size 

category are employed by dually registered firms.  Focusing on dually registered firms only, 

approximately 60.5% of total registered financial professionals at these firms are dually 

registered representatives; approximately 39.1% are only registered representatives; and less than 

one percent are only registered investment adviser representatives.  

                                                                                                                                                             

 

937  We calculate these numbers based on Form U4 filings. Representatives of broker-dealers, 
investment advisers, and issuers of securities must file this form when applying to 
become registered in appropriate jurisdictions and with SROs. Firms and representatives 
have an obligation to amend and update information as changes occur. Using the 
examination information contained in the form, we consider an employee a registered 
financial professional if he or she has an approved, pending, or temporary registration 
status for either Series 6 or 7 (registered representative) or is registered as an investment 
adviser representative in any state or U.S. territory (IAR).  We limit the firms to only 
those that do business with retail investors, and only to licenses specifically required as a 
registered representative or IAR. 

938  See supra footnotes 900 and 927. 



425 

 

 

Table 5: Total Registered Representatives at Broker-Dealers, Investment Advisers, and 

Dually Registered Firms with Retail Investors939  

Size of Firm 
(Total Assets for 
Standalone BDs 
and Dually 
Registered 
Firms; AUM for 
Standalone IAs) 

Total 
Number of 

Reps 

% of Reps in 
Dually 

Registered 
Firms 

% of Reps in 
Standalone 

BD w/ an IA 
Affiliate 

% of Reps in 
Standalone 

BD w/o an IA 
Affiliate 

% of Reps in 
Standalone 
IA w/ a BD 

Affiliate 

% Reps in 
Standalone 
IA w/o a BD 

Affiliate 

>$50 billion 84,461 73% 7% 0% 19% 1% 

$1 billion to $50 
billion 170,256 67% 11% 0% 15% 7% 

$500 million to 
$1 billion 29,874 71% 5% 1% 7% 16% 

$100 million to 
$500 million 66,924 51% 27% 0% 4% 18% 

$10 million to 
$100 million 106,178 55% 42% 2% 1% 1% 

$1 million to $10 
million  33,790 35% 54% 11% 0% 0% 

< $1 million 12,522 8% 52% 36% 3% 1% 

Total Licensed 
Representatives 504,005 60% 23% 2% 9% 6% 

 

                                                                                                                                                             

 

939  The classification of firms as dually registered, standalone broker-dealers, and standalone 
investment advisers comes from Forms BD, FOCUS, and ADV as described earlier. The 
number of representatives at each firm is obtained from Form U4 filings.  Note that all 
percentages in the table have been rounded to the nearest whole percentage point.  



426 

 

In Table 6 below, we estimate the number of employees who are registered 

representatives, registered investment adviser representatives, or dually registered 

representatives.940  Similar to Table 5, we calculate these numbers using Form U4 filings. Here, 

we also limit the sample to employees at firms that have retail-facing businesses as discussed 

previously.941  

In Table 6, approximately 25% of registered employees at registered broker-dealers or 

investment advisers are dually registered representatives.  However, this proportion varies 

significantly across size categories.  For example, for firms with total assets between $1 billion 

and $50 billion,942 approximately 35% of all registered employees are dually registered 

representatives.  In contrast, for firms with total assets below $1 million, 13% of all employees 

are dually registered representatives.  

                                                                                                                                                             

 

940  We calculate these numbers based on Form U4 filings.  
941  See supra footnotes 900 and 927. 
942  Firm size is defined as total assets from the balance sheet for broker-dealers and dual-

registrants (source: FOCUS reports) and as AUM for investment advisers (source: Form 
ADV).  We are unable to obtain customer assets for broker-dealers, and for investment 
advisers, we can only obtain information from Form ADV as to whether the firm assets 
exceed $1 billion.  We recognize that our approach of using firm assets for broker-dealers 
and customer assets for investment advisers does not allow for direct comparison; 
however, our objective is to provide measures of firm size and not to make comparisons 
between broker-dealers and investment advisers based on firm size.  Across both broker-
dealers and investment advisers, larger firms, regardless of whether we stratify on firm 
total assets or AUM, have more customer accounts, are more likely to be dually 
registered, and have more representatives or employees per firm than smaller broker-
dealers or investment advisers. 



427 

 

Table 6: Number of Employees at Retail-Facing Firms who are Registered Representatives, 

Investment Adviser Representatives, or Both943  

Size of Firm (Total Assets for 
Standalone BDs and Dually 
Registered Firms; AUM for 
Standalone IAs) 

Total Number 
of Employees 

Percentage of Dually 
Registered 

Representatives 

Percentage of 
Registered 

Representatives 
Only 

Percentages of 
IARs Only 

>$50 billion 218,539 19% 16% 1% 

$1 billion to $50 billion 328,842 35% 12% 4% 

$500 million to $1 billion 43,211 18% 40% 10% 

$100 million to $500 million 119,214 23% 24% 9% 

$10 million to $100 million 176,559 20% 39% 1% 

$1 million to $10 million 56,230 17% 39% 1% 

< $1 million 18,334 13% 46% 3% 

Total Employees at Retail-
Facing Firms 960,929 25% 23% 4% 

 

Approximately 87% of investment adviser representatives are dually registered 

representatives.  This percentage is relatively unchanged from 2010.  According to information 

provided in a FINRA comment letter in connection with the 913 Study, 87.6% of registered 

investment adviser representatives were dually registered as registered representatives as of mid-

October 2010.944  In contrast, approximately 52% of registered representatives were dually 

registered as investment adviser representatives at the end of 2018.945  

                                                                                                                                                             

 

943  See supra footnotes 899, 920, 940, and 942. Note that all percentages in the table have 
been rounded to the nearest whole percentage point.  

944  See Letter from Angela C. Goelzer, FINRA, to Jennifer B. McHugh, Senior Advisor to 
the Chairman, U.S. Securities and Exchange Commission, re: File Number 4-606; 

 

 



428 

 

e. Investor Account Statistics 

Investors seek financial advice and services to achieve a number of different goals, such 

as saving for retirement or children’s college education.  Approximately 73% of adults live in a 

household that invests.946  The OIAD/RAND survey indicates that non-investors are more likely 

to be female, to have lower family income and educational attainment, and to be younger than 

investors.947  Approximately 35% of households that do invest do so through accounts such as 

broker-dealer or advisory accounts.948 

As shown above in Figures 2 and 3, the number of retail investors and their AUM 

associated with investment advisers has increased significantly, particularly since 2012.  As of 

                                                                                                                                                             

 

Obligations of Brokers, Dealers and Investment Advisers (Nov. 3, 2010), at 1, available 
at https://www.sec.gov/comments/4-606/4606-2836.pdf.   

945  In order to obtain the percentage of IARs that are dually registered as registered 
representatives of broker-dealers, we sum the representatives at dually registered entities 
and those at investment advisers across size categories to obtain the aggregate number of 
representatives in each of the two categories.  We then divide the aggregate dually 
registered representatives by the sum of the dually registered representatives and the 
IARs at investment adviser-only firms.  We perform a similar calculation to obtain the 
percentage of registered representatives of broker-dealers that are dually registered as 
IARs. 

946  See OIAD/RAND, defining "investors" as persons "owning at least one type of 
investment account, (e.g., an employer-sponsored retirement account, a non-employer 
sponsored retirement account such as an IRA, a college savings investment account, or 
some other type of investment account such as a brokerage or advisory account), or 
owning at least one type of investment asset (e.g., mutual funds, exchange-traded funds 
or other funds; individual stocks; individual bonds; derivatives; and annuities).” 

947  Id. at 36. 
948  Id. at 39. 



429 

 

December 2016, nearly $24.2 trillion is invested in retirement accounts, of which $7.5 trillion is 

in IRAs.949  A total of 43.3 million U.S. households have either an IRA or a brokerage account; 

an estimated 20.2 million U.S. households have a brokerage account, and 37.7 million 

households have an IRA (including 72% of households that also hold a brokerage account).950 

With respect to IRA accounts, one commenter documents that 43 million U.S. households own 

either traditional or Roth IRAs and that approximately 70% are held with financial professionals, 

with the remainder being direct market.951  Further, this commenter finds that approximately 

64% of households have aggregate IRA (traditional and Roth) balances of less than $100,000, 

and approximately 36% of investors have balances below $25,000. As noted in one study, the 

growth of assets in traditional IRAs comes from rollovers from workplace retirement plans; for 

                                                                                                                                                             

 

949  See Sarah Holden & Daniel Schrass, The Role of IRAs in U.S. Households’ Saving for 
Retirement, 2016, ICI RES. PERSP., Jan. 2017, available at https://www.ici.org/pdf/per17-
08.pdf. See also ICI Letter. 

950  The data is obtained from the Federal Reserve System’s 2016 Survey of Consumer 
Finances (“SCF Survey”), a triennial survey of approximately 6,200 U.S. households, and 
imputes weights to extrapolate the results to the entire U.S. population.  As noted, some 
survey respondent households have both a brokerage and an IRA. See Board of 
Governors of the Federal Reserve System, Survey of Consumer Finances (2016), 
available at https://www.federalreserve.gov/econres/scfindex.htm.  The SCF Survey data 
does not directly examine the incidence of households that could use advisory accounts 
instead of brokerage accounts; however, some fraction of IRA accounts reported in the 
survey could be those held at investment advisers. 

951  See Sarah Holden & Daniel Schrass, The Role of IRAs in US Households’ Saving for 
Retirement, 2018, ICI RES. PERSP., Dec. 2018, available at 
https://www.ici.org/pdf/per24-10.pdf.  See also ICI Letter. 



430 

 

example, 58% of traditional IRAs consist of rollover assets, and contributions due to rollovers 

exceeded $460 billion in 2015 (the most recently available data).952   

While the number of retail investors obtaining services from investment advisers and the 

aggregate value of associated AUM has increased, the OIAD/RAND study also suggests that the 

general willingness of investors to use planning or to take financial advice regarding strategies, 

securities, or accounts is relatively fixed over time.953  With respect to the account assets 

associated with retail investors, the OIAD/RAND survey also estimates that approximately 10% 

of investors who have brokerage or advisory accounts hold more than $500,000 in assets, while 

approximately 47% hold $50,000 in assets or less.  Altogether, investors who have brokerage or 

advisory accounts typically trade infrequently, with approximately 31% reporting no annual 

transactions and an additional approximately 30% reporting three or fewer transactions per 

year.954 

With respect to particular securities, commenters have provided us with additional 

information about ownership of mutual funds and IRA account statistics.  For example, one 

commenter stated that 56 million U.S. households and nearly 100 million individual investors 

own mutual funds, of which 80% are held through 401(k) and other work-based retirement plans, 

                                                                                                                                                             

 

952  See Holden & Schrass (2018), supra footnote 951. 
953  See OIAD/RAND at 50 (noting that this conclusion was limited by the methodology of 

comparing participants in a 2007 survey with those surveyed in 2018). 
954  See OIAD/RAND. 



431 

 

while 63% of investors hold mutual funds outside of those plans.955  Of those investors who own 

mutual funds outside of workplace retirement plans, approximately 50% use financial 

professionals, while nearly one-third purchase direct-sold funds either directly from the fund 

company or through a discount broker.956   

Table 7 below provides an overview of account ownership segmented by account type 

(e.g., IRA, brokerage, or both) and investor income category based on the SCF Survey.957  

Table 7: Ownership by Account Type in the U.S. by Income Group 

(as reported by the 2016 SCF Survey) 

Income Category % Brokerage Only % IRA Only % Both Brokerage and IRA 

Bottom 25% 1.2% 7.6% 2.4% 

25% - 50% 3.2% 14.5% 5.4% 

50% - 75% 4.1% 21.4% 11.4% 

75% - 90% 7.5% 33.4% 16.5% 

Top 10% 12.0% 24.7% 43.9% 

Average 4.4% 18.3% 11.6% 

 

                                                                                                                                                             

 

955  See ICI Letter; see also Sarah Holden, Daniel Schrass, & Michael Bogdan, Ownership of 
Mutual Funds, Shareholder Sentiment, and Use of the Internet, 2018, ICI RES. PERSP., 
Nov. 2018, available at https://www.ici.org/pdf/per22-06.pdf. 

956  See Holden et al. (2018), supra footnote 955. See also ICI Letter.  
957  See SCF Survey, supra footnote 950.  To the extent that investors have IRA accounts at 

banks that are not also registered as broker-dealers, our data may overestimate the 
numbers of IRA accounts held by retail investors that could be subject to Regulation Best 
Interest. 



432 

 

With respect to the nature of the accounts held by investors and whether they are 

managed by financial professionals, the OIAD/RAND survey finds that 36% of its sample of 

participants report that they currently use a financial professional and approximately 33% receive 

some kind of recommendation service.958  Of the subset of those investors who report holding a 

brokerage, advisory, or similar account, approximately 33% self-direct their own account, 25% 

have their account managed by a financial professional, and 10% have their account advised by a 

financial professional.959  For those investors who take financial advice, the OIAD/RAND study 

suggests that they may differ in characteristics from other investors.  The survey further finds 

that investors who take financial advice are generally older, retired, and have a higher income 

than other investors, but also may have lower educational attainment (e.g., high school or less) 

than other investors.960 

Similarly, one question in the SCF Survey asks what sources of information households’ 

financial decision-makers use when making decisions about savings and investments. 

Respondents can list up to fifteen possible sources from a preset list that includes “Broker” or 

“Financial Planner” as well as “Banker,” “Lawyer,” “Accountant,” and a list of non-professional 
                                                                                                                                                             

 

958  See OIAD/RAND at 48.  In a focus group preceding the survey, focus group participants 
provided a number of reasons for not using a financial professional in making 
investments, including being unable or unwilling to pay the fees, doing their own 
financial research, being unsure of how to work with a professional, and being concerned 
about professionals selling securities without attending to investors' plans and goals. 

959  See OIAD/RAND at 46. 
960  See OIAD/RAND at 48. 



433 

 

sources.961  Panel A of Table 8 below presents the breakdown of where households who have 

brokerage accounts seek advice about savings and investments. The table shows that of those 

respondents with brokerage accounts, 23% (4.7 million households) use advice services of 

broker-dealers for savings and investment decisions, while 49% (7.8 million households) take 

advice from a “financial planner.”  Approximately 36% (7.2 million households) seek advice 

from other sources such as bankers, accountants, and lawyers.  Almost 25% (5.0 million 

households) do not use advice from the above sources. 

 Panel B of Table 8 below presents the breakdown of advice received by households who 

have an IRA. Approximately 15% (5.7 million households) rely on advice services of their 

broker-dealers and 48% (18.3 million households) obtain advice from financial planners.  

Approximately 41% (15.5 million households) seek advice from bankers, accountants, or 

lawyers, while the 25% (9.5 million households) use no advice or seek advice from other sources. 

 

                                                                                                                                                             

 

961  See SCF Survey, supra footnote 950, which specifically asks participants “Do you get 
advice from a friend, relative, lawyer, accountant, banker, broker, or financial planner? 
Or do you do something else?” See Federal Reserve Codebook for 2016 Survey of 
Consumer Finances (2016), available at 
https://www.federalreserve.gov/econres/files/codebk2016.txt.  Other response choices 
presented by the survey include “Calling Around,” “Magazines,” “Self,” “Past 
Experience,” “Telemarketer,” and “Insurance Agent,” as well as other choices.  
Respondents could also choose “Do Not Save/Invest.”  The SCF Survey allows for 
multiple responses, so these categories are not mutually exclusive.  However, we would 
note that the list of terms in the question does not specifically include “investment 
adviser.” 



434 

 

Table 8, Panel A: Sources of Advice for Households who have a Brokerage Account in the 

U.S. by Income Group962  

Income Category % Taking Advice 
from Brokers 

% Taking Advice 
from Financial 

Planners  

% Taking Advice 
from Lawyers, 

Bankers, or 
Accountants 

% Taking no 
Advice or from 
Other Sources 

Bottom 25% 20.55% 53.89% 35.64% 24.30% 

25% - 50% 22.98% 38.03% 43.92% 32.36% 

50% - 75% 20.75% 52.00% 31.42% 23.61% 

75% - 90% 22.56% 48.94% 32.25% 28.10% 

Top 10% 25.29% 50.53% 38.47% 21.06% 

Average 23.02% 49.02% 35.99% 24.94% 

 

Table 8, Panel B: Sources of Advice for Households who have an IRA in the U.S. by 

Income Group963  

Income Category % Taking Advice 
from Brokers 

% Taking Advice 
from Financial 

Planners  

% Taking Advice 
from Bankers,  

Accountants, or 
Lawyers 

% Taking no 
Advice or from 
Other Sources 

Bottom 25% 12.14% 38.30% 43.69% 31.85% 

25% - 50% 9.79% 43.82% 40.67% 32.74% 

50% - 75% 14.93% 45.20% 41.23% 25.23% 

75% - 90% 14.68% 52.14% 41.65% 24.26% 

Top 10% 21.40% 55.40% 40.03% 18.56% 

Average 15.25% 48.45% 41.17% 25.28% 

 
                                                                                                                                                             

 

962  See SCF Survey, supra footnote 950. 
963  Id.  



435 

 

The OIAD/RAND survey notes that for survey participants who reported working with a 

specific individual for investment advice, 70% work with a dual-registrant, 5.4% with a broker-

dealer, and 5.1% with an investment adviser.964 

f. Financial Incentives of Firms and Financial Professionals 

Commission experience indicates that there is a broad range of financial incentives 

provided by standalone broker-dealers and dually registered firms to their financial 

professionals.965  While some firms provide base pay for their financial professionals ranging 

from approximately $45,000 to $85,000 per year, many firms provide compensation only 

through a percentage of commissions, plus performance-based awards, such as individual or 

team bonuses based on production.966  Commission-based compensation to financial 

professionals range from 30% to 95% of total commissions paid to the firm on a particular 

transaction, although this compensation is generally reduced by various costs and expenses 

attributable to the financial professional (e.g., clearing costs associated with some securities, 
                                                                                                                                                             

 

964  See OIAD/RAND at 53.  As documented by OIAD/RAND, retail investors surveyed had 
difficulty in accurately identifying the type of relationship that they have with their 
financial professional. 

965  Information on compensation and financial incentives generally relates to 2016 
compensation arrangements for a sample of approximately 20 firms, comprising both 
standalone broker-dealers and dually registered firms.  We acknowledge that the 
information provided in this baseline may not be representative of the compensation 
structures more generally because of the diversity and complexity of services and 
securities offered by standalone broker-dealers and dually registered firms. 

966  Commission experience indicates that some firms award production bonuses based on 
commissions generated, while other firms provide awards based on AUM. 



436 

 

charges related to an SRO or the Securities Investor Protection Corporation  (“SIPC”), and 

insurance, among others).   

Several firms have varying commission-based compensation rates depending on the 

investment type being sold.  For example, compensation ranges from 76.5% for stocks, bonds, 

options, and commodities to 90% for open-ended mutual funds, private placements, and unit 

investment trusts.  Several firms charge varying commissions on securities depending on the 

amount of security sold (e.g., rates on certain proprietary mutual funds range from 0.75% to 

5.75% depending on the share class), but do not provide those rates to financial professionals 

based on investment type.  Some firms also provide incentives for their financial professionals to 

recommend proprietary securities and services over third-party or non-proprietary securities.  

Commission rates for some firms, however, decline as the dollar amount sold increases, and such 

rates vary across asset classes as well (e.g., within a given share class, rates range from 1.50% to 

5.75% depending on the dollar amount of the fund sold).  With respect to compensation to 

individual financial professionals, if compensation rates for mutual funds are approximately 90% 

(as discussed above, for example), financial professionals can earn between 0.68% and 5.18%, 

depending on the type and amount of security sold.   

For financial professionals who do not earn commission-based compensation, some firms 

charge retail customers flat fees ranging from $500 to $2,500, depending on the level of service 

required, such as financial planning, while others charge hourly rates ranging from $150 to $350 

per hour.  For dually registered firms that charge clients based on a percentage of AUM, the 

average percentage charge varies based on the size of the account: the larger the AUM, the lower 

the percentage fee charged.  Percentage-based fees for the sample firms range from 

approximately 1.5% for accounts below $250,000 to 0.5% for accounts in excess of $1 



437 

 

million.967  If compensation rates range between 30% and 95%, a firm charging a customer $500 

can provide compensation to the financial professional between $150 and $475 for each financial 

plan provided.  For fee-based accounts, assuming that a retail customer has an account worth 

$250,000, the firm will charge account-level fees of $3,750 ($250,000 x 1.5%), and the financial 

professional can earn between $1,170 and $3,560 annually for each account. However, accounts 

may also be subject to additional fees beyond those described here and the financial 

professionals also may receive additional compensation. 

In addition to “base” compensation, most firms also provide bonuses (based on either 

individual or team performance) or variable compensation, ranging from approximately 10% to 

83% of base compensation.  These bonuses could be awarded based on either commissions 

generated or AUM.  While the majority of firms base at least some portion of their bonuses on 

production, usually in the form of total gross revenue, other forms of bonus compensation are 
                                                                                                                                                             

 

967  We note that some firms could have higher or lower commission-based compensation 
rates or asset-based fee percentages than those provided here.  For example, based on a 
review of Form ADV Part 2A (the brochure) of several large dual-registrants (not 
included in the sample above), asset-based fees for low AUM accounts could range as 
high as 2.0% to 3.0%, with the average fee for high AUM accounts ranging between 
0.5% to 1.5%.  See also  AdvisoryHQ, Average Financial Advisor Fees in 2018-2019: 
Fees Charged by Advisory & Wealth Management Firms, 
http://www.advisoryhq.com/articles/financial-advisor-fees-wealth-managers-planners-
and-fee-only-advisors/. The AdvisoryHQ report shows that average asset-based fees 
range from 1.18% for accounts less than $50,000 to less than 0.60% for accounts in 
excess of $30 million, while fixed-fees range from $7,500 for accounts less than 
$500,000 to $55,000 for accounts in excess of $7.5 million.  Again, we note that these are 
charges to clients and are not indicative of the total compensation earned by the financial 
professional per account. 



438 

 

derived from customer retention, customer experience, and manager assessment of performance.  

Moreover, some firms use a tiered system within their compensation grids depending on firm 

experience and production levels.  Financial professionals’ variable compensation can also 

increase when they enroll retail customers in advisory accounts versus other types of accounts, 

such as brokerage accounts.  Some firms also provide transition bonuses for financial 

professionals with prior work experience based on historical trailing production levels and AUM.  

Although many firms do not have any incentive-based contests or programs, some firms award 

non-cash incentives for meeting certain performance, best practices, or customer service goals, 

including trophies, dinners with senior officers, and travel to annual meetings with other award 

winners.968   

2. Regulatory Baseline and Current Market Practices 

Broker-dealers' current standards of conduct are governed by federal and state law and 

regulation as well as the rules and guidance of SROs,969 particularly, for the purposes of this 

                                                                                                                                                             

 

968  See FINRA Regulatory Notice 16-29, Gifts, Gratuities and Non-Cash Compensation 
Rules – FINRA Requests Comment on Proposed Amendments to Its Gifts, Gratuities and 
Non-Cash Compensation Rules (Aug. 2016).  At the time this notice was published, 
FINRA’s impression was that investment-specific internal sales contests for non-cash 
compensation were not widely used. 

969  Generally, all registered broker-dealers that deal with the public must become members 
of FINRA, a registered national securities association, and may choose to become 
exchange members.  See Exchange Act section 15(b)(8) and Exchange Act rule 15b9-1.  
FINRA is the sole national securities association registered with the SEC under section 
15A of the Exchange Act.  Accordingly, for purposes of discussing a broker-dealer’s 

 

 



439 

 

rulemaking, those related to the suitability of recommendations and disclosure of conflicts of 

interest.  In response to comment letters that stated the Proposing Release did not fully consider 

the current market practices, we have provided an overview of these practices reported by 

commenters and from industry studies.970  Together, these laws and regulations comprise the 

regulatory baseline. 

a. Federal and State Securities Laws 

Under the antifraud provisions of the federal securities laws and SRO rules, broker-

dealers are required to deal fairly with their customers.971  In addition, broker-dealers must 

comply with a wide range of specific obligations specified in the Exchange Act and the rules 

thereunder.  Moreover, there is a body of case law holding that broker-dealers that exercise 

                                                                                                                                                             

 

regulatory requirements when providing advice, we focus on FINRA’s regulation, 
examination, and enforcement with respect to member broker-dealers.   

970  See, e.g., AALU Letter; Letter from John L. Thornton, Co-Chair, Committee in Capital 
Markets Regulation (Jul. 18, 2018) (“CCMR Letter”); CFA August 2018 Letter; Davis & 
Harman Letter; EPI Letter; Lincoln Financial Letter; NASAA August 2018 Letter; UVA 
Letter (which stated that the Proposing Release did not adequately address current market 
practices and/or provide industry studies and surveys of those practices). 

971  See, e.g., FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade); 
NASD Interpretive Material 2310-2, Fair Dealing with Customers (“Implicit in all 
member and registered representative relationships with customers and others is the 
fundamental responsibility for fair dealing. Sales efforts must therefore be undertaken 
only on a basis that can be judged as being within the ethical standards of [FINRA’s] 
Rules, with particular emphasis on the requirement to deal fairly with the public.”); 
Charles Hughes & Co. v. SEC, 139 F.2d 434 (2d Cir. 1943), cert. denied, 321 U.S. 786 
(1944); Hanly v. SEC, 415 F.2d 589, 596 (2d Cir. 1969); see also e.g., 913 Study at 51 
and footnote 221. 



440 

 

discretion or control over customer assets, or have a relationship of trust and confidence with 

their customers, may owe customers a fiduciary duty, depending on the 

circumstances.972  Additionally, some states provide through statute or regulation, among other 

requirements such as minimum requirements for sales practices, that broker-dealers have some 

form of state-specific fiduciary duty to their customers in at least some circumstances.  

Substantial variation exists among states’ fiduciary standards, ranging from states with express 

fiduciary standards that apply to broker-dealers to those with limited or no such standards.973  

                                                                                                                                                             

 

972 See, e.g., U.S. v. Skelly, 442 F.3d 94, 98 (2d Cir. 2006) (fiduciary duty found “most 
commonly” where “a broker has discretionary authority over the customer’s account”); 
United States v. Szur, 289 F.3d 200, 211 (2d Cir. 2002) (“Although it is true that there ‘is 
no general fiduciary duty inherent in an ordinary broker/customer relationship,’ a 
relationship of trust and confidence does exist between a broker and a customer with 
respect to those matters that have been entrusted to the broker.”) (citations omitted); Leib 
v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 461 F. Supp. 951, 953-954 (E.D. Mich. 
1978), aff’d, 647 F.2d 165 (6th Cir. 1981) (recognizing that a broker who has de facto 
control over non-discretionary account generally owes customer duties of a fiduciary 
nature; looking to customer’s sophistication, and the degree of trust and confidence in the 
relationship, among other things, to determine duties owed); Arleen W. Hughes, 
Exchange Act Release No. 4048 (Feb. 18, 1948) (Commission Opinion), aff’d sub nom. 
Hughes v. SEC, 174 F.2d 969 (D.C. Cir. 1949) (“Release 4048”) (noting that fiduciary 
requirements generally are not imposed upon broker-dealers who render investment 
advice as an incident to their brokerage unless they have placed themselves in a position 
of trust and confidence, and finding that Hughes was in a relationship of trust and 
confidence with her clients). See also Gross Letter (which discussed the obligations of 
broker-dealers with discretionary or de facto control over customer accounts); Solely 
Incidental Interpretation. 

973  See AARP August 2018 Letter; PIABA Letter; U. of Miami Letter. See also Michael S. 
Finke & Thomas Patrick Langdon, The Impact of the Broker-Dealer Fiduciary Standard 
on Financial Advice (Working Paper, Mar. 9, 2012) for a discussion of state fiduciary 
standards. One comment letter also provided an extensive overview of the fiduciary441 

 

b. FINRA Rule 2111: Suitability  

FINRA Rule 2111 (the “Suitability Rule”) requires that a broker-dealer or associated 

person have a reasonable basis to believe that a recommended securities transaction or 

investment strategy involving securities is suitable for the retail customer.974  A broker-dealer 

cannot disclaim away its suitability obligation under the Suitability Rule.975  We reviewed the 

Suitability Rule and drew upon it and enhanced the suitability requirement in developing 

Regulation Best Interest.976  FINRA also requires additional specific suitability obligations with 

                                                                                                                                                             

 

obligations of state-registered investment advisers, “typified by an expectation of 
undivided loyalty where the adviser acts primarily for the benefit of its clients.” See 
NASAA February 2019 Letter at 22 and footnote 40.  This comment letter also stated that 
“[s]ome states also extend these fiduciary obligations beyond investment advisers to 
brokers, especially in dual-hatted scenarios,” and that these fiduciary obligations were 
extended even when broker-dealers handled non-discretionary accounts. Id. at 23-24 and 
footnote 41.  

974  See FINRA Rule 2111, supra footnote 161.  As a “General Principle,” the rule states that 
associated persons have a “fundamental responsibility for fair dealing” and that the rule is 
intended to promote ethical sales practices and high standards of commercial conduct. 
See FINRA Rule 2111.01.  See also, In re Application of Raghavan Sathianathan, 
Exchange Act Release No. 54722 at 10 (Nov. 8, 2006) (“Sathianathan’s 
recommendations… were unsuitable because they were designed to maximize his own 
commissions rather than to establish a suitable portfolio.”).  See also 913 Study at 59 and 
footnote 187. 

975  FINRA Rule 2111.02 (Disclaimers). 
976  See supra footnote 161. The primary requirements for the Suitability Rule are described 

in the Proposing Release at Section IV.B.2.a. 



442 

 

respect to certain types of securities or transactions, such as variable insurance products and 

derivatives securities, including options and securities-based futures.977 

  As discussed by several commenters,978 the regulatory baseline also includes FINRA 

guidance on best practices, such as guidance regarding suitability, which provides guidance on 

how broker-dealers and associated persons should comply with suitability obligations when 

making recommendations to customers. FINRA guidance regarding suitability includes 

Regulatory Notice 12-25, which states that under the Suitability Rule, “a broker’s 

recommendations must be consistent with his customers’ best interests,”979 as well as other 

regulatory notices that provide guidance on the suitability of specific securities or investment 

strategies involving securities, including, but not limited to, mutual funds, variable contracts 

including annuities, structured and complex securities, leveraged and inverse exchange-traded 

products, and IRA rollovers.980    

                                                                                                                                                             

 

977  See, e.g., FINRA Rule 2330 (Members’ Responsibilities Regarding Deferred Variable 
Annuities); FINRA Rule 2360 (Options); FINRA Rule 2370 (Securities Futures); FINRA 
Rule 2821 (Sales Practices for Deferred Variable Annuities including a Suitability 
Obligation). See also 913 Study at 65-66. 

978  See CFA August 2018 Letter; Bank of America Letter; Transamerica August 2018 Letter. 
979  See FINRA Regulatory Notice 12-25; see also FINRA Regulatory Notice 13-31, 

Suitability – FINRA Highlights Examination Approaches, Common Findings and 
Effective Practices for Complying With its Suitability Rules (Sep. 2013) (which provides 
“…effective practices… to help firms enhance compliance and supervision under the 
suitability rule”). 

980  See, e.g., NASD Notice to Members 94-16, NASD Reminds Members Of Mutual Fund 
Sales Practice Obligations (Mar. 1994) and NASD Notice to Members 95-80, NASD 

 

 



443 

 

c. FINRA Report on Conflicts of Interest 

In 2013, FINRA published as guidance a Report on Conflicts of Interest (“FINRA 

Conflicts Report”) to provide an overview of effective practices that broker-dealers could 

employ to manage and mitigate conflicts of interest.981  In the report, FINRA provides 

suggestions for broker-dealers for addressing conflicts of interest related to three broad areas: a 

firm-level approach to identify and manage conflicts of interest; the production and distribution 

of new securities; and compensation and other financial incentives of associated persons.982  

                                                                                                                                                             

 

Further Explains Members Obligations and Responsibilities Regarding Mutual Funds 
Sales Practices (Sep. 1995) (mutual fund suitability and sales practices); NASD Notice to 
Members 96-86, NASD Regulation Reminds Members and Associated Persons that Sales 
of Variable Contracts are Subject to NASD Suitability Requirements (Dec. 1996) and 
NASD 99-35, NASD Reminds Members of Their Responsibilities Regarding Sales of 
Variable Annuities (May 1999) (suitability and sales practices of variable contracts and 
variable annuities); NASD Notice to Members 05-59, NASD Provides Guidance 
Concerning the Sale of Structure Products;  and FINRA Regulatory Notice 12-03, 
Complex Products – Heightened Supervision of Complex Products (Jan. 2012);  
(suitability and sales practices of structured and complex products); FINRA Regulatory 
Notice 09-31, FINRA Reminds Firms of Sales Practice Obligations Relating to 
Leveraged and Inverse Exchange-Traded Funds (June 2009) (sales practices of leveraged 
and inverse ETFs); and FINRA Regulatory Notice 13-45, Rollovers to Individual 
Retirement Accounts – FINRA Reminds Firms of Their Responsibilities Concerning IRA 
Rollovers (Dec. 2013) (obligations when recommending a rollover or transfer of assets 
from a sponsored retirement plan to an IRA). 

981  See FINRA Conflicts Report, supra footnote 459. See also IRI Letter, which notes that 
the FINRA Conflicts Report “…provides valuable guidance as to the elements of an 
effective practice framework for managing BDs’ conflicts of interest…” See also SIFMA 
August 2018 Letter; CFA August 2018 Letter; Raymond James Letter; Ameriprise Letter; 
ACLI Letter; Fein Letter. 

982  See FINRA Conflicts Report, supra footnote 459. 



444 

 

With respect to new securities, the FINRA Conflicts Report recommends, among other things, 

new security review committees and disclosure of conflicts related to recommendations of new 

securities to customers.983  The FINRA Conflicts Report also provides guidance to broker-

dealers on managing conflicts of interest that arise from compensation and financial incentives of 

broker-dealers.  For example, the FINRA Conflicts Report recommends increased surveillance of 

recommendations near compensation thresholds and capping compensation credits across similar 

investment types to prevent representatives from preferentially recommending securities that 

yield the largest compensation.984   

d. Other Broker-Dealer Obligations: Disclosure, Supervision, and 

Compensation 

Broker-dealers are subject to other disclosure obligations under the federal securities laws 

and SRO rules.  For instance, under existing antifraud provisions of the Exchange Act, a broker-

dealer has a duty to disclose material adverse information to its customers.985  Broker-dealers 

                                                                                                                                                             

 

983  Id. 
984  Id. 
985  A broker-dealer may be liable if it does not disclose “material adverse facts of which it is 

aware.” See, e.g., Chasins v. Smith, Barney & Co., 438 F.2d 1167, 1172 (2nd Cir. 1970); 
SEC v. Hasho, 784 F. Supp. 1059, 1110 (S.D.N.Y. 1992); In the Matter of RichMark 
Capital Corp., Exchange Act Release No. 48758 (Nov. 7, 2003) (Commission Opinion) 
(“When a securities dealer recommends stock to a customer, it is not only obligated to 
avoid affirmative misstatements, but also must disclose material adverse facts of which it 
is aware. That includes disclosure of ‘adverse interests’ such as ‘economic self-interest’ 

 

 



445 

 

found to be acting as fiduciaries also have a duty to disclose material conflicts of interest.986  

Broker-dealers are also prohibited from making misleading statements.987  Courts have found 

that broker-dealers, in making recommendations, should have disclosed that they were: acting as 

a market maker for the recommended security; trading as a principal with respect to the 

recommended security; engaging in revenue sharing with a recommended mutual fund; or 

“scalping” a recommended security.988  

Broker-dealers are also currently subject to supervisory obligations under Section 

15(b)(4)(E) of the Exchange Act and SRO rules, including the establishment of policies and 

procedures reasonably designed to prevent and detect violations of, and to achieve compliance 

                                                                                                                                                             

 

that could have influenced its recommendation.”) (citations omitted). See also 
Relationship Summary Proposal. 

986  See, e.g., United States v. Szur, 289 F.3d 200, 212 (2d Cir. 2002) (broker’s fiduciary 
relationship with customer gave rise to a duty to disclose commissions to customer, 
which would have been relevant to customer’s decision to purchase stock); Arleen W. 
Hughes, Exchange Act Release No. 4048 (Feb. 18, 1948) (Commission Opinion), aff’d 
sub nom. Hughes v. SEC, 174 F.2d 969, 976 (D.C. Cir. 1949) (broker-dealer acted in the 
capacity of a fiduciary and, as such, broker-dealer was under a duty to make full 
disclosure of the nature and extent of her adverse interest when engaging in principal 
transactions, “including her cost of the securities and the best price at which the security 
might be purchased in the open market”). 

987  See Proposing Release at footnotes 175-177 and 205, and accompanying text.  See 
Exchange Act Sections 10(b) and 15(c). 

988  See 913 Study at footnotes 251-54. See also id. at footnotes 225-232 (which discuss 
existing SRO rules on disclosures). 



446 

 

with, the federal securities laws and regulations, as well as applicable SRO rules.989  Specifically, 

the Exchange Act authorizes the Commission to sanction a broker-dealer or any associated 

person that fails to reasonably supervise another person subject to the firm’s or the person’s 

supervision that commits a violation of the federal securities laws.990  The Exchange Act 

provides an affirmative defense against a charge of failure to supervise where reasonable 

procedures and systems for applying the procedures have been established and effectively 

implemented without reason to believe those procedures and systems are not being complied 

with.  Further, under the federal securities laws and FINRA rules, prices for securities and 

broker-dealer compensation are required to be fair and reasonable, taking into consideration all 

relevant circumstances.991   

Broker-dealers also register with and report information, including about their business 

and affiliates, to the Commission, the SROs, and other jurisdictions through Form BD.992  Form 

BD requires information about the background of the applicant, its principals, controlling 
                                                                                                                                                             

 

989  See supra footnote 809. See also Proposing Release at 21622. 
990  Exchange Act Sections 15(b)(4)(E) and (b)(6)(A). 
991  See, e.g., Exchange Act Sections 10(b) and 15(c); FINRA Rules 2121 (Fair Prices and 

Commissions), 2122 (Charges for Services Performed), and 2341 (Investment Company 
Securities).  See also FINRA Rule 3221 (Non-Cash Compensation).  Several commenters 
stated that, as part of their overall business practices, they use non-cash compensation 
(e.g., firm-sponsored business conferences), which they believe is in compliance with 
existing FINRA Rule 3221 on non-cash compensation practices. See Guardian August 
2018 Letter; NY Life Letter. 

992  See Relationship Summary Proposal at 21472; see also generally Form BD. 



447 

 

persons, and employees, as well as information about the type of business in which the broker-

dealer proposes to engage and all control affiliates engaged in the securities or investment 

advisory business.993  Once a broker-dealer is registered, it must keep its Form BD current by 

amending it promptly when the information is or becomes inaccurate for any reason.994  In 

addition, firms report similar information and additional information—such as written customer 

complaints and other disciplinary matters— to FINRA pursuant to FINRA Rule 4530 (Reporting 

Requirements).  

e. DOL Fiduciary Rule as it Relates to Current Market Practice 

This section discusses the recently vacated DOL Fiduciary Rule,995 the implications for 

broker-dealers, and the industry response to the DOL Fiduciary Rule.  Although the DOL 

Fiduciary Rule was vacated by the Fifth Circuit Court of Appeals in June, we discuss the DOL 

Fiduciary Rule as part of the baseline because certain broker-dealers and other industry 

participants may have adjusted their practices in order to plan for the implementation of the 

requirements of this rule.  It is possible that some of these broker-dealers may continue to 

operate their business using these adjusted practices, while other may have reverted to the pre-

DOL Fiduciary Rule practices.  Below, we discuss actual and potential costs, as well as changes 

                                                                                                                                                             

 

993  See generally Form BD. 

994  See Exchange Act rule 15b3-1(a). 

995  See supra footnote 32.       



448 

 

in services and securities offerings, in response to the DOL Fiduciary Rule as reported by 

industry participants through surveys.  We also describe how, following the Fifth Circuit Court 

of Appeals decision vacating the DOL Fiduciary Rule, certain of those costs have been reduced 

and the trend toward reduction in retail investor access to services and securities offerings that 

may have been caused in part by the DOL Fiduciary Rule appears to have ended and may be 

reversing. 

i. Department of Labor’s Fiduciary Rule and Temporary Enforcement Policy 

As noted above, prior to the Fifth Circuit decision, many firms took steps to come into 

compliance with the DOL Fiduciary Rule, and in particular, the BIC Exemption and other PTEs, 

including changes to business practices.996 

Following the decision by the Fifth Circuit, the DOL acknowledged that uncertainty 

about fiduciary obligations and the scope of exemptive relief under the prohibited transaction 

provisions of ERISA and the Internal Revenue Code following the court’s decision could 

temporarily disrupt existing investment advice arrangements during the transition period, and 

also that financial institutions had devoted significant resources to comply with PTEs issued in 

connection with the DOL Fiduciary Rule, including the BIC Exemption.997 Based on these 

                                                                                                                                                             

 

996  See supra footnotes 32-34 and accompanying text. 
997  See U.S. Department of Labor Field Assistance Bulletin 2018-02, available at 

https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-
bulletins/2018-02.   



449 

 

concerns, the DOL issued a temporary enforcement policy stating that it would not pursue claims 

against fiduciaries working in good faith to comply with the BIC Exemption’s Impartial Conduct 

Standards for transactions that would have been exempted by the BIC Exemption or treat such 

fiduciaries as violating applicable prohibited transactions rules.998  Prior to the Fifth Circuit 

decision, some broker-dealers that offered services to IRAs and other retirement accounts may 

have implemented changes to services and securities to comply with and meet the conditions of 

the BIC Exemption and other PTEs, including the Impartial Conduct Standards.999  Although the 

Commission does not currently have data on the number of firms that may have devoted 

resources to comply with the PTEs,1000 the Commission can broadly estimate the maximum 

number of broker-dealers that could have undertaken changes in order to comply with 

requirements of the PTEs from the number of broker-dealers that have retail customer accounts. 

                                                                                                                                                             

 

998  Id.  
999  See, e.g., Michael Wursthorn, A Complete List of Brokers and Their Approach to ‘The 

Fiduciary Rule’, WALL ST. J., Feb. 6, 2017, https://www.wsj.com/articles/a-complete-
list-of-brokers-and-their-approach-to-the-fiduciary-rule-1486413491?mod=article_inline 
for a discussion of how broker-dealers adjusted certain practices in response to the DOL 
Fiduciary Rule. 

1000       In order to perform this analysis, the Commission would need to know which financial 
firms offer services to IRAs and other retirement accounts.  Under the current reporting 
regimes for both broker-dealers and investment advisers, they are not required to disclose 
whether (or what fraction of) their accounts are held by retail investors in retirement 
accounts. 



450 

 

Approximately 73.5% (2,766) of registered broker-dealers report sales to retail customers.1001  

Similarly, approximately 8,235 (62% of) investment advisers serve high net worth and non-high 

net worth individual clients. The Commission understands that these numbers are an upper 

bound and likely overestimate the broker-dealers and investment advisers that provide retirement 

account services and began compliance with the requirements of the PTEs.1002   

ii. Industry Response to DOL Fiduciary Rule 

Although the DOL Fiduciary Rule became effective in June 2017, the DOL provided 

transitional relief through July 2019,1003 which is now indefinitely extended under the temporary 

enforcement policy put in place in June 2018 following the Fifth Circuit decision.  As described 

above, a significant subset of broker-dealers have retail customers with retirement accounts and 
                                                                                                                                                             

 

1001  As of December 2018, 3,764 broker-dealers have filed Form BD.  Retail sales by broker-
dealers were obtained from Form BR.  See supra footnote 900.   

1002  The Department of Labor Regulatory Impact Analysis (“DOL RIA”) identifies 
approximately 4,000 broker-dealers (FINRA, 2016), of which approximately 2,500 are 
estimated to have either ERISA accounts or IRA accounts serviced by broker-dealers, 
similar to the estimates that we provide above.  In addition to broker-dealers, the DOL 
RIA estimates that other providers of ERISA or IRA accounts include: approximately 
10,600 federally registered investment advisers and 17,000 state-registered investment 
advisers (NASAA 2012/2013 Report), of which approximately 17,000 of federal and 
state investment advisers that are not dually registered, approximately 6,000 ERISA plan 
sponsors (2013 Form 5500 Schedule C), and approximately 400 life insurance companies 
(2014 SNL Financial Data). See U.S. Department of Labor, Regulating Advice Markets: 
Definition of the Term 'Fiduciary', Conflicts of Interest, Retirement Investment Advice: 
Regulatory Impact Analysis for Final Rule and Exemptions (Apr. 2016), available at 
https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-
regulations/completed-rulemaking/1210-AB32-2/ria.pdf.   

1003  See supra footnote 1002. 



451 

 

would have been affected by the DOL Fiduciary Rule, and at least some broker-dealers began 

taking steps to effectuate compliance with the DOL Fiduciary Rule.  A number of commenters 

stated that we did not sufficiently consider the existing regulatory environment and the current 

market practices of firms and financial professionals in light of the DOL’s Fiduciary Rule and 

other existing rules and regulations.1004  Below, we discuss the industry response to the DOL 

Fiduciary Rule and the effect of the Fifth Circuit decision on broker-dealers. 

In the Proposing Release, we predominantly based our discussion of the industry and 

customer effects of the DOL Fiduciary Rule on information from a single industry study.1005  

Commenters provided additional citations to industry studies,1006 which describe changes in 

market practices across a broader-sample of broker-dealers in response to the DOL Fiduciary 

Rule.1007  In these studies, certain of the survey participants reported that they responded to the 

                                                                                                                                                             

 

1004  See, e.g., AALU Letter; CCMC Letters; CCMR Letter; CFA August 2018 Letter; Davis 
& Harman Letter; EPI Letter; Lincoln Financial Letter; Morningstar Letter; NASAA 
August 2018 Letter; Wells Fargo Letter. 

1005  See SIFMA Study, supra footnote 33.  The SIFMA Study surveyed 21 SIFMA members 
and captured 43% of U.S. “financial advisors” (132,000 out of 310,000), 35 million retail 
retirement accounts, and 27% of qualified retirement savings assets ($4.6 trillion out of 
$16.9 trillion).  The types of retirement accounts serviced by the participants in the 
SIFMA Study were not defined. 

1006  See, e.g., CCMC Letters; Davis & Harman Letter; EPI Letter; Lincoln Financial Letter. 
1007  See, e.g., Financial Services Roundtable & Harper Polling, Department of Labor 

Fiduciary Rule: National Survey of Financial Professionals (July 2017), available at 
https://www.sec.gov/comments/ia-bd-conduct-standards/cll4-2641320-161289.pdf (see 
Appendix A) (“FSR Study”).  The FSR Study surveyed 600 financial advisers in July 
2017, including certified financial planners, chartered financial analysts, broker-dealers, 

 

 



452 

 

DOL Fiduciary Rule and the BIC Exemption by reducing certain services and access to advice to 

small retirement accounts.  Certain participants further reported that they encouraged customers 

toward self-directed accounts and/or advisory accounts, including robo-advisors.  Certain other 

participants reported that they reduced or eliminated certain securities within certain types of 

retirement accounts that they offered. Finally, certain participants reported that they increased 

certain fees for some of their customers.  However, as it is generally the case with survey 

analysis, the surveys in the aforementioned studies are subject to potential selection biases (i.e., 

the sample of respondents is not necessarily random) and methodological limitations (e.g., the 

design of the questionnaire may influence the choices made by the respondents).  Given these 

limitations, it is generally not clear whether the results of these studies capture significant or 

                                                                                                                                                             

 

and dually registered representatives. See also Center for Capital Markets 
Competitiveness, Fiduciary Rule: Initial Impact Analysis, FTI Consulting Report 
Presented to the U.S. Chamber of Commerce (Sept. 7, 2017), available at 
https://www.centerforcapitalmarkets.com/wp-content/uploads/2017/07/Fiduciary-Rule-
Initial-Impact-Analysis.pdf (“Chamber Study”). The Chamber Study surveyed 14 
financial advisory companies (insurance companies, securities manufacturers, and 
broker-dealers) responsible for $10 trillion in AUM and nearly 26 million investment 
accounts. The types of accounts serviced by the participants in the Chamber Study were 
not defined. See also A.T. Kearney, The $20 Billion Impact of the New Fiduciary Rule on 
the U.S. Wealth Management Industry, Perspective for Discussion (Oct. 2016), available 
at https://www.atkearney.com/documents/10192/7041991/DOL+Perspective+-
+August+2016.pdf/b2a2176b-c821-41d9-b12e-d3d2b0807d69 (“Kearney Study”).  We 
note that the development of business models and practices discussed herein reflect 
changes made voluntarily by firms in response to the DOL Fiduciary Rule, but were not 
necessarily required by the DOL Fiduciary Rule. 



453 

 

marginal changes in broker-dealer practices, and whether these changes are indicative of broader 

trends in the market for advice in response to the DOL Fiduciary Rule.   

Changes to Services and Securities 

A number of studies indicated that, as a result of the DOL Fiduciary Rule, certain 

industry participants had already or were planning to alter their menu of services and securities 

that they made available to retail customers.  For example, of the 21 SIFMA members that 

participated in the SIFMA Study, 53% eliminated or reduced access to certain brokerage advice 

services and 67% migrated away from open choice to fee-based or limited brokerage 

services.1008  Another study also discussed a shift from commission-based accounts to fee-based 

accounts but offered no details about the sample or the methodology employed to arrive at the 

estimates.1009  Finally, another study documented that at least 29% of their survey participants 

expected to move clients, particularly those with low account balances, to robo-advisors.1010  In 

addition, a number of media articles describe several cases of broker-dealers that have adjusted 

                                                                                                                                                             

 

1008  See SIFMA Study, supra footnote 33.  
1009  See Kearney Study (provided by the Davis & Harman and Lincoln Financial Letters).  
1010  See FSR Study, which states that “[a]dvisors who say the average net worth of their 

clients is under $25,000 are more likely to say they will definitely, probably, or have 
already directed more clients to robo advisor services, both online and at call centers 
(43% vs. 29% overall).” 



454 

 

their practices with respect to the range of accounts offered as a result of the DOL Fiduciary 

Rule.1011 

Further, industry studies noted that certain of their respondents changed their securities 

offerings as a result of the DOL Fiduciary Rule.1012  For example, 95% of the SIFMA Study 

participants altered their securities offerings by reducing or eliminating certain asset or share 

classes;  86% of the respondents reduced the number or type of mutual funds (e.g., 29% 

eliminated no-load funds, while 67% reduced the number of mutual funds), and 48% reduced 

                                                                                                                                                             

 

1011  For example, in response to the DOL Fiduciary Rule, J.P. Morgan and Merrill Lynch 
phased out commission-based retirement plans and instead charged fees based on AUM. 
See Crystal Kim, BofA, JPMorgan, and the Fiduciary Rule: Will They or Won’t They, 
BARRON’S, Mar. 15, 2017, https://www.barrons.com/articles/bofa-jpmorgan-and-the-
fiduciary-rule-will-they-or-wont-they-1489588442.  However, upon the Fifth Circuit’s 
ruling on the DOL Fiduciary Rule, J.P. Morgan and Merrill Lynch reversed their earlier 
decision and began to offer commission-based retirement plans again. See Jed Horowitz, 
JPMorgan to Remove Some Fiduciary Rule Handcuffs, Others May Follow, 
ADVISORHUB, May 4, 2018, https://advisorhub.com/jpmorgan-to-remove-some-
fiduciary-rule-handcuffs-others-may-follow/; Imani Moise, Merrill Lynch Does about 
Face on Fiduciary-Era Policy, REUTERS, Aug. 30, 2018, 
https://www.reuters.com/article/us-bank-of-america-fiducuary/merrill-lynch-does-about-
face-on-fiduciary-era-policy-idUSKCN1LF1R9. See also Daisy Maxey, Winners and 
Losers in a Post-Fiduciary World, WALL ST. J., May 24, 2017, available at 
https://www.wsj.com/articles/winners-and-losers-in-a-post-fiduciary-world-1495638708;  
Nir Kaissir, Merrill Lynch Can’t Restore the Bad Old Days of Conflicts, BLOOMBERG, 
Sept. 4, 2018, available at https://www.bloomberg.com/opinion/articles/2018-09-
04/merrill-lynch-can-t-restore-the-bad-old-days-of-conflicts.  

1012  While the industry studies discussed in this section examined shifts in services and 
securities provided to retail investors, one limitation of these studies is that they did not 
discuss whether the quality of advice provided to retail investors also changed as a result. 



455 

 

annuity securities offerings. 1013  Similarly, another study found that nearly 30% of survey 

participants eliminated or reduced securities or services available to retirement investors in 

response to the DOL Fiduciary Rule,1014 while the Chamber Study noted that 13.4 million 

accounts of the companies surveyed had limited access to certain securities, including mutual 

funds, variable annuities, and exchange-traded funds.1015  Finally, the SIFMA Study states that 

although the DOL Fiduciary Rule applied only in connection with services for retirement 

accounts, certain of the survey participants had implemented the changes to both retirement and 

non-retirement accounts.1016  These studies do not discuss the attributes of the securities that the 

participants chose to no longer offer. In addition, as noted above, survey analysis is subject to 

                                                                                                                                                             

 

1013  See SIFMA Study, supra footnote 33.  
1014  See American Bankers Association, ABA Survey: Department of Labor Fiduciary Rule 

(July 20, 2017), available at https://www.aba.com/Advocacy/Issues/Documents/dol-
fiduciary-rule-survey-summary-report.pdf (“ABA Study”).  The ABA Study conducted a 
survey of 57 banks about their understanding of the DOL Fiduciary Rule on securities 
and services available to retirement investors. See also Kearney Study, which anticipated 
a shift from mutual funds to exchange-traded funds, and that “certain high-cost 
investment products (such as variable annuities) will be phased out as the business model 
is no longer viable under [the DOL Fiduciary Rule].”  See also FSR Study, which 
reported that 63% of its survey participants anticipated fewer investment options and 
56% had already reduced or anticipated reducing the number of mutual funds offered to 
retirement customers.  

1015  See Chamber Study. See also Editorial Board, Tom Perez’s Fiduciary Flop, WALL ST. J., 
Mar. 18, 2018, https://www.wsj.com/articles/tom-perezs-fiduciary-flop-1521412228, 
which noted that some firms restricted sales of commission-based securities such as load 
mutual funds and variable annuities in retirement accounts. 

1016  See, e.g., SIFMA Study, supra footnote 33. 



456 

 

certain limitations that, generally, complicate the interpretation of their results.  For instance, it is 

not generally clear whether the results of these studies capture significant or marginal changes in 

broker-dealer practices, and whether these changes are indicative of broader trends in the market 

for advice in response to the DOL Fiduciary Rule.  

Besides the studies mentioned above, a number of media articles provide anecdotal 

evidence of broker-dealers that chose to no longer offer certain securities.1017  Some commenters 

also provided data about historical trends in certain product markets.1018  For example, one 

commenter provided data for the market of mutual funds and showed that between 2007 and 

2018, the percentage of assets in load mutual funds declined from 27% to 12%, while no-load 

                                                                                                                                                             

 

1017  See Alex Steger, Exclusive: UBS to Cut over 800 Funds from Platform, CITYWIRE, Mar. 
13, 2018, https://citywireusa.com/professional-buyer/news/exclusive-ubs-to-cut-over-
800-funds-from-platform/a1100101; Michael Thrasher, Ameriprise Drops Hundreds of 
Funds Offered to Brokerage Clients, WEALTHMANAGEMENT.COM, June 8, 2017, 
https://www.wealthmanagement.com/industry/ameriprise-drops-hundreds-funds-offered-
brokerage-clients; Hugh Son, Morgan Stanley to Reduce Wealth Fees Even with Rule 
Uncertainty, BLOOMBERG, Jan. 26, 2017,  
https://www.bloomberg.com/news/articles/2017-01-26/morgan-stanley-to-proceed-with-
wealth-changes-ahead-of-new-rules; Margarida Correia, LPL Puts Final Touches on 
Product Lineups in Preparation for Fiduciary Rule, FINANCIALPLANNING, Mar. 9, 2017, 
https://www.financial-planning.com/news/lpl-puts-final-touches-on-product-lineups-in-
preparation-for-fiduciary-rule?tag=00000154-3e16-d45e-a175-7f9f48a20001; Bruce 
Kelly, Wells Fargo Advisors Restricting Investments for Retirement Accounts, 
INVESTMENTNEWS, May 24, 2017, 
https://www.investmentnews.com/article/20170524/FREE/170529959/wells-fargo-
advisors-restricting-investments-for-retirement-accounts. 

1018  See, e.g., ICI Letter. 



457 

 

share classes increased from 51% to 71% over the same time period.1019  Further, this commenter 

stated that this shift has occurred because of the growth in assets in 401(k) plans and other 

retirement accounts, as well as the increase in the number of advisory accounts, both of which 

tend to invest in no-load share classes. 

However, the DOL Fiduciary Rule may have caused certain product markets to adjust.1020 

For example, innovations, including the introduction of T and clean share classes of mutual 

funds, can be regarded as a paradigm shift in terms of how product sponsors compensate broker-

dealers for distribution services.  One commenter noted that these products may reduce the 

expected fund underperformance net of costs for retail investors relative to A shares by nearly 50 

basis points annually.1021  

The Effect of Costs and Fees 

Some firms may have responded to the DOL Fiduciary Rule by either presenting 

customers with the option to enter into different and potentially more costly advice relationships 

compared to a brokerage advice relationship or by passing some of the compliance costs to 

                                                                                                                                                             

 

1019  See id. 
1020  See, e.g., James Chen, Clean Shares, Investopedia, available at 

https://www.investopedia.com/terms/c/clean-shares.asp, stating that “[t]he mutual fund 
industry introduced clean shares, along with T shares, in response to the Department of 
Labor’s fiduciary rule.” 

1021  See Letter from Aron Szapiro, Director of Policy Research, Morningstar (Sept. 2017). 



458 

 

customers.1022 However, one study observed that 63% of the responding firms that limited or 

eliminated access to advised brokerage services stated that they had at least some customers who 

chose to move to self-directed accounts rather than fee-based accounts and cited the reasons that 

customers provided as (1) “did not want to move to a fee-based account,” (2) “was not in the 

retirement investor’s best interest to move to a fee-based account,” (3) “did not meet the account 

minimums,” or (4) “wished to maintain positions in certain asset classes which were not eligible 

for a fee-based account.”1023  Another study further observed that nearly 40% of the responding 

firms believed that the relationship with their customers had been altered as a result of the DOL 

Fiduciary Rule and that customers with smaller account balances were nearly ten times more 

likely to have been negatively affected by the DOL Fiduciary Rule than customers with larger 

account balances.1024  Further, another study observed that 68% of the responding firms were 

less likely to provide services to smaller accounts, and 46% anticipated that they may service 

fewer clients overall.1025  

                                                                                                                                                             

 

1022  See supra footnote 1011 (which describes how certain firms responded to the DOL 
Fiduciary Rule and later reversed changes in response to the Fifth Circuit decision). 

1023  See SIFMA Study, supra footnote 33. 
1024  See ABA Study.  
1025  See FSR Study.  See also Chamber Study, which found that some survey participants 

have added minimum account balances and have migrated away from commission-based 
models toward fee-based models. 



459 

 

One study observed that, generally, based on the numbers provided by the respondents, a 

fee-based account can be more costly than a brokerage account; however, such comparison is 

generally hard to make without knowing the securities in the two types of accounts, and it is not 

clear that the survey made this clear to respondents.1026  One study1027 observed that 

approximately 52% of its survey participants indicated that they may pass on the costs associated 

with complying with the DOL Fiduciary Rule to clients in the form of higher fees, while another 

study stated that more than 6 million client accounts of the survey participants may be subject to 

higher costs and fees as a result of the DOL Fiduciary Rule, although it is not clear whether this 

estimate assumes full adoption of the DOL Fiduciary Rule.1028   

Estimated Costs of Compliance and Effects on Compensation Structures 

One study observed that survey respondents were expecting to incur compliance costs as 

a result of the DOL Fiduciary Rule that would vary by the size of the respondent.1029  For 

                                                                                                                                                             

 

1026  See SIFMA Study.  We note that only a subset of the SIFMA Study participants provided 
information on the costs associated with brokerage and advisory accounts.  See CFA 
August 2018 Letter.  The SIFMA Study did not provide any information on the set of 
firms comprised in this subset that provided information on brokerage and advisory costs.  
See also ICI Letter (which provided similar estimates for fees and costs attributable to 
brokerage and advisory accounts). 

1027  See FSR Study. 
1028  See Chamber Study. 
1029  See SIFMA Study.  As a general matter, we note that the estimates reported by industry 

studies, including this study, are based on a rulemaking with more extensive requirements 
for changes to business models than those required by Regulation Best Interest.  



460 

 

instance, large firms with net capital in excess of $1 billion were expected to have start-up and 

ongoing compliance costs of $55 million and $6 million, respectively, while firms between $50 

million and $1 billion in net capital were expected to have start-up and ongoing compliance costs 

of $16 million and $3 million, respectively.  The study further estimated that the total start-up 

compliance costs for large and medium-size firms combined would have been approximately 

$4.7 billion, while ongoing costs would have been approximately $700 million per year.  

Another study observed that the costs of complying with DOL Fiduciary Rule would 

encompass technology, legal, process changes, educational, and training costs for firms.1030  This 

study forecasted that the DOL Fiduciary Rule may cause a $2 trillion redistribution in assets 

from broker-dealers to investment advisers, robo-advisors, and self-directed accounts, and a 

nearly $20 billion decrease in revenues to the entire financial services industry, including broker-

dealers.  

The study further forecasted that as a result of the DOL Fiduciary Rule product sponsors 

“will be incentivized to streamline product offerings, lower fees, and improve performance,” and 

investor would pay $7.5 billion less in mutual fund and ETF expenses by the end of 2010. 

However, as noted above, this study does not provide details about how it obtained its estimates. 

Several media articles provide some anecdotal evidence suggesting that as a response to 

the DOL Fiduciary Rule some broker-dealers began to alter the compensation structures of their 

                                                                                                                                                             

 

1030  See Kearney Study.461 

 

registered representatives.1031  For example, some broker-dealers have indicated that they 

adjusted their compensation structures by equalizing commissions and deferred sales charges 

across similar securities.1032  Other broker-dealers banned sales quotas, contests, special awards, 

and bonuses,1033 including deferred bonuses as part of recruitment efforts.1034  However, 

following the decision by the Fifth Circuit to vacate the DOL Fiduciary Rule, some firms 

reinstated back-end recruiting bonuses.1035 

                                                                                                                                                             

 

1031  See Son (2017), supra footnote 1017; Tara Siegel Bernard, Do Financial Advisers Have 
to Act in Your Interest? Maybe, N.Y. TIMES, Mar. 22, 2018, 
https://www.nytimes.com/2018/03/22/your-money/financial-advisers-customer-
interest.html. 

1032  See, e.g., Andrew Welsch, Facing Higher Costs, Raymond James Cuts Adviser Pay in 
Rare Move, FINANCIALPLANNING, July 11, 2017, https://onwallstreet.financial-
planning.com/news/facing-higher-costs-raymond-james-cuts-adviser-pay-in-rare-
move?tag=00000151-16d0-def7-a1db-97f024310000. 

1033  See Bernard (2018). 
1034  See Mason Braswell, Morgan Stanley Resumes Recruiting Offers – Slimmer and DOL-

Compliant, ADVISORHUB, Nov. 3, 2016, https://advisorhub.com/morgan-stanley-
resumes-recruiting-offers-slimmer-and-dol-compliant/; Deon Roberts, Wells Fargo 
Overhauling Bonuses to Comply with New Rules on Financial Advisers, CHARLOTTE 
OBSERVER, Dec. 14, 2016, 
https://www.charlotteobserver.com/news/business/banking/bank-watch-
blog/article120961138.html.  

1035  See Mason Braswell, Farewell Fiduciary Rule? Morgan Stanley Sweetens Recruiting 
Bonuses, ADVISORHUB, May 1, 2018, https://advisorhub.com/farewell-fiduciary-rule-
morgan-stanley-sweetens-recruiting-bonuses/.  “Back-end” bonuses are expressly 
contingent on the achievement of sales or asset targets. See U.S. Department of Labor, 
Conflict of Interest FAQs (Part I – Exemptions) (Oct. 27, 2016), available at 
https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-
center/faqs/coi-rules-and-exemptions-part-1.pdf.  



462 

 

iii. Additional Evidence of Current Market Practices 

In this section, we include information on Commission observations on the broker-dealer 

industry.  Commission experience indicates that there have been a number of changes to the 

broker-dealer industry and its business practices over time.1036  Consistent with the trend baseline 

provided in Section III.B.1.c and industry studies and anecdotal evidence described above, we 

have observed firms choosing to do business with retail investors as investment advisers, not as 

broker-dealers, by either migrating existing brokerage accounts to advisory accounts or directing 

new retail customers to advisory accounts.   

Beyond broker-dealer trends in business practices, Commission experience also indicates 

that some broker-dealers have responded to the DOL Fiduciary Rule and the Fifth Circuit 

decision vacating the DOL Fiduciary Rule by modifying their existing business practices.  For 

example, some firms, consistent with anecdotal evidence discussed above, eliminated brokerage 

IRA accounts in response to the DOL Fiduciary Rule; however, upon the Fifth Circuit decision, 

the firms reinstituted brokerage IRAs.  Other examples of changes following the Fifth Circuit 

                                                                                                                                                             

 

1036  Information on the broker-dealer industry and business practices comes from a variety of 
Commission resources and generally relates to market trends and changes to business 
practices that have emerged in recent years and is comprised of both standalone broker-
dealers and dually registered firms.  With respect to industry trends, Commission 
resources generally verify data cited above in Section III.B.2.e.ii.  We acknowledge that 
the information provided in this baseline may not be representative of business practices 
more generally because of the diversity and complexity of services and securities offered 
by standalone broker-dealers and dually registered firms. 



463 

 

decision include changes to incentive-based compensation in certain types of accounts and 

principal trading restrictions.   

3. Investment Advice and Evidence of Potential Investor Harm 

A number of commenters expressed the view that the Proposing Release did not fully 

document the problems attributed to potential conflicts of interest stemming from the broker-

dealer model and the resulting harm to retail customers.1037  In order to address these 

commenters’ concerns, we analyze academic and industry studies to present an overview of the 

market for advice for retail customers.1038  Below, we discuss which types of investors seek 

                                                                                                                                                             

 

1037  See, e.g., AARP August 2018 Letter; Better Markets August 2018 Letter; CFA August 
2018 Letter; EPI Letter; U. of Miami Letter; Morningstar Letter; PIABA Letter; Letter 
from Ron A. Rhoades, Director, Personal Financial Planning Program and Assistant 
Professor of Finance, Gordon Ford College of Business, Western Kentucky University 
(Aug. 6, 2018) (“Rhoades August 2018 Letter”); Former SEC Senior Economists Letter. 

1038  Although the discussion here generally focuses on studies provided by comment letters, 
at times we have included additional references either to more fully articulate specific 
arguments or to provide counterarguments to studies provided by comment letters in an 
effort to present a complete overview of pertinent literature.  Because the studies we cite 
in this section generically discuss investment advice or advice rather than 
recommendations, and use a variety of terms to describe financial professionals or firms 
(e.g., brokers, advisers, or financial advisers) and investors (e.g., investors, customers, or 
clients), in the discussion that follows, we use generic terms of advice or investment 
advice, financial professional, firm, and retail investor or investor.  Although we believe 
that the studies generally discuss advice as it relates to broker-dealers or investment 
advisers, because of generic terms used, such as “financial adviser,” it is possible that 
other types of advice providers (e.g., commercial banks, tax consultants, etc.) could be 
included in some of the studies cited below.  However, because not all authors clearly 
define which financial professionals are included in a given study, we are unable to 

 

 



464 

 

investment advice; the benefits attained through investment advice for retail investors; 

limitations to the value of that advice that stem from agency costs, particularly those related to 

conflicts of interest arising from financial professional compensation; and evidence of potential 

investor harm.  Where appropriate, we note limitations to the application of various academic 

studies that form the basis of other economic analyses, which investigate potential investor harm 

attributed to recommendations received from financial professionals. 

a. Who Seeks Investment Advice1039 

Approximately 37% of U.S. households currently engage with financial professionals 

according to OIAD/RAND; however, households who hire these professionals are not uniformly 

distributed among the U.S. population.1040  In addition to OIAD/RAND, a number of academic 

                                                                                                                                                             

 

provide an exhaustive list of all types of financial professionals that make up the market 
for advice.   

1039  One limitation of the majority of the studies examined is that we are unable to distinguish 
whether the retail investor is seeking and/or receiving investment advice from a broker-
dealer or an investment adviser (or some other type of financial professional).  The 
studies generally do not have sufficiently granular data to distinguish broker-dealer 
customers from investment adviser clients.  Further, for studies where retail investors can 
be distinguished by their investment choices (e.g., purchasing direct-sold versus broker-
sold funds), we are unable to determine whether differences exist between broker-sold 
funds sold by broker-dealers and broker-sold funds sold by investment advisers. As 
discussed below, some commenters expressed the view that buy-and-hold retail investors 
were more likely to prefer the services of brokerage accounts over advisory accounts. See 
infra footnote 1055. 

1040  According to OIAD/RAND, the use of financial professionals varies by both income and 
education levels.  For example, 38% of retail investors with income greater than 
$100,000 engage with financial professionals, while only 13.7% of retail investors with 

 

 



465 

 

studies, provided with comment letters, examine characteristics of investors and their propensity 

for seeking (and following) investment advice.  Older, wealthier, more educated, and financially 

more literate retail investors are more likely to seek and act on advice obtained from financial 

professionals, suggesting that investors who may benefit most from advice (younger, less 

educated, and less financially sophisticated) are least likely to obtain it.1041  Several studies 

examine the choice by retail investors to select into broker-sold or direct-sold mutual funds. 
                                                                                                                                                             

 

incomes below $25,000 did so. Another study, the Survey of Consumer Finance, 
indicates that the use of financial professionals by American households is closer to 60%, 
but also includes financial planners, accountants, lawyers, and bankers, in addition to 
broker-dealers and investment advisers. See SCF Survey, supra footnote 950. 

1041  See, e.g., Utpal Bhattacharya et al., Is Unbiased Financial Advice to Retail Investors 
Sufficient? Answers from a Large Field Study, 25 REV. FIN. STUD. 975 (2012); Daniel 
Hoechle et al., The Impact of Financial Advice on Trade Performance and Behavioral 
Biases, 21 REV. FIN. 871 (2017); Jeremy Burke & Angela A. Hung,  
Do Financial Advisors Influence Savings Behavior?, RAND Labor and Population 
Report Prepared for the Department of Labor (2015), available at 
https://www.rand.org/content/dam/rand/pubs/research_reports/RR1200/RR1289/RAND_
RR1289.pdf; Claude Montmarquette & Nathalie Viennot-Briot, Econometric Models on 
the Value of Advice of a Financial Advisor, CIRANO Project Report No. 2012RP-17 
(July 2012), available at https://www.cirano.qc.ca/pdf/publication/2012RP-17.pdf; 
Andreas Hackethal, Michael Haliassos, & Tullio Jappelli, Financial Advisors: A Case of 
Babysitters?, 36 J. BANKING & FIN. 509 (2012). See also AARP August 2018 Letter; 
CFA August 2018 Letter; FPC Letter; Primerica Letter; Wells Fargo Letter (which 
provided several studies cited here; other studies (e.g., Hoechle et al. (2017)) are included 
because they capture characteristics of the investors most likely to seek and act on 
financial advice that are not captured by the studies suggested by the commenters).  
Studies also note that the characteristics of investors most likely to seek advice are also 
likely to be those most attractive to financial professionals as they have more assets to 
manage. See Michael S. Finke, Financial Advice: Does it Make a Difference? (Working 
Paper, May 5, 2012) (which describes the relationship between investors and financial 
professionals). 



466 

 

These studies find less financially sophisticated investors are more likely to purchase “broker-

sold” funds and therefore more likely to receive advice from a financial professional.1042   

As we detail below, retail investors bear costs associated with obtaining advice from 

financial professionals, which may deter some investors, especially those with limited wealth or 

income, from seeking investment advice.  However, an investor’s lack of sophistication may also 

prevent the investor from obtaining or using investment advice even when advice is provided at 

no cost.  One paper examines the outcomes from a large sample of active retail investors of a 

large broker-dealer. 1043  These retail investors received unsolicited and unbiased advice from the 

broker-dealer at no cost.  Although the advice was designed to improve the efficiency of the 

investors’ portfolios, only 5% of investors accepted the offer to receive the free advice.  

Moreover, those that did accept the advice rarely followed the advice.  Investors who 
                                                                                                                                                             

 

1042  See, e.g., Christopher J. Malloy & Ning Zhu, Mutual Fund Choices and Investor 
Demographics (Working Paper, Mar. 14, 2004), available at 
https://pdfs.semanticscholar.org/16a1/8daed89c3c48a765ad3a265018b4d27bd0f4.pdf; 
John Sabelhaus, Daniel Schrass, & Steven Bass, Characteristics of Mutual Fund 
Investors, 2008, ICI RES. FUNDAMENTALS, Feb. 2009, available at 
https://www.ici.org/pdf/fm-v18n2.pdf; John Chalmers & Jonathan Reuter, Is Conflicted 
Advice Better than No Advice? (Working Paper, Sept. 14, 2015), available at 
https://www.semanticscholar.org/paper/Is-Conflicted-Investment-Advice-Better-than-No-
Chalmers-Reuter/3337ce8c3a72bf55dac43f407fd104b93aec863b. See also AARP August 
2018 Letter; CFA August 2018 Letter; EPI Letter (which provided the Chalmers & 
Reuter (2015) citation; Malloy & Zhu (2004) and Sabelhaus et al. (2009) are included 
because they capture aspects of the mutual fund selection decision by retail investors that 
are not captured by the studies suggested by the commenters). We provide a more 
detailed discussion of these studies below in Section III.B.3.c. 

1043  See Bhattacharya et al. (2012), supra footnote 1041. 



467 

 

participated in the study had only minimal improvements to their portfolio efficiency. The 

authors cite lack of financial sophistication and lack of familiarity or trust as reasons why the 

unsolicited advice was not followed.1044 

b. Benefits and Limitations of Investment Advice 

A number of commenters provided academic studies of benefits that investors may obtain 

from hiring financial professionals.1045  One benefit of hiring a firm or financial professional is 

that professional advice can help the average retail investor overcome common “investment 

mistakes” that he or she may make when investing.1046  Common “investment mistakes” made 

by retail investors include limited allocation of assets to equities, under-diversification, excessive 

trading, and home bias.1047  These studies also attempt to identify reasons why retail investors 

persistently make inefficient investment choices.   

                                                                                                                                                             

 

1044  See id. 
1045  See infra footnote 1048. 
1046  See Bhattacharya et al. (2012), supra footnote 1041. “Investment mistakes” are investors’ 

actions that would go against what a rational investor would do when undertaking 
efficient investment decisions (here and below, infra footnote 1047, we provide studies 
that analyze common “investment mistakes” made by retail investors).  For example, 
evidence suggests that retail investors tend to trade too frequently.  See Brad M. Barber & 
Terrance Odean, Trading is Hazardous to Your Wealth: The Common Stock Performance 
of Individual Investors, 55 J. FIN. 773 (2000). 

1047  As described in Bhattacharya et al. (2012), supra footnote 1041, possible explanations for 
common “investment mistakes” may arise from behavioral biases (e.g., cognitive errors), 
the cost of information acquisition, or the selection of the financial professional. See, e.g., 
Luigi Guiso, Paolo Sapienza, & Luigi Zingales, People’s Opium? Religion and Economic 
Attitudes, 50 J. MONETARY ECON. 225 (2003); Laurent E. Calvet, John Y. Campbell, & 

 

 



468 

 

Beyond correcting potential “investment mistakes,” academic studies document a 

multitude of other benefits that accrue to retail investors as a result of seeking investment advice, 

including, but not limited to: higher household savings rates, setting long-term goals and 

calculating retirement needs, more efficient portfolio diversification and asset allocation, 

increased confidence and peace of mind, improvement in financial situations, and improved tax 

efficiency.1048  For example, one study notes that investors who engaged financial professionals 

                                                                                                                                                             

 

Paolo Sodini, Down or Out: Assessing the Welfare Costs of Household Investment 
Mistakes, 115 J. POL. ECON. 707 (2007); Barber & Odean (2000), supra footnote 1046; 
Karen K. Lewis, Trying to Explain Home Bias in Equities and Consumption, 37 J. ECON. 
LITERATURE 571 (1999).  

1048  See, e.g., Mitchell Marsden, Catherine D. Zick, & Robert N. Mayer, The Value of Seeking 
Financial Advice, 32 J. FAM. & ECON. ISSUES 625 (2011); Jinhee Kim, Jasook Kwon, & 
Elaine A. Anderson, Factors Related to Retirement Confidence: Retirement Preparation 
and Workplace Financial Education, 16 J. FIN. COUNSELING & PLAN. 77 (2005); 
Michael S. Finke, Sandra J. Huston, & Danielle D. Winchester, Financial Advice: Who 
Pays, 22 J. FIN. COUNSELING & PLAN. 18 (2011); Daniel Bergstresser, John M.R. 
Chalmers, & Peter Tufano, Assessing the Costs and Benefits of Brokers in the Mutual 
Fund Industry, 22 REV. FIN. STUD. 4129 (2009); Ralph Bluethgen, Steffen Meyer, & 
Andreas Hackethal, High-Quality Financial Advice Wanted! (Working Paper, Feb. 2008), 
available at http://citeseerx.ist.psu.edu/viewdoc/summary?doi=10.1.1.596.2310; Neal M. 
Stoughton, Youchang Wu, & Josef Zechner, Intermediated Investment Management, 66 
J. FIN. 947 (2011).  Marsden et al. (2011) documents benefits attributable to hiring a 
financial professional, such as better retirement account diversification and savings goals, 
but does not find that hiring a financial professional measurably increases the amount of 
overall wealth accumulation for those investors. See also, Burke & Hung (2015), supra 
footnote 1041, for additional studies on the causal relation between the use of a financial 
professional and wealth accumulation.  Francis M. Kinniry et al., Putting a Value on Your 
Value: Quantifying Vanguard Advisor's Alpha, Vanguard Research (Sept. 2016), 
available at https://www.vanguard.com/pdf/ISGQVAA.pdf, estimates the value to 
investors associated with obtaining financial advice of approximately 3% in net returns to 

 

 



469 

 

for at least 15 years had approximately 173% more assets on average than investors who did not 

hire financial professionals, driven by higher household savings rates and increased asset 

allocation to non-cash instruments.1049  Further, financial professionals may be able to help retail 

investors overcome information asymmetries that exist between firms that supply securities and 

their customers that retail investors would not be able to disentangle on their own.1050 

Commenters also provided academic studies which discussed the limitations of the 

advice received from financial professionals, including how both direct and indirect costs of 

advice can reduce returns earned by investors.1051  How financial professionals are compensated 

                                                                                                                                                             

 

investors, associated with suitable asset allocation, managing expense ratios, behavioral 
coaching, alleviating home bias, among others.  See also AARP August 2018 Letter; 
CCMC Letters; CFA August 2018 Letter; Edward Jones Letter; Letter from Brian M. 
Nelson (Jul. 10, 2018) (“Nelson Letter”) (which provided several of these studies; other 
studies were included because they capture aspects of the benefits of advice for retail 
investors that are not captured by the studies suggested by the commenters (e.g., Marsden 
et al. (2011), Finke et al. (2011)). 

1049  See Montmarquette & Vionnet-Briot (2012), supra footnote 1041. While this study 
describes the benefits of hiring financial professionals on asset accumulation, it also notes 
that termination of relationships with financial professionals resulted in a significant loss 
of overall investment asset value. See Primerica Letter; Wells Fargo Letter (which 
provided references to this academic study). 

1050  See Roman Inderst & Marco Ottaviani, Financial Advice, 50 J. ECON. LITERATURE 494 
(2012). See also AARP August 2018 Letter. 

1051  See, e.g., AARP August 2018 Letter; CFA August 2018 Letter; EPI Letter; Letter from 
Ron A. Rhoades, Director, Personal Financial Planning Program and Assistant Professor 
of Finance, Gordon Ford College of Business, Western Kentucky University (Dec. 6, 
2018) (“Rhoades December 2018 Letter”). 



470 

 

can erode the value of advice in two primary ways: (1) the direct costs associated with 

purchasing advice detract from returns over time1052; and (2) the indirect costs to retail investors 

that arise from conflicts of interest between financial professionals and investors.  Financial 

professionals are generally compensated directly by retail investors in three principal ways: 

commission-based (e.g., broker-dealers), fee-based on AUM (e.g., investment advisers), and flat 

or hourly fees (e.g., financial planners), although some financial professionals may receive 

compensation in multiple ways for providing advice to the same investor.1053  

                                                                                                                                                             

 

1052  As noted in one study, the direct costs (fees and expenses) may not be transparent to 
retail investors. Coupled with conflicts of interest that can bias any advice provided, 
information asymmetry between financial professionals and retail investors may be large. 
See Finke (2012), supra footnote 1041. 

1053  For example, investment advisers and supervised persons may receive account-level 
advisory fees, and may also receive compensation for the sale of securities or other 
investment products, including asset-based sales charges or service fees for the sale of 
mutual funds to their advisory clients.  See Items 5.C, 5.E, and 14.A of Form ADV Part 
2A; Items 4.A.2, 4.B, and 5 of Form ADV Part 2B.  When we refer to advisers and 
supervised persons receiving fees for the sale of securities or other investment products, 
we generally mean advisers that are also registered broker-dealers or advisers whose 
affiliated broker-dealers receive these fees.  Form ADV instructs advisers that if they 
receive compensation in connection with the purchase or sale of securities, they should 
carefully consider the applicability of broker-dealer registration requirements of the 
Exchange Act and any applicable state securities statutes.  See Form ADV, Part 2A, Note 
to Item 5.E. 

  

 



471 

 

One study estimates that the average annual costs associated with commission-based 

accounts are approximately 75 bps, while the average fee-based account costs 130 bps.1054  We 

acknowledge that in addition to the fees charged for particular types of services, other expenses 

may be incurred that reduce returns earned by investors, some of which may be earned by the 

financial professional or the firm and paid by the firm’s product or service providers (e.g., fund 

loads, 12b-1 fees, and shareholder servicing fees).   

Some commenters expressed the view that certain investors (e.g., buy-and-hold investors) 

may prefer to pay a single commission relative to an ongoing fee-based obligation that is tied to 

AUM in their account.1055  We note that this choice may be dependent on the investor’s holding 

period and other ongoing expenses that affect an investor’s net return over time.  For example, a 

buy-and-hold investor that chooses an account where fees are based on AUM may pay more over 

time than a similar buy-and-hold investor that pays a single commission.  Further, some 

commission-based securities, such as mutual funds, may have ongoing expenses, including 12b-1 
                                                                                                                                                             

 

1054  See John H. Robinson, Who's the Fairest of Them All? A Comparative Analysis of 
Financial Advisor Compensation Models, 20 J. FIN. PLAN. 56 (2007). See also AARP 
August 2018 Letter. One study, however, argues that when the direct costs associated 
with commissions are combined with the estimated agency costs, there is little difference 
in the costs between commission-based and fee-based advice. See Quinn Curtis, The 
Fiduciary Rule Controversy and the Future of Investment Advice (Univ. of Va. Sch. of 
Law, Law & Econ. Research Paper Series No. 2018-04, Mar. 2018). See also UVA 
Letter.  We note that services provided may also vary between brokerage and advisory 
accounts, which could also affect differences in costs paid by retail investors.   

1055  See, e.g., Cetera August 2018 Letter; AALU Letter; Pacific Life August 2018 Letter; 
NAIFA Letter; Empower Retirement Letter; CCMR Letter; Primerica Letter. 



472 

 

fees, which could lead to an erosion of net returns over time.1056  Such ongoing expenses, 

however, may not be adequately accounted for by investors when making investment decisions 

about the type of account to open and what type of security to purchase.1057  Several commenters 

provided analyses to show the expected effect of one-time costs and ongoing expenses (e.g., 

operating costs or advisory fees) to investors from both commission-based and fee-based 

perspectives, conditional on the investor’s holding period.1058   

Separately, investors may face indirect costs that are a result of agency problems that 

emerge when financial professionals seek to maximize their own compensation and take actions 

that place their own interests ahead of the investors that they are supposed to serve.1059  A 

number of commenters and academic studies have stated that commission-based compensation is 

                                                                                                                                                             

 

1056  See CFA August 2018 Letter; EPI Letter.  See also ICI Letter (which described a shift 
from load to no load funds, decreasing expense ratios, and a decline in the percentage of 
funds that charge 12b-1 fees). 

1057  See infra footnote 1084 and corresponding discussion. 
1058  See, e.g., Cetera August 2018 Letter and November 2018 Letter; Pacific Life August 

2018 Letter. 
1059  See Jeremy Burke et al., Impacts of Conflicts of Interest in the Financial Services 

Industry (RAND Labor & Population, Working Paper No. WR-1076, Feb. 2015), 
available at https://www.rand.org/pubs/working_papers/WR1076.html; Hamid Mehran 
& Rene M. Stulz, The Economics of Conflicts of Interest in Financial Institutions, 85 J. 
FIN. ECON. 267 (2007).  See also Letter from D. Bruce Johnsen, Professor of Law, Scalia 
Law School, George Mason University (Aug. 7, 2018) (“Johnsen Letter”); Robinson 
(2007), supra footnote 1054.  Broker-dealers may act in a brokerage (i.e., agency) 
capacity or a dealer (i.e., principal) capacity.  See Proposing Release at Section I.  While 
the discussion is framed in terms of agency problems, it is applicable to both capacities. 



473 

 

more likely to contribute to conflicts of interest between financial professionals and retail 

investors than fee-based compensation.1060  Other commenters, however, indicated that 

commission-based compensation provides benefits to investors.1061  One study finds that 

conflicts of interest are likely to be present in all forms of compensation earned by financial 

professionals.  For example, fee-based compensation could result in so-called “reverse churning” 

and a disincentive to reduce AUM, even if that would be in the investor’s best interest, while 

flat-fee models can lead to shirking and overbilling.1062  However, due to limitations on the data 

available regarding fee-based advice, most of the academic studies to date regarding conflicts of 

interest focus on commission-based compensation models.  As such, the potential conflicts 

associated with the fee-based compensation models, including fee-based compensation earned by 

broker-dealers, have not been subject to as much analysis.  Studies show that commission-based 

compensation potentially leads to biased advice, including excessive trading in accounts and 

recommendations to purchase high-commission securities, both of which benefit the financial 

professional and may lead to lower net returns.1063   

                                                                                                                                                             

 

1060  See IPA Letter; CFA August 2018 Letter.   
1061  See AALU Letter; Invesco Letter; ACLI Letter; NAIFA Letter. See Burke et al. (2015), 

supra footnote 1059 for a survey on the academic literature on conflicts of interest. 
1062  See Robinson (2007), supra footnote 1054.   
1063  See, e.g., Stoughton et al. (2011), supra footnote 1048; Roman Inderst & Marco 

Ottaviani, Misselling Through Agents, 99 AM. ECON. REV. 883 (2009); Max Beyer, 
David de Meza, & Diane Reyniers, Do Financial Advisor Commissions Distort Client 

 

 



474 

 

Financial professionals also may benefit from other forms of transaction-based payment 

from customers, such as mark-ups and mark-downs; for instance, one study documents that the 

size of the mark-up or mark-down is significantly positively related to whether the broker-dealer 

solicits the transaction and whether the broker-dealer acts in a principal capacity.1064  Because 

mark-ups and mark-downs are payments from the customer to the broker-dealer, they give rise to 

conflicts of interest between a broker-dealer and his or her customer at the time of a 

recommendation, particularly if they are opaque to the customer, at the time of the 

recommendation.  Mechanisms, including regulation,1065 disclosure, and reputation,1066 may be 

                                                                                                                                                             

 

Choice?, 119 ECON. LETTERS 117 (2013). See also AARP August 2018 Letter.  
Financially unsophisticated investors, as discussed by Stoughton et al. (2011), are those 
most likely to purchase inefficient assets.   

1064  See Allen Ferrell, The Law and Finance of Broker-Dealer Mark-Ups (Harvard John M. 
Olin Ctr. for Law, Econ., and Bus., Discussion Paper, Apr. 6, 2011), available at 
https://www.finra.org/sites/default/files/NoticeAttachment/p123492.pdf. See AARP 
August 2018 Letter. 

1065  See, e.g., antifraud provisions of the federal securities laws, FINRA Rule 2121 (Fair 
Prices and Commissions); MSRB Rules G-15 and G-30, amended pursuant to Exchange 
Act Release No. 79347 (Nov. 17, 2016) [81 FR 84637] (Nov. 23, 2016); and FINRA 
Rules 2121 and 2232, amended pursuant to Exchange Act Release No. 79346 (Nov. 17, 
2016) [81 FR 84659] (Nov. 23, 2016). 

1066  See William P. Rogerson, Reputation and Product Quality, 14 BELL J. ECON. 508 (1983); 
Benjamin Klein & Keith B. Leffler, The Role of Market Forces in Assuring Contractual 
Performance, 89 J. POL. ECON. 615 (1981); W. Bentley MacLeod, Reputations, 
Relationships, and Contract Enforcement, 45 J. ECON. LITERATURE 595 (2007) for 
theoretical models of the effect of reputation on investment quality.  See AARP August 
2018 Letter.  For example, FINRA and MSRB introduced rules in May 2018 regarding 
mark-up disclosure rules for same-day trades, allowing investors to be able to see what 

 

 



475 

 

able to mitigate the risk of financial professionals acting on conflicts of interest to the detriment 

of their customers.1067  In addition to direct payments of commissions from retail investors, 

financial professionals may receive payments from third parties, such as securities issuers, which 

can increase costs to investors through higher management fees and reduced net returns, and 

provide incentives to recommend these securities over those that do not provide such 

incentives.1068 

While a number of studies suggest that conflicts of interest may lead to investor harm, 

one study, which provides a survey of the literature on conflicts of interest, states that “although 

conflicts of interest are omnipresent when contracting is costly and parties are imperfectly 
                                                                                                                                                             

 

they have paid for riskless principal transactions (FINRA Rule 2232 and MSRB Rule G-
15).  The Commission has also brought enforcement cases for undisclosed excessive 
markups under Exchange Act Rule 10b-5.  

1067  See, e.g., Inderst & Ottaviani (2012), supra footnote 1050.  See also Bolton et al. (2007), 
infra footnote 1073, which posits that competition or consolidation affect reputation costs 
and provide a disciplining mechanism for providers of financial advice.  Although 
various mechanisms exist to address agency problems in general, such as monitoring, 
bonding, and contracting (see, e.g., Finke (2012), supra footnote 1041), the agency 
problem between financial professionals and retail investors is not necessarily one that 
can be solved cost-effectively through these approaches.  See infra Section III.A.2 for a 
discussion of limitations to these approaches.  See also Curtis (2018), supra footnote 
1054. See also AARP August 2018 Letter; CFA August 2018 Letter; UVA Letter. 

1068  See Stoughton et al. (2011), supra footnote 1048. The authors also state that “[i]n 
addition to the advisory fees charged to the clients, wrap account managers may receive 
rebates from fund management companies as well,” and that wrap accounts have 
increased in popularity.  See also Mark Egan, Brokers vs. Retail Investors: Conflicting 
Interests and Dominated Products, J. FIN. (forthcoming 2019).  See also AARP August 
2018 Letter; CFA August 2018 Letter. 



476 

 

informed, there are important factors that mitigate their impact and, strikingly, it is possible for 

customers of financial institutions to benefit from the existence of such conflicts… The existence 

of a conflict of interest… does not mean that… the customers of that institution will be 

harmed… [A] variety of mechanisms help control conflicts of interest and their impact [e.g., a 

financial institution’s reputation].”1069  Another study of commission-based compensation in the 

United Kingdom indicates that commission-based compensation leads to significant bias in 

certain types of securities (e.g., with profit bonds or distribution bonds) and financial 

professionals and when bias exists, retail investors are harmed and the costs associated with such 

harm are significant; however, the study also states that the advice market in the United 

Kingdom is not overrun with bias (“adviser recommendations are not dominated by self-

interest”) and the market for advice generally works well.1070  

                                                                                                                                                             

 

1069  See Mehran & Stulz (2007), supra footnote 1059.  See also Johnsen August 2018 Letter. 
1070  See Robert Laslett, Tim Wilsdon, & Kyla Malcolm, Polarisation: Research into the 

Effect of Commission Based Remuneration on Advice, Charles River Associates Report 
Submitted to the U.K. Financial Services Authority (Jan. 2002), available at 
http://www.crai.com/sites/default/files/publications/polarisation-research-into-the-effect-
of-commission-based-remuneration-on-advice.pdf. Laslett et al. (2002) estimate harm 
resulting from biased advice of approximately £140 million per year.  Following the ban 
on commission-based compensation in the U.K. in 2013, another study finds that while 
the quality of financial advice increases, increased costs of providing advice lead some 
financial professionals to turn away small retail investors.  See Tracey McDermott & 
Charles Roxbury, Financial Advice Market Review, Financial Conduct Authority and HM 
Treasury Final Report (Mar. 2016) , available at 
https://www.fca.org.uk/publication/corporate/famr-final-report.pdf (which provides an 
overview of the effects of the Retail Distribution Review by the Financial Conduct 
Authority in the United Kingdom).  Further, McDermott & Roxbury (2016) report that 

 

 



477 

 

Although financial professionals may aid retail investors in correcting common investing 

mistakes and overcoming informational hurdles associated with securities transactions or 

investment strategies, the average retail investor may not be able to assess the quality of advice 

received from financial professionals.1071  The difficulty in assessment can arise from several 

sources, including a large degree of heterogeneity in the quality of advice, insufficient financial 

literacy on the part of investors, and information asymmetry between the financial professional 

and investors.1072  Information asymmetry arises when information necessary to assess the 

quality of the advice received may not be available to the retail investor, even when it is 

available to the financial professional.  For example, a financial professional may disclose 
                                                                                                                                                             

 

financial advice costs approximately £150 per hour and that giving retirement advice 
requires an average of nine hours on the part of the financial professional. 

1071  A number of studies consider advice to be a credence good, which is a type of good with 
qualities that cannot be observed by the consumer after purchase, making it difficult to 
assess its utility.  See, e.g., Roman Inderst, Consumer Protection and the Role of Advice 
in the Market for Retail Financial Services, 167 J. INSTITUTIONAL & THEORETICAL 
ECON. 4 (2011) (which provides a review of investors’ ability to assess the quality of 
investment advice). 

1072  See, e.g., Bluethgen et al. (2008), supra footnote 1048.  Although this study documents 
reasons why investors may be unable to assess the quality of advice, the focus is on using 
adviser characteristics as screening mechanisms to alleviate the first complication noted, 
the high degree of heterogeneity in the quality of advice.  The paper finds that good 
predictors of high quality advice include the financial professional’s cognitive ability 
(e.g., analytical skills, rationality, and financial knowledge), how financial professionals 
are compensated (financial professionals that have a high fraction of commission-based 
revenue are less likely to recommend high quality investments, e.g., index funds), and the 
firm’s business model. See also Finke (2012), supra footnote 1041; AARP August 2018 
Letter.  See also Relationship Summary Adopting Release. 



478 

 

conflicts of interest that could affect the advice provided, but the information may not be 

sufficiently precise to help a retail investor gauge how those conflicts affect the advice provided. 

Conflicts of interest, therefore, can erode the benefits of advice provided to retail 

investors, particularly if investors are unaware that the conflicts exist or if they do not understand 

the implications of conflicts.1073  Financial professionals may use this information asymmetry, 

particularly with unsophisticated investors, to capture economic rents for themselves, and this 

could exacerbate biases that investors sometimes exhibit, such as return chasing or under-

diversification.1074  One experimental study sent “mystery shoppers” to broker-dealers and 

investment advisers in several large cities in the United States and found that financial 

professionals provided recommendations that benefited themselves and exacerbated behavioral 

                                                                                                                                                             

 

1073  See, e.g., Inderst & Ottaviani (2012), supra footnote 1050; Patrick Bolton, Xavier 
Freixas, & Joel Shapiro, Conflicts of Interest, Information Provision, and Competition in 
the Financial Services Industry, 85 J. FIN. ECON. 297 (2007). See also AARP August 
2018 Letter. 

1074  See, e.g., Marco Ottaviani, The Economics of Advice (Working Paper, May 2000), 
available at http://faculty.london.edu/mottaviani/EOA.pdf (included because they capture 
aspects of the information asymmetries between retail investors and financial 
professionals that are not captured by the studies suggested by the commenters); Miriam 
Krausz & Jacob Paroush, Financial Advising in the Presence of Conflict of Interests, 54 
J. ECON. & BUS. 55 (2002); Inderst & Ottaviani (2012), supra footnote 1050; Stoughton 
et al. (2011), supra footnote 1048. See also AARP August 2018 Letter. 



479 

 

biases on the part of investors, including return chasing or recommendations of high-cost 

actively managed funds.1075 

Although financial professionals may be hired to help overcome “investment mistakes” 

made by investors,1076 a number of studies show that financial professionals themselves may be 

subject to the same behavioral biases as unadvised retail investors, such as return chasing and 

overconfidence.1077  One study, using data on Canadian investors and their financial 

                                                                                                                                                             

 

1075  See Sendhil Mullainathan, Markus Noeth, & Antoinette Schoar, The Market for Financial 
Advice: An Audit Study (Nat'l Bureau of Econ. Research, Working Paper No. 17929, Mar. 
2012), available at https://www.nber.org/papers/w17929.pdf.  See also AARP August 
2018 Letter; CFA August 2018 Letter; EPI Letter.  Although the Mullainathan et al. 
(2012) study included both broker-dealers and investment advisers, the study notes that 
most professionals in their sample focused on the lower end of the retail spectrum and 
tended to be compensated through commissions rather than fees based on AUM. See also 
Santosh Anagol, Shawn Cole, & Shayak Sarkar, Understanding the Advice of 
Commissions Motivated Agents: Evidence from the Indian Life Insurance Market 
(Harvard Bus. Sch., Working Paper No. 12-055, Oct. 2015), available at 
https://www.hbs.edu/faculty/Publication%20Files/12-055_13c23c02-e57f-4aea-9630-
316aa4b772ce.pdf, which used a similar audit approach to evaluate the quality of advice 
provided by life insurance agents in India, and found that agents recommended unsuitable 
products and strategies that paid high commissions. 

1076  See supra footnote 1046. 
1077  See, e.g., Mullinathan et al. (2012), supra footnote 1075; Terrance Odean, Are Investors 

Reluctant to Realize Their Losses?, 53 J. FIN. 1775 (1998); Zur Shapira & Itzhak 
Venezia, Patterns of Behavior of Professionally Managed and Independent Investors, 25 
J. BANKING & FIN. 1573 (2001).  See also AARP August 2018 Letter.  See also Anagol 
et al. (2015), supra footnote 1075, which documents that life insurance agents in India 
purchase the same inefficient products that they recommend to their clients.  One study of 
Canadian financial professionals and their clients observed a commonality among 
portfolios of a given financial professional, and that the financial professional’s own 
portfolio allocations strongly predicted the asset allocations of his or her customers, 

 

 



480 

 

professionals, observes that financial professionals appear to have the same “misguided beliefs” 

as their investors, and therefore do not correct, and may even exacerbate common investment 

mistakes.1078  In that study, financial professionals invested in the same manner that they 

recommended to their clients; they traded excessively, chased returns, bought expensive actively 

managed funds, under-diversified their portfolios, and earned similar net returns.  Further, these 

financial professionals continued to follow similar investment strategies as those they 

recommended to their clients, even after they had left the industry, suggesting that they believed 

their own investment advice.1079  

                                                                                                                                                             

 

indicating limited customization, regardless of the customer’s risk tolerance, age, or 
financial sophistication.  Although the results of this paper indicate that conflicts of 
interest are unlikely to motivate advice because financial professionals and their investors 
hold similar portfolios, it does raise questions of the high cost of financial advice when 
customization is limited. See Stephen Foerster et al., Retail Financial Advice: Does One 
Size Fit All?, 72 J. FIN. 1441 (2017) (included because they capture insights into how 
financial professionals may be subject to similar biases as retail investors that are not 
captured by the studies suggested by the commenters).  See Robinson (2007), supra 
footnote 1054. 

1078  See Juhani T. Linnainmaa, Brian T. Melzer, & Alessandro Previtero, The Misguided 
Beliefs of Financial Advisors (Kelley Sch. of Bus., Research Paper No. 18-9, May 2018), 
available at http://www.aleprevitero.com/wp-content/uploads/2018/06/SSRN-
id3101426.pdf. See also CFA August 2018 Letter. 

1079  Linnainmaa et al. (2018), supra footnote 1078, also suggest that conflicts of interest may 
not be driven by financial professionals, but instead are between the firm and its clients, 
and that firms deliberately hire financial professionals who believe their misguided (and 
ultimately expensive) advice.  In light of their findings, the authors suggest that 
regulation designed to stem conflicts of interest could be ineffective if aligning investors 
and financial professionals does not alter the advice that they provide, could raise barriers 
to entry that could reduce the amount of advice available, and may limit investor choice.481 

 

c. Evidence of Potential Investor Harm 

A number of commenters provided citations to academic studies that analyze the 

evidence of potential investor harm driven by conflicts of interest of financial professionals.1080  

A number of these studies, including Bergstresser et al. (2009), Del Guercio and Reuter (2014), 

and Christoffersen, Evans, and Musto (2013), underpinned the economic analyses of the Council 

of Economic Advisors 2015 Study (“CEA Study”) and the DOL RIA assessment of the 

aggregate harm borne by retail investors in retirement plans due to conflicts of interest.1081  

                                                                                                                                                             

 

1080  See, e.g., AARP August 2018 Letter; Better Markets August 2018 Letter; CFA August 
2018 Letter; EPI Letter; State Attorneys General Letter.  

1081  See Letter from Linda Agerbak (Jun. 21, 2018) (“Agerbak Letter”); Better Markets 
August 2018 Letter; CFA August 2018 Letter; EPI Letter; Letter from Public Citizen 
(Aug. 7, 2018) (“Public Citizen Letter”); State Attorneys General Letter; Former SEC 
Senior Economists Letter.  See also Bergstresser et al. (2009), supra footnote 1048; 
Diane Del Guercio & Jonathan Reuter, Mutual Fund Performance and the Incentive to 
Generate Alpha, 69 J. FIN. 1673 (2014); Susan E.K. Christoffersen, Richard Evans, & 
David K. Musto, What Do Consumers' Fund Flows Maximize? Evidence from Their 
Brokers’ Incentives, 68 J. FIN. 201 (2013).  See Office of the President of the United 
States, Council of Economic Advisers, The Effects of Conflicted Investment Advice on 
Retirement Savings (Feb. 2015), available at 
https://obamawhitehouse.archives.gov/sites/default/files/docs/cea_coi_report_final.pdf.  
See also DOL RIA, supra footnote 1002.  Both the CEA Study and the DOL RIA 
assumed that the DOL Fiduciary Rule would eliminate all conflicts of interest and, 
therefore, all of the harms to retirement investors resulting from conflicts.  See also Curtis 
(2018) and infra footnote 1103.  By contrast, Regulation Best Interest would not require 
elimination or mitigation of firm-level conflicts, and will require written policies and 
procedures reasonably designed to eliminate or mitigate of some representative-level 
conflicts, which means that some conflicts and their attendant harms may remain, 
especially at the firm level.  The disclosure requirements of Regulation Best Interest, 

 

 



482 

 

Below we discuss evidence of potential investor harm attributable to recommendations of certain 

investments by financial professionals, including mutual funds, 401(k) plans, corporate bonds, 

and non-traded REITs.  We then discuss the aggregate measures of investor harm estimated by 

the CEA Study and the DOL RIA and the limitations of those estimates.   

Directly addressing the question of whether and how brokerage customers or advisory 

clients are affected by conflicts of interest (e.g., through quantification) requires measurement of 

the effect of advice, subject to different levels of conflict, received from broker-dealers or 

investment advisers.  Most data currently available to researchers does not make distinctions 

between types of firms or financial professionals, and generally aggregates all firms or financial 

professionals into a single category of financial professionals (e.g., “adviser” or “financial 

adviser”).  Further, an investor’s propensity to choose a particular type of relationship may be 

correlated with the investor’s skill or choice of investment and, therefore, may introduce bias 

into studies that are able to differentiate between types of advice relationships.  Despite these 

limitations, by examining the existing academic literature, discussed below, we are able to gain 

qualitative insight into, and address commenter concerns, about conflicts of interest in the market 

for financial advice and the potential harm to investors.  

                                                                                                                                                             

 

however, may empower some customers to push back on broker-dealer conflicts of 
interest and more generally may have a deterrent effect. 



483 

 

The majority of studies to date that investigate the potential harm to investors arising 

from potential conflicts of interest have generally centered on findings based on analysis of 

investments in mutual funds.  Due to the readily available data for mutual funds, the literature is 

rich with studies exploring various aspects of those securities, including the performance of 

funds, relationships between flows and performance or expenses, and differences in performance 

of funds depending on the distribution channel.  These studies have further been used by 

commenters and other providers of economic analyses to estimate the magnitude of investor 

harm potentially stemming from conflicts of interest as it relates to mutual fund investments.1082 

Evidence suggests that there is a strong relationship between past performance and 

subsequent fund flows, even when funds do not persistently outperform, suggesting that 

investors and/or their financial professionals may engage in return-chasing behavior.1083  Several 

                                                                                                                                                             

 

1082  See CEA Study, supra footnote 1081, and DOL RIA, supra footnote 1002. See also EPI 
Letter; Better Markets August 2018 Letter; St. John’s U. Letter; Letter from Royce A. 
Charney, President, Trust Administrators (Aug. 7, 2018) (“Charney Letter”); Agerbak 
Letter; CFA August 2018 Letter. 

1083  See Judith Chevalier & Glenn Ellison, Risk Taking by Mutual Funds as a Response to 
Incentives, 105 J. POL. ECON. 1167 (1997); Jonathan B. Berk & Richard C. Green, 
Mutual Fund Flows and Performance in Rational Markets, 112 J. POL. ECON. 1269 
(2004); Brad M. Barber, Terrance Odean, & Lu Zheng, Out of Sight, Out of Mind: The 
Effects of Expenses on Mutual Fund Flow, 78 J. BUS. 2095 (2005); Erik R. Sirri & Peter 
Tufano, Costly Search and Mutual Fund Flows, 53 J. FIN. 1589 (1998). In the theoretical 
model provided by Berk and Green (2004), active funds do not outperform passive funds 
because investors compete to invest in strong past performers (i.e., they chase returns), 
driving these funds’ returns to the competitive level. See also AARP August 2018 Letter; 
CFA August 2018 Letter. 



484 

 

studies also examine the effect of mutual fund costs, and find that (1) fund flows are negatively 

related to front-end loads, but are relatively insensitive to fund-level operating expenses (e.g., 

12b-1 fees), indicating that investors may be aware of upfront costs when selecting funds, but 

may be less attuned to the effect on net returns of ongoing operating expenses;1084 and (2) 

unsophisticated investors are more likely to pay higher fees than sophisticated investors and are 

less likely to expend search costs to look for lower-fee funds.1085  Retail investors, however, can 

benefit when funds commence operation of an institutional “twin” fund as overall expenses 

decrease and managerial effort increases, suggesting that retail investors may not be able to 

monitor fund managers as effectively as institutional investors.1086 

Analyses in the CEA Study and the DOL RIA focus on the underperformance of certain 

broker-sold funds, potentially driven by conflicts of interest and a misalignment of incentives 

between financial professionals and investors.1087  A number of studies document that actively 

managed load mutual funds purchased by investors through a financial professional 

                                                                                                                                                             

 

1084  See Barber et al. (2005), supra footnote 1083. 
1085  See Todd Houge & Jay Wellman, The Use and Abuse of Mutual Fund Expenses, 70 J. 

BUS. ETHICS 23 (2007). See AARP August 2018 Letter. 
1086  See Richard B. Evans & Rudiger Fahlenbrach, Institutional Investors and Mutual Fund 

Governance: Evidence from Retail-Institutional Fund Twins, 25 REV. FIN. STUD. 3530 
(2012). See AARP August 2018 Letter.  The authors identify funds as “twins” if they 
share the same manager, investment objectives, fund families, and have a gross return 
correlation of 0.95 or greater. 

1087  See CEA Study, supra footnote 1081, and DOL RIA, supra footnote 1002. 



485 

 

underperform other types of mutual funds.1088  For example, several studies find that actively 

managed load funds underperform a buy-and-hold strategy by between 1.56% and 2.28% 

annually, while other studies show that actively managed load funds underperform no-load funds 

by between 1% and 1.5% per year.1089  This underperformance could be driven by poor market 

timing of investors (e.g., return chasing),1090 or because increased expenditures by the funds on 

marketing and advertising successfully attract retail flows, and such expenses decrease net 

returns to investors over time.1091  Fees and expenses, as documented by several studies, are two 

                                                                                                                                                             

 

1088  See Bergstresser et al. (2009), supra footnote 1048; Del Guercio & Reuter (2014), supra 
footnote 1081.  

1089  See, e.g., Mercer Bullard, Geoffrey Friesen, & Travis Sapp, Investor Timing and Fund 
Distribution Channels (Working Paper, 2008); Geoffrey C. Friesen & Travis R.A. Sapp, 
Mutual Fund Flows and Investor Returns: An Empirical Examination of Fund Investor 
Timing Ability, 31 J. BANKING & FIN. 2796 (2007); Matthew R. Morey, Should You 
Carry the Load? A Comprehensive Analysis of Load and No-Load Mutual Fund Out-of-
Sample Performance, 27 J. BANKING & FIN. 1245 (2003). See also Eugene F. Fama & 
Kenneth R. French, Luck Versus Skill in the Cross-Section of Mutual Fund Returns, 65 J. 
FIN. 1915 (2010), which notes that although some active managers may outperform 
passive benchmarks while others underperform, on average, the alpha attributable to 
active management will net to zero; therefore, net of fees, on average, and the alpha 
earned by actively managed funds will be reduced by the aggregate amount of fees and 
expenses of active management.  See also William F. Sharpe, The Arithmetic of Active 
Management, 47 FIN. ANALYSTS J. 7 (1991). See AARP August 2018 Letter; CFA 
August 2018 Letter. 

1090  See, e.g., Bullard et al. (2008), supra footnote 1089; Friesen & Sapp (2007), supra 
footnote 1089. 

1091  One study documents that heavily advertised funds outperform their benchmarks prior to 
the marketing efforts, but do not outperform their benchmarks in the post-advertising 
period.  These funds, however, attract significantly more inflows, relative to a control 

 

 



486 

 

of the most reliable predictors of future returns, and fees should reflect performance (e.g., funds 

with high fees hypothetically should have better ex post performance in order to justify the fees), 

as at least some portion of the fees are dedicated to portfolio management; however, these 

studies consistently find a negative relationship between fees and performance—lower cost 

funds on average are more likely to generate higher performance net of fees than high cost 

funds.1092 

A number of studies, also cited by the DOL RIA and the CEA Study, explore the 

distinction between broker-sold funds and direct-sold funds, and the effect of the distribution 

channel on fund flows and performance.  When examining a sample of only broker-sold funds, 

one study shows that funds that pay higher fees to financial professionals or charge higher excess 

                                                                                                                                                             

 

group.  See Prem C. Jain & Joanna Shuang Wu, Truth in Mutual Fund Advertising: 
Evidence on Future Performance and Fund Flows, 55 J. FIN. 937 (2000). See also 
Nikolai Roussanov, Hongxun Ruan, & Yanhao Wei, Marketing Mutual Funds (Nat’l 
Bureau of Econ. Research, Working Paper No. 25056, Sept. 2018), available at 
https://www.nber.org/papers/w25056.pdf. See AARP August 2018 Letter; CFA August 
2018 Letter; EPI Letter. 

1092  See Javier Gil-Bazo & Pablo Ruiz-Verdu, The Relation Between Price and Performance 
in the Mutual Fund Industry, 64 J. FIN. 2153 (2009); Russel Kinnel, Predictive Power of 
Fees: Why Mutual Fund Fees Are So Important, Morningstar Manager Research (May 
2016); William F. Sharpe, The Arithmetic of Investment Expenses, 69 FIN. ANALYSTS J. 
34 (2013).  Gil-Bazo & Ruiz-Verdu (2009) find that actively managed funds with the 
worst performance charge, on average, the highest fees.  See AARP August 2018 Letter; 
CFA August 2018 Letter. 



487 

 

loads generate greater fund inflows.1093  Moreover, broker-sold funds, on average, underperform 

direct-sold funds by between 23 bps and 255 bps per annum, with most studies observing 

average underperformance of approximately 100 bps (1%) per year.1094   

Further, conflicts of interest appear to depend upon the choice of investment (e.g., 

broker-sold versus direct-sold funds) as well as the magnitude of the costs (e.g., mutual fund 

loads).  One study suggests that the market for funds is segmented: more financially 

sophisticated investors select direct-sold funds, which unbundle portfolio management from 

advice of financial professionals, while less financially sophisticated investors purchase broker-

sold funds, which combine portfolio management and advice.1095  Another study focuses 

                                                                                                                                                             

 

1093  See Christoffersen et al. (2013), supra footnote 1081; Chalmers & Reuter (2015), supra 
footnote 1042; Jasmin Sethi, Jake Spiegel, & Aron Szapiro, Conflicts of Interest in 
Mutual Fund Sales: What Do the Data Tell Us?, 6 J. RETIREMENT 46 (2019). 
Christoffersen et al. (2013) and Sethi et al. (2019) measure excess loads by first 
estimating the baseline (average) load paid with regressions of loads on a number of 
explanatory variables, then using the residuals from these regressions (excess loads) to 
explain fund flows and performance.  See also Morningstar Letter; Letter from Aron 
Szapiro, Director of Policy Research, Morningstar, Inc., et al. (Aug. 24, 2018) 
(“Morningstar Letter Supplement”). Sethi et al. (2019) find, however, that the relation 
between excess loads and fund flows tapered off after the DOL Fiduciary Rule was 
adopted, suggesting that the DOL Fiduciary Rule may have discouraged financial 
professionals from directing flows to funds with high excess loads. 

1094  See, e.g., Bergstresser et al. (2009), supra footnote 1048; Chalmers & Reuter (2015), 
supra footnote 1042; Xuanjuan Chen, Tong Yao, & Tong Yu, Prudent Man or Agency 
Problem? On the Performance of Insurance Mutual Funds, 16 J. FIN. INTERMEDIATION 
175 (2007). See AARP August 2018 Letter. 

1095  See Del Guercio & Reuter (2014), supra footnote 1081.  Moreover, this study finds that 
broker-sold actively managed funds underperform broker-sold index funds by between 

 

 



488 

 

exclusively on broker-sold funds, but segments those funds into groups that depend on the size of 

excess loads and whether the funds are sold by affiliated or unaffiliated brokers.1096  That study 

observes that funds with a one-standard deviation increase in excess loads are related to a 

reduction in future performance of between 34 bps and 49 bps in the following year.  As detailed 

in Bergstresser et al. (2009), the broker-sold channel is likely to include funds sold through both 

broker-dealers and investment advisers; however, the data provided to the authors is not granular 

enough to be able to distinguish the performance characteristics of the two distinct channels.1097 

A number of commenters stated that the Proposing Release did not appropriately account 

for existing economic analyses produced by the CEA Study and the DOL RIA to measure the 

                                                                                                                                                             

 

1.1% and 1.3% per year, which the authors suggest may reflect an agency conflict. See 
also Diane Del Guercio, Jonathan Reuter, & Paula A. Tkac, Broker Incentives and 
Mutual Fund Market Segmentation (Nat'l Bureau of Econ. Research, Working Paper No. 
16312, Aug. 2010), available at https://www.nber.org/papers/w16312.pdf. See AARP 
August 2018 Letter; CFA August 2018 Letter.  Although some of the growth in direct-
sold funds comes from passive investing (e.g., index funds), greater than 75% of the 
number of direct-sold funds are actively managed (as of 2012).  See Jonathan Reuter, 
Revisiting the Performance of Broker-Sold Mutual Funds (Working Paper, Nov. 2, 2015), 
available at https://www2.bc.edu/jonathan-reuter/research/brokers_revisited_201511.pdf. 

1096  See Christoffersen et al. (2013), supra footnote 1081. 
1097  See Bergstresser et al. (2009), supra footnote 1048. The Bergstresser et al. study also 

notes that many funds in the direct-sold channel may be recommended by fee-based 
advisers, whose services “are typically paid for with an advisory fee that is outside of the 
fund expenses or distribution costs.  As a practical matter, the ‘direct’ channel may not be 
as direct as one might imagine.” 



489 

 

potential harm to investors from conflicts of interest.1098  The CEA Study and the DOL RIA use 

the literature on underperformance of broker-sold mutual funds as the foundation for their 

analyses on the potential harm of retail investors, focusing on harm specifically directed at 

retirement savings.  Applying an estimate of approximately 1% underperformance to broker-sold 

funds, which is consistent with estimates of underperformance provided by several studies,1099 

the CEA Study and the DOL RIA apply different methods and approaches to calculate the 

aggregate dollar harm for retail investors in their retirement accounts.1100  Based on $1.7 trillion 

invested in potentially conflicted funds, the CEA Study estimates annual harm to retirement 

investors of approximately $17 billion.1101  Similarly, the DOL RIA, which estimates potential 

                                                                                                                                                             

 

1098  See also ARA August 2018 Letter; EPI Letter; Better Markets August 2018 Letter; St. 
John’s U. Letter; Charney Letter; Agerbak Letter; CFA August 2018 Letter. 

1099  See Bergstresser et al. (2009), supra footnote 1048; Del Guercio & Reuter (2014), supra 
footnote 1081; Christoffersen et al. (2013), supra footnote 1081.  A number of 
commenters, regarding the DOL RIA, indicated that both the CEA Study, supra footnote 
1081, and the DOL RIA, supra footnote 1002, misinterpreted estimated effects described 
in the Christoffersen et al. (2013) paper, and overstated the potential harm associated 
with funds with high excess loads by more than double the actual estimate had the 
interpretation been correct. See Craig M. Lewis, The Flawed Cost-Benefit Analysis 
Underlying the Department of Labor’s Fiduciary Rule (White Paper, Aug. 2017), 
available at https://www.sec.gov/comments/ia-bd-conduct-standards/cll4-2268185-
160965.pdf; Public Interest Comment from Mark Warshawsky & Hester Peirce, George 
Mason University Mercatus Center (Apr. 17, 2017), available at 
https://www.mercatus.org/system/files/warshawsky-dol-fiduciary-rule-pic-v1.pdf. See 
also Curtis (2018), supra footnote 1054. 

1100  See CEA Study, supra footnote 1081, and DOL RIA, supra footnote 1002. 
1101  See CEA Study, supra footnote 1081. 



490 

 

loss due to conflicts of interest of between 50 bps and 100 bps per year, produces ten-year 

aggregate estimates of investor harm of between $95 billion and $189 billion stemming from the 

underperformance of broker-sold mutual funds. 

The level of underperformance due to fund selection is highly sensitive to the data sample, 

including the sample period, as well as the methodology employed to calculate performance.  

Many of the studies used to support the analyses underlying the CEA Study and the DOL RIA 

rely on data obtained prior to 2011.  However, since 2011 there have been a number of advances 

in the market for mutual funds (e.g., shifts from load to no-load funds and increase in no-load 

funds without 12b-1 fees), likely leading some of the inferences drawn from those studies to be 

dated and not reflective of the current market environment.1102  A number of commenters 

indicated potential flaws associated with the approach and interpretation of the analyses used by 

the CEA Study and the DOL RIA.1103  One study updates the Del Guercio and Reuter (2014) 

                                                                                                                                                             

 

1102  See ICI Letter and Section III.B.2.e.ii, supra. 
1103  See Lewis (2017), supra footnote 1099; Warshawsky & Peirce (2017), supra footnote 

1099.  See also Curtis (2018), supra footnote 1054. To date, only one academic study of 
which we are aware (Curtis (2018)) has analyzed the DOL Fiduciary Rule and the DOL 
RIA, and discusses issues with the approach taken by the DOL RIA in estimating the 
benefits and costs of the DOL Fiduciary Rule, noting that the DOL RIA likely 
underestimates the potential costs of the rule.  This study also indicates that the net 
benefits of the DOL Fiduciary Rule are expected to be close to zero because the DOL 
Fiduciary Rule may not completely eliminate conflicts of interest and the actual cost of 
investment advice at the intermediary-level was excluded from the DOL RIA 
computation of benefit.  Once the calculation accounted for costs of advice, Curtis (2018) 
estimates that the total costs attributed to conflicts of interest, including 

 

 



491 

 

sample using data from between 2003 and 2012 and tests the robustness of the methodology by 

examining the underperformance of broker-sold funds relative to direct-sold funds.1104  While 

underperformance of broker-sold funds still existed, depending on the methodology and 

empirical approach used, the underperformance of these funds was reduced to between 20 bps 

and 70 bps, with the majority of the estimation approaches falling to between 20 bps and 50 bps, 

indicating a reduction in the underperformance of broker-sold funds relative to earlier studies.1105  

Another study replicates the Christoffersen et al. (2013) analysis of excess loads on 

underperformance using data from between 2010 and 2017, and finds that after 2010, funds with 

high excess loads did not underperform funds with low excess loads, which the authors interpret 

as evidence that financial professionals have improved their recommendations over time.1106  

                                                                                                                                                             

 

underperformance of some securities, is only slightly higher than the costs associated 
with advice that is free of conflicts. 

1104  See Reuter (2015), supra footnote 1095. 
1105  Reuter (2015), supra footnote 1095, states that “[t]hese changes suggest that the average 

broker-sold fund has become more competitive with the average direct-sold fund”; 
however additional research would be required to determine if these changes are driven 
by existing fund families, new fund families, or some combination of factors.  When 
performance is value-weighted, Reuter (2015) discusses that brokers appear to direct 
clients toward funds that pay “higher-than-average distribution costs.” 

1106  See Sethi et al. (2019), supra footnote 1093.  The authors note that the underperformance 
of high excess load funds becomes statistically insignificant in the analysis only with the 
inclusion of prior-year performance of the fund (which Christoffersen et al. (2013), supra 
footnote 1081, include in one of their models). The authors suggest that the reduction in 
flows to funds with excess loads could be due in part to the DOL Fiduciary Rule; 
however, they also note that their analysis does not reveal a clear association between the 

 

 



492 

 

Taken together, these recent studies on fund selection suggest that the magnitude of potential 

investor harm likely is not as large as that estimated by the CEA Study and the DOL RIA when 

more recent data is used to compute the underperformance of broker-sold mutual funds. 

Another recent study replicates and extends the Friesen and Sapp (2007) and Bullard et al. 

(2008) analyses of market timing ability by investors in mutual fund sales and purchases to 

newer data (2007 through 2016).1107  The study shows that the difference between dollar returns 

and buy-and-hold returns (“performance gap”) declined from 1.56% between 1991 and 2004 to 

1.01% between 2007 and 2016 for a combined sample of load and no-load funds, suggesting a 

moderation in market timing errors in the most recent period.  However, the excess performance 

gap (the difference between the performance gap on load funds and no load funds) has slightly 

increased between 2007 and 2016, from approximately 1% to 1.12%, indicating that, to the 

extent that load funds are sold by financial professionals and that all inflows and outflows are 

due solely to market timing motivations, investors who hold load funds are more prone to market 

timing errors than investors in no-load funds, and these errors are not being corrected by 

financial professionals.  The studies discussed above acknowledge that interpretation of the 
                                                                                                                                                             

 

DOL Fiduciary Rule and returns.  The authors further cite to Holden et al. (2018), supra 
footnote 955, which discusses the shift away from load mutual funds to no-load funds 
over time.  See also ICI Letter; Morningstar Letter; Morningstar Letter Supplement.  

1107  See Karthik Padmanabhan, Constantijn Panis, & Timothy Tardiff, The Ability of Investors 
to Time Purchases and Sales of Mutual Funds (Working Paper, Nov. 1, 2017) (see also 
Department of Labor April 2019 memo). See, e.g., Bullard et al. (2008), supra footnote 
1089; Friesen & Sapp (2007), supra footnote 1089. 



493 

 

empirical result that broker-sold funds underperform direct-sold funds is subject to another 

caveat because there is likely to be a selection bias in the type of investor that utilizes the direct-

sold fund channel relative to those investors who rely on financial professionals for advice and 

recommendations about which funds to purchase.  A similar selection bias is likely to exist for 

investors who purchase no-load funds versus those that purchase load funds from financial 

professionals.  For example, although numerous studies discussed above suggest that financial 

advice is more likely to be obtained by older, more financially sophisticated, and wealthier 

investors,1108 Chalmers and Reuter (2015) observe that younger, less financially experienced, 

and less wealthy investors are more likely to buy broker-sold funds.1109   

  Beyond mutual funds, a nascent literature is emerging on other securities that may be 

prone to conflicts of interest by financial professionals.1110  Recent studies have examined 

                                                                                                                                                             

 

1108  See supra Section III.B.3.a. 
1109  See supra footnote 1042. 
1110  Some commenters (see, e.g., CFA August 2018 Letter; AARP August 2018 Letter; EPI 

Letter) also provided studies about conflicts of interest in 401(k) plans which have shown 
that (i) plan sponsors tilt securities toward high-cost securities (see Ian Ayres & Quinn 
Curtis, Beyond Diversification: The Pervasive Problem of Excessive Fees and 
"Dominated Funds" in 401(k) Plans, 124 YALE L.J. 1476 (2015)); (ii) plans have 
inadequate or excessive investment choices (see Edwin J. Elton, Martin J. Gruber, & 
Christopher R. Blake, The Adequacy of Investment Choices Offered by 401(K) Plans, 90 
J. PUB. ECON. 1299 (2006); Sheena Sethi-Iyengar, Gur Huberman, & Wei Jiang, How 
Much Choice is Too Much? Contributions to 401(k) Retirement Plans, in PENSION 
DESIGN AND STRUCTURE: NEW LESSONS FROM BEHAVIORAL FINANCE (Olivia S. Mitchell 
& Stephen P. Utkuss eds., 2004)); (iii) plans may include proprietary funds even when 
other funds perform better (see Veronika K. Pool, Clemens Sialm, & Irina Stefanescu, It 

 

 



494 

 

potential conflicts of interest in markets for more complex investments, including reverse 

convertible corporate bonds and non-traded REITs.  One study uses a sample of reverse 

convertible corporate bonds that differ only in the financial incentives provided to financial 

professionals and the coupon rate, and finds that investors are more likely to purchase—based on 

the advice given—the inferior bond (lower coupon, all else equal) with the higher “kick-back” to 

the broker-dealer, which appears to be driven by conflicts of interest between the financial 

professional and the investors.1111  In an examination of non-traded REITs, one study documents 

that retail investors in non-traded REITs underperformed by over $45 billion relative to a 

portfolio of traded REITs, and that nearly one-third of that underperformance was driven by 

upfront fees used to compensate broker-dealers.1112  

Finally, although a significant amount of empirical evidence suggests that there may be 

investor harm due to conflicts of interest between financial professionals and investors, because 

                                                                                                                                                             

 

Pays to Set the Menu: Mutual Fund Investment Options in 401(K) Plans, 71 J. FIN. 1779 
(2016)); and (iv) funds included in 401(k) plans underperform passive benchmarks by 
approximately 31 bps annually (see Edwin J. Elton, Martin J. Gruber, & Christopher T. 
Blake, How do Employer's 401(K) Mutual Fund Selections Affect Performance?, Ctr. for 
Retirement Research at Bos. Coll., Issue in Brief No. 13-1 (Jan. 2013), available at 
https://crr.bc.edu/wp-content/uploads/2013/01/IB_13-1-508.pdf).   

1111  See Egan (2019), supra footnote 1068. 
1112  See Craig McCann, Fiduciary Duty and Non-Traded REITs, INVESTMENTS & WEALTH 

MONITOR, July/Aug. 2015, at 39, available at 
https://www.slcg.com/pdf/workingpapers/Fiduciary%20duty%20and%20Non-
traded%20REITs.pdf. See CFA August 2018 Letter. 



495 

 

of changes to the mutual fund industry (e.g., shifts from load to no-load funds and the 

introduction of new share classes),1113 increased competition,1114 and the anticipation of 

regulation designed to ameliorate potential conflicts of interest, several new studies indicate that 

potential harm to investors arising from conflicts of interest may be declining.1115  One survey 

paper concludes that although the empirical evidence is consistent with financial professionals 

having conflicts of interest that may harm consumers, “none of the articles concludes that clients 

would have been better off by foregoing advice.  Even if people receive lower returns… 

consulting with an advisor may provide intangible benefits that consumers value,” and “it is 

important to bear in mind that these studies may have data limitations and in general cannot 

                                                                                                                                                             

 

1113  See ICI Letter and Holden et al. (2018), supra footnote 951. See also Capital Group 
Letter; Money Management Institute Letter; FPC Letter at footnote 73.  As noted above, 
innovations, including the introduction of T and clean share classes of funds may reduce 
the expected fund underperformance net of costs for retail investors relative to A shares 
by nearly 50 basis points annually. See supra footnote 1021 and accompanying text. See 
also supra footnote 1020 and accompanying text.  

1114  See LPL December 2018 Letter; Morgan Stanley Letter (which discuss the migration to 
open architecture platforms). 

1115  See Reuter (2015), supra footnote 1042; Sethi et al. (2019), supra footnote 1093. See also 
CFA August 2018 Letter; EPI Letter; Morningstar Letter; Morningstar Letter 
Supplement.  We include recent studies provided by commenters to present the current 
baseline of empirical findings on potential investor harm stemming from conflicts of 
interest. 



496 

 

account for selection issues and the intangible benefits that investors receive from financial 

advisors.”1116 

4. Trust, Financial Literacy, and the Effectiveness of Disclosure 

A number of commenters stated that the Proposing Release did not sufficiently address 

how issues related to trust in financial professionals, investors’ level of financial literacy or 

sophistication, and limitations on the effectiveness of disclosure likely exacerbate the problems 

of information asymmetry and potential conflicts of interest between retail investors and 

financial professionals.1117  In order to address commenters’ concerns, we examined and discuss 

below both academic and industry research on how trust and financial literacy could affect the 

recommendations provided by financial professionals to retail investors, as well as the 

effectiveness and limitations of disclosure in ameliorating potential conflicts of interest. 

a. Trust in Investment Advice 

In seeking financial advice, a retail investor places not only money but also trust in a 

financial professional.  Commenters stated that retail investors will follow the advice of their 

                                                                                                                                                             

 

1116  See Burke et al. (2015), supra footnote 1059. The DOL RIA, supra footnote 1002, and 
some commenters, however, have stated that no advice is a better alternative to advice 
subject to conflicts of interest. See also EPI Letter; Betterment Letter; PIABA Letter; 
CFA August 2018 Letter.  The DOL RIA suggests that investors who obtain advice 
subject to conflicts of interest are worse off due to the costs associated with obtaining 
such advice (e.g., underperformance) than had they not sought or received advice at all. 

1117  See AARP August 2018 Letter; CFA August 2018 Letter; FPC Letter; Rhoades 
December 2018 Letter; EPI Letter.  



497 

 

“trusted advisors,” because they believe “financial professional[s] will place the investor’s 

financial interest before his or her own.”1118  Moreover, one industry study of over 800 investors 

notes that “96% of U.S. investors report that they trust their financial professional and 97% 

believe their financial professional has their best interest in mind.”1119 Academic studies have 

explored the issue of trust and how it affects financial decisions of investors.  Studies in this 

strand of academic literature find that higher levels of trust increase investors’ propensity to seek 

investment advice and hire financial professionals,1120 increase levels of stock market 

                                                                                                                                                             

 

1118  See Letter from Christine Lazaro, President, PIABA (Dec. 7, 2018) (“PIABA December 
2018 Letter”).  See also, e.g., Rhoades December 2018 Letter; Gross Letter; Letter from 
William W. McGinnis, W. McGinnis Advisors (Aug. 7, 2018) (“McGinnis Letter”); EPI 
Letter; Betterment Letter; State Attorneys General Letter; Better Markets August 2018 
Letter; OIAD/RAND (providing a survey on academic literature on trust). One survey 
notes, however, that approximately 15% of survey participants do not consult with 
financial professionals because they “don’t trust them.” See Cetera November 2018 
Letter. 

1119  See CCMC Letters.  See also Center for Capital Markets Competitiveness, Working with 
Financial Professionals: Opinions of American Investors (2018), available at 
https://www.centerforcapitalmarkets.com/wp-
content/uploads/2018/04/CCMC_InvestorPolling_v5-1.pdf.  

1120  See Jeremy Burke & Angela A. Hung, Trust and Financial Advice (RAND Labor & 
Population, Working Paper No. WR-1075, Jan. 2015), available at 
https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-
regulations/proposed-regulations/1210-AB32-2/trust-and-financial-advice.pdf.  This 
study indicates that increased financial trust is associated with higher levels of both 
seeking and following investment advice. See also AARP August 2018 Letter; FPC 
Letter; CFA August 2018 Letter. 



498 

 

participation,1121 and increase willingness to take on higher-risk investments.1122  Regarding the 

importance of trust in established advice relationships, some studies find that trust in financial 

professionals is greater when investors have lower financial literacy or when purchasing complex 

products, such as insurance products.1123 Further, as trust in financial professionals grows, 

investors may be more likely to delegate all investment decisions to the financial professional, 

irrespective of their level of financial education.1124  

                                                                                                                                                             

 

1121  See Luigi Guiso, Paola Sapienza, & Luigi Zingales, Trusting in the Stock Market, 63 J. 
FIN. 2557 (2008). Guiso et al. (2008) find that higher levels of trust in financial 
professionals by investors is associated with a 50% increase in the probability of buying 
stocks and a 3.4% increase in the proportion of equity investments in the aggregate 
portfolio. See Rhoades December 2018 Letter. 

1122  See Nicola Gennaioli, Andrei Shleifer, & Robert Vishny, Money Doctors, 70 J. FIN. 91 
(2015). This study suggests that increased trust in financial professionals by investors 
alleviates anxiety in undertaking higher-risk investments (e.g., equities) (included 
because they capture aspects of the benefits of higher levels of trust in financial 
professionals by retail investors that are not captured by the studies suggested by the 
commenters). 

1123  See Thomas Pauls, Oscar Stolper, & Adreas Walter, Broad-Scope Trust and Financial 
Advice (Working Paper, Nov. 17, 2016), available at 
https://www.researchgate.net/publication/314235638_Broad-
scope_trust_and_financial_advice; David de Meza, Bernd Irlenbusch, & Diane Reyniers, 
Disclosure, Trust and Persuasion in Insurance Markets (IZA Discussion Paper Series, 
No. 5060, July 2010), available at http://repec.iza.org/dp5060.pdf. See also 
OIAD/RAND, which shows that investors most likely in need of investor protection (e.g., 
financially unsophisticated) are most likely to place their trust in financial professionals. 
See also Letter from AFL-CIO et al. (Dec. 7, 2018) (“AFL-CIO December 2018 Letter”). 

1124  See Riccardo Calcagno, Maela Giofre, & Maria Cesira Urzi-Brancati, To Trust is Good, 
but to Control is Better: How Investors Discipline Financial Advisors’ Activity, 140 J. 
ECON. BEHAV. & ORG. 287 (2017). See OIAD/RAND. 



499 

 

Several commenters stated that some financial professionals respond to the trust that 

retail investors place in them by acting on their conflicts of interest, which could benefit the 

financial professional at the expense of the investor.1125  In addition, some studies have shown 

that higher levels of trust by retail investors can provide incentives for financial professionals to 

provide conflicted investment advice or undertake actions that benefit themselves at the expense 

of their customers.  For example, one study found that because investors trust their financial 

professionals to provide higher ex ante expected returns on their risky investments, firms 

employing those professionals increased fees above levels that, in the author’s view, were 

consistent with a competitive equilibrium, resulting in lower ex post net returns to investors.1126  

Further, this study documents that, although a relationship with a trusted professional can 

encourage investors to invest in financial markets when it is efficient for them to do so, in some 

cases financial professionals may instead provide more conflicted investment advice or 

inefficient advice in order to satisfy the desires of investors who trust them (e.g., undertaking 

lottery-like behavior by investing in the riskiest securities).1127 Although trust in financial 

professionals can help alleviate certain behavioral biases and encourage participation in the 

securities markets, one commenter stated that “[r]etail customers who place their trust in 

                                                                                                                                                             

 

1125  See, e.g., Rhoades December 2018 Letter; EPI Letter; Better Markets August 2018 Letter. 
1126  See Calcagno et al. (2017), supra footnote 1124. 
1127  See id. 



500 

 

salespeople that market services as acting in their best interest can end up paying excessively 

high costs for higher risk or underperforming investments that only satisfy a suitability standard, 

not a fiduciary standard.” 1128 

b. Financial Literacy and Investment Advice 

As discussed above, financial literacy affects those who seek investment advice from 

financial professionals.  One commenter noted that “[a]s consumers move closer to retirement, 

they may be more vulnerable to the negative impact of advice that is not in their best interest for 

three reasons: (1) the assets they have to invest are larger; (2) they may lack strong financial 

literacy skills; and (3) reduced cognition may affect financial decision making.”1129 A number of 

studies have shown that financial literacy is significantly related to retirement planning and 

wealth accumulation by retail investors.1130  Generally, studies find that investors who are more 

financially literate or sophisticated are more likely to seek investment advice and are more likely 

                                                                                                                                                             

 

1128  See AARP August 2018 Letter.  See also PIABA Letter; St. John’s U. Letter. See also 
Joseph C. Peiffer & Christine Lazaro, Major Investor Losses Due to Conflicted Advice: 
Brokerage Industry Advertising Creates the Illusion of a Fiduciary Duty, PIABA Report 
(Mar. 25, 2015), available at https://piaba.org/sites/default/files/newsroom/2015-
03/PIABA%20Conflicted%20Advice%20Report.pdf.  

1129  See AARP August 2018 Letter. 
1130  See, e.g., Jere R. Behrman et al., Financial Literacy, Schooling, and Wealth 

Accumulation (Nat'l Bureau of Econ. Research, Working Paper No. 16452, Oct. 2010), 
available at https://www.nber.org/papers/w16452.pdf; Hans-Martin von Gaudecker, How 
Does Household Portfolio Diversification Vary with Financial Literacy and Financial 
Advice?, 70 J. FIN. 489 (2015) (included in response to comment letters that expressed 
views about limited financial literacy by some retail investors).501 

 

to follow that advice than less financially sophisticated investors.1131  Further, one study shows 

that investors with lower financial literacy who do not seek investment advice underperform 

investors with higher financial literacy who seek investment advice by more than 50 bps on 

average, and these losses are predominantly driven by under-diversification of their 

portfolios.1132   

A number of studies link retail investor demographic characteristics to financial literacy 

and document that financial illiteracy, although widespread, is most significant among investors 

with lower levels of educational attainment, women, and minorities.1133  Moreover, many studies 

have examined the relationship between age, cognition, and financial literacy, and have shown 

that older investors, on average, are the least likely to be financially literate, and that financial 
                                                                                                                                                             

 

1131  See supra Section III.B.3.  See also Riccardo Calcagno & Chiara Monticone, Financial 
Literacy and the Demand for Financial Advice, 50 J. BANKING & FIN. 363 (2015), who 
observe that investors with lower levels of financial literacy are less likely to consult 
advisers and avoid risky assets; however, when they do seek advice, they generally 
delegate investment decisions to their financial professionals. Lusardi & Mitchell (2011) 
indicate that investors who are more financially sophisticated are more likely to plan for 
wealth accumulation and be successful in their planning. See Annamaria Lusardi & 
Olivia S. Mitchell, Financial Literacy and Planning: Implications for Retirement 
Wellbeing (Nat’l Bureau of Econ. Research, Working Paper No. 17078, May 2011), 
available at https://www.nber.org/papers/w17078.pdf. See AARP August 2018 Letter. 

1132  See von Gaudecker (2015), supra footnote 1130. This study finds that losses borne by 
investors with lower financial literacy are predominantly driven by under-diversification 
of their portfolios.  

1133  See Lusardi & Mitchell (NBER 2011), supra footnote 1131. See also Annamaria Lusardi 
& Olivia S. Mitchell, Financial Literacy and Retirement Planning in the United States, 
10 J. PENSION ECON. & FIN. 509 (2011). See AARP August 2018 Letter. 



502 

 

literacy degrades as investors age.1134  A number of these studies show, however, that investors 

with low levels of financial literacy are likely to be over-confident in their financial abilities.  For 

example, several studies that explore the relationship between age and financial literacy show 

that confidence in financial decision making does not decline with age, and potentially leads to 

poor decisions (e.g., paying higher mortgage rates).1135  Although over-confident investors with 

low levels of financial literacy could potentially benefit most from seeking and following 

investment advice, one study shows that over-confident investors are less likely to seek advice 

and perceive it as less valuable.1136 

One potential problem, however, for investors with lower financial literacy is that they 

may not be able to distinguish the quality of their financial professional or the advice that they 

                                                                                                                                                             

 

1134  See Michael S. Finke, John Howe & Sandra J. Huston, Old Age and Decline in Financial 
Literacy (Working Paper, Aug. 24, 2011), who document that financial literacy scores 
decline by approximately 1% each year over the age of 60. See also Annamaria Lusardi, 
Olivia S. Mitchell, & Vilsa Curto, Financial Literacy and Financial Sophistication 
Among Older Americans (Nat’l Bureau of Econ. Research, Working Paper No. 15469, 
Nov. 2009), available at https://www.nber.org/papers/w15469.pdf; Keith Gamble et al., 
Aging and Financial Decision Making, 61 MGMT. SCI. 2603 (2015). See AARP August 
2018 Letter. 

1135  See Finke et al. (2011) and Gamble et al. (2015), supra footnote 1134. 
1136  See Marc M. Kramer, Financial Literacy, Overconfidence and Financial Advice Seeking 

(Working Paper, Dec. 19, 2014), available at 
https://efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2015-
Amsterdam/papers/EFMA2015_0067_fullpaper.pdf.  



503 

 

receive.1137  One study documents that small traders, relative to large institutional investors, are 

unable to recognize biases in recommendations provided by securities analysts, and therefore 

follow analyst recommendations to buy and sell securities without considering other information 

produced by the analyst.1138  Additionally, financial literacy may influence the quality of advice 

that financial professionals are willing to provide their clients.  Some financial professionals 

appear to be more likely to provide superior information to more financially literate investors, 

who may be able to discern the quality of the advice, and more likely to provide inferior and 

potentially more conflicted information to investors who are less financially literate.1139 

c. Evidence on the Effectiveness and Limitations of Disclosure 

Regulation Best Interest relies in part on disclosure of certain material facts to retail 

customers.1140  A number of commenters, however, stated that we failed to sufficiently account 

                                                                                                                                                             

 

1137  See Lauren E. Willis, Against Financial-Literacy Education, 94 IOWA L. REV. 197 
(2008). See AARP August 2018 Letter. 

1138  See Ulrike Malmendier & Devin Shanthikumar, Are Small Investors Naive About 
Incentives?, 85 J. FIN. ECON. 457 (2007). See AARP August 2018 Letter. 

1139  See Willis (2008), supra footnote 1137, and Calcagno & Monticone (2015), supra 
footnote 1131. See also John A. Turner, Bruce W. Klein, & Norman P. Stein, Financial 
Illiteracy Meets Conflicted Advice: The Case of Thrift Savings Plan Rollovers (Working 
Paper, Apr. 2015), available at https://gflec.org/wp-content/uploads/2015/04/Turner-
0408Assessing-the-Standard-for-Financial-Advice.pdf, which documents that financial 
professionals often suggest rolling over from thrift savings plans to more expensive plans 
(e.g., IRAs), and that such behavior is pervasive among both broker-dealers and 
investment advisers. See AARP August 2018 Letter. 

1140  See supra Section II.C.1. 



504 

 

for limitations of disclosure in the Proposing Release of Regulation Best Interest.1141  One 

commenter stated that “studies show that regulation by disclosure alone can actually undermine 

investor protection by emboldening advisers to ignore the client’s best interest once they have 

‘checked the disclosure box,’ and by rendering investors even more vulnerable to conflicted 

advice once they receive disclosures.”1142  Another commenter asserted that the ineffectiveness 

of disclosure arises because of investors’ failure to understand the disclosure, inadequate time to 

read and process the information, cognitive dissonance, and trust in financial professionals’ oral 

representations over written disclosures, among others.1143  Below, we discuss studies that have 

identified characteristics that make disclosure effective as well as limitations to the effectiveness 

of disclosure to investors, in particular focusing on issues related to disclosure of conflicts of 

interest and how disclosure could inflate potential conflicts between financial professionals and 

investors. 

Characteristics of effective disclosures include saliency of information, clear and concise 

information delivered in a transparent manner, and increased use of visual and interactive design, 

                                                                                                                                                             

 

1141  See AARP August 2018 Letter; Better Markets August 2018 Letter; State Attorneys 
General Letter; EPI Letter; Morningstar Letter; Warren Letter; UVA Letter. 

1142  See Better Markets August 2018 Letter. See infra footnote 1148 for studies submitted by 
this commenter. 

1143  See State Attorneys General Letter. See also EPI Letter. 



505 

 

among others.1144  One study, examining the effect of disclosure of fees and costs for mutual 

funds, observes that disclosures that prominently feature fees are more effective than others, but 

do not appear to reduce the importance that investors place on other fund characteristics, such as 

performance or risk.1145  Other studies, however, have found that disclosures may be ineffective, 

particularly if the intended audience does not read the disclosure documents or does not 

understand the material presented to them. One study, for example, notes that as the length and 

complexity of the disclosure document increases, so does the time that it takes for investors to 

read and understand the material contained within; therefore, investors are more likely to prefer 

shorter, simpler, and more straightforward language in disclosures.1146 

                                                                                                                                                             

 

1144  See Relationship Summary Adopting Release at Section IV, which also discusses the 
benefits and limitation of disclosure.  See also Margaret Hagan, Designing 21st Century 
Disclosure Methods for Financial Decision Making, Stanford Law School Policy Lab 
(2016), available at https://law.stanford.edu/publications/designing-21st-century-
disclosures-for-financial-decision-making/.  One study finds that when fund expenses are 
bundled with brokerage commissions, reducing the transparency of various fees and 
costs, investors experience larger degrees of underperformance than when the fees are 
more transparent.  See Roger M. Edelen, Richard B. Evans, & Gregory B. Kadlec, 
Disclosure and Agency Conflict: Evidence from Mutual Fund Commission Bundling, 103 
J. FIN. ECON. 308 (2012). See AARP August 2018 Letter. 

1145  See Lucy Hayes, William Lee, & Anish Thakrar, Now You See It: Drawing Attention to 
Charges in the Asset Management Industry (Fin. Conduct Auth., Occasional Paper No. 
32, Apr. 2018), available at https://www.fca.org.uk/publication/occasional-
papers/occasional-paper-32.pdf. See Morningstar Letter. See also Anagol et al. (2015), 
supra footnote 1075. 

1146  See Tamar Frankel, The Failure of Investor Protection by Disclosure, 81 U. CIN. L. REV. 
421 (2013). See FPC. See also Omri Ben-Shahar & Carl E. Schneider, The Failure of 
Mandated Disclosure, 159 U. PA. L. REV. 647 (2011), which also questions the 

 

 



506 

 

Many studies have explored the effect of revealing conflicts of interest to consumers and 

note that disclosure of conflicts may produce undesirable behavior by the disclosing party, or 

that receivers of the information provided by disclosures may fail to appropriately account for 

the implications.1147  A series of studies documents that consumers do not account for conflicts 

of interest revealed through disclosures, and that such disclosures of conflicts can have the 

perverse effect of increasing bias and moral licensing in the provision of advice.1148  Moral 

licensing arises when the discloser of information “take[s] an ethical action that validates [her] 

self-image as a good person” so she feels as though she “may well give [herself] permission to 

                                                                                                                                                             

 

effectiveness of disclosures and finds mandated disclosures ineffective substitutes for 
more direct regulation. See AARP August 2018 Letter; Better Markets August 2018 
Letter; State Attorneys General Letter.   

1147  See also Relationship Summary Adopting Release. 
1148  See Daylian M. Cain, George Loewenstein, & Don A. Moore, When Sunlight Fails to 

Disinfect: Understanding the Perverse Effects of Disclosing Conflicts of Interest, 37 J. 
CONSUMER RES. 836 (2011); Daylian M. Cain, George Loewenstein, & Don A. Moore, 
The Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts of Interest, 34 J. 
LEGAL STUD. 1 (2005); George Loewenstein, Daylian M. Cain & Sunita Sah, The Limits 
of Transparency: Pitfalls and Potential of Disclosing Conflicts of Interest, 101 AM. 
ECON. REV. (PAPERS & PROC.) 423 (2011). These studies also note that, although 
disclosure is intended to help financially unsophisticated consumers, disclosure is most 
likely to be beneficial to sophisticated users of the information. One study, however, 
notes that disclosure can reduce biased advice if the disclosure acts as a deterrent against 
entering into conflicts, and may improve trust in advisers. See Sunita Sah & George 
Loewenstein, Nothing to Declare: Mandatory and Voluntary Disclosure Leads Advisors 
to Avoid Conflicts of Interest, 25 PSYCH. SCI. 575 (2014). See also Morningstar Letter; 
EPI Letter; Better Markets August 2018 Letter; Warren Letter; UVA Letter; AARP 
August 2018 Letter; Johnsen Letter. 



507 

 

play fast and loose with the rules for a while.”1149  Disclosure may also lead to a decrease in trust 

of biased advice because consumers feel pressured to satisfy the discloser’s self-interest 

(“panhandler effect”);1150 however, the panhandler effect can be mitigated if the disclosure is 

provided from an external source, the disclosure is not common knowledge between the discloser 

and the receiver of the information, the receiver can change his or her mind at a later date, and 

the receiver can change his or her mind in private.1151  One study notes that, beyond conflicts 

disclosures, disclosures of actual bias lead to an improvement in performance of portfolios 

relative to investors who only receive conflict disclosures.1152 

From the perspective of the investor, conflicts disclosures may lead to under- or over-

reaction by investors.  According to one study, investors may not know how to appropriately 

                                                                                                                                                             

 

1149  See Robert A. Prentice, Moral Equilibrium: Stock Brokers and the Limits of Disclosure, 
2011 WIS. L. REV. 1059 (2011). See AARP August 2018 Letter; Better Markets August 
2018 Letter; State Attorneys General Letter. 

1150  See Cain et al. (2011), supra footnote 1148; Sunita Sah, Prashant Malaviya, & Debora 
Thompson, Conflict of Interest Disclosure as an Expertise Cue: Differential Effects of 
Automatic and Deliberative Processing, 147 ORGANIZATIONAL BEHAV. & HUM. 
DECISION PROCESSES 127 (2018), whereby disclosures of conflicts of interest act “as a 
heuristic cue to infer greater trust in advisors’ expertise.” 

1151  See Sunita Sah, George Loewenstein, & Daylian M. Cain, The Burden of Disclosure: 
Increased Compliance With Distrusted Advice, 104 J. PERSONALITY & SOC. PSYCHOL. 
289 (2013). See Morningstar Letter; Better Markets August 2018 Letter; EPI Letter. 

1152  See Christopher Tarver Robertson, Biased Advice, 60 EMORY L.J. 653 (2011).  This study 
also suggests that obtaining an opinion from an unbiased adviser “is a much better 
remedy for biased advice than disclosure.”  See AARP August 2018 Letter. 



508 

 

respond to information about conflicts (e.g., estimating the effects on the quality of advice or 

knowing how to search for an unbiased second opinion) and therefore may fail to adequately 

adjust their behaviors when conflicts are disclosed.1153  Alternatively, some investors may 

overreact to disclosures of conflicts of interest, and may instead forgo valuable investment 

advice.1154 

C. Benefits and Costs 

1. General 

In formulating Regulation Best Interest, the Commission has considered the potential 

benefits of establishing a best interest standard of conduct for broker-dealers, as well as the 

potential costs.   
                                                                                                                                                             

 

1153  See Angela A. Hung, Min Gong, & Jeremy Burke, Effective Disclosures in Financial 
Decisionmaking, RAND Labor and Population Report Prepared for the Department of 
Labor (2015), available at 
https://www.rand.org/content/dam/rand/pubs/research_reports/RR1200/RR1270/RAND_
RR1270.pdf.  See also AARP August 2018 Letter; Better Markets August 2018 Letter; 
Warren Letter.  See also James M. Lacko & Janis K. Pappalardo, The Effect of Mortgage 
Broker Compensation Disclosures on Consumers and Competition: A Controlled 
Experiment, Federal Trade Commission, Bureau of Economics Staff Report (Feb. 2004), 
available at https://www.ftc.gov/sites/default/files/documents/reports/effect-mortgage-
broker-compensation-disclosures-consumers-and-competition-controlled-
experiment/030123mortgagefullrpt.pdf, which documents that when mortgage customers 
receive information about mortgage broker compensation through disclosures, such 
disclosures lead to an increase in more expensive loans and create a bias against broker-
sold loans, even when the broker-sold loans are the more cost effective option. See EPI 
Letter. 

1154  See George Loewenstein, Cass R. Sunstein, & Russell Golman, Disclosure: Psychology 
Changes Everything, 6 ANN. REV. ECON. 391 (2014). See IRI Letter. 



509 

 

Regulation Best Interest enhances the broker-dealer standard of conduct beyond existing 

suitability obligations, and aligns the standard of conduct with retail customers’ reasonable 

expectations.  Under Regulation Best Interest, broker-dealers and their associated persons will be 

required, 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.  As a result, Regulation Best Interest should enhance the 

efficiency of recommendations that broker-dealers provide to retail customers, help retail 

customers evaluate the recommendations received, and improve retail customer protection when 

receiving recommendations from broker-dealers.  The four component obligations of Regulation 

Best Interest’s work together to enhance the current standard of conduct for broker-dealers and 

improve disclosure of material facts relating to the scope and terms of the relationship and 

conflicts of interest.  Both on its own and together with the other new rules and forms we are 

adopting,1155 we anticipate that Regulation Best Interest will reduce the agency costs of the 

                                                                                                                                                             

 

1155  See, e.g., Relationship Summary Adopting Release. 



510 

 

relationship between the associated persons of the broker-dealer and their retail customers, while 

preserving access to financial advice and choice in the scope of services and how to pay for them. 

 In this section, we discuss broader themes associated with the costs and benefits of 

Regulation Best Interest, including general comments we received on our analysis of the costs 

and benefits in the Proposing Release.  Following this more general discussion, we discuss the 

specific costs and benefits associated with Regulation Best Interest’s four component obligations. 

 While the Commission has considered the potential benefits and costs of Regulation Best 

Interest, the Commission notes that generally it is difficult to quantify such benefits and costs 

with meaningful precision.1156  Where possible, the Commission has provided an estimate of 

specific costs; however, several factors make the quantification of many of the effects of 

Regulation Best Interest difficult.  With respect to costs to broker-dealers, there is a lack of data 

on the extent to which broker-dealers with different business practices engage in disclosure and 

conflict mitigation activities to comply with existing requirements, and therefore how costly it 

would be to comply with the proposed requirements.  Also, the final rule will provide broker-

dealers flexibility in complying with Regulation Best Interest, and, as a result, there could be 

multiple ways in which broker-dealers will satisfy this obligation, although broker-dealers must 

comply with each of the elements of the obligation.  In addition, Regulation Best Interest may 
                                                                                                                                                             

 

1156  See supra Section III.B.3.c for discussion of the wide range of estimates of the potential 
benefits of Regulation Best Interest stemming from a reduction in investor harm, and 
discussion surrounding infra footnotes 1165-1182 for other issues associated with these 
estimates. 



511 

 

affect broker-dealers differently depending on their business model (e.g., full service broker-

dealer, broker-dealer that uses independent contractors, insurance-affiliated broker-dealer) and 

size.  More generally, estimates of the magnitude of such benefits and costs depend on 

assumptions about (1) the extent to which broker-dealers currently engage in disclosure and 

conflict mitigation activities, (2) how broker-dealers currently develop recommendations for 

their customers, (3) how broker-dealers choose to comply with Regulation Best Interest, (4) 

whether and how broker-dealers change investments and share classes offered as a result of 

Regulation Best Interest, (5) whether and how product  manufacturers change their investment 

offerings as a result of Regulation Best Interest, (6) whether broker-dealers restrict access to 

brokerage accounts by raising minimum account sizes or adding additional qualification 

requirements, (7) whether broker-dealers try to shift customers to advisory accounts as a result of 

Regulation Best Interest, (8) how retail customers perceive the risk and return of their portfolios, 

(9) how likely retail investors are to act on a recommendation that complies with Regulation Best 

Interest, (10) how the risk and return of retail customer portfolios change as a result of how they 

act on the recommendation, and (11) how investment advisers, including dually registered 

advisers, react to the adoption of Regulation Best Interest and the other regulatory developments, 

including the rules we are adopting and interpretations we are issuing simultaneously with 

Regulation Best Interest.  Because many of these factors are firm-specific and thus inherently 

difficult to quantify, even if it were possible to calculate a range of potential quantitative 

estimates, that range would be so wide as to not be informative about the magnitude of the 

benefits or costs associated with Regulation Best Interest. 

Broader economic forces, beyond broker-dealer and retail customer behavioral responses 

to Regulation Best Interest, also make meaningful estimates of economic impacts difficult to 



512 

 

develop.  The market for investment advice and services is complex and vast, and as history 

demonstrates, is dynamic and affected by market-specific facts (including product developments 

and regulatory changes) as well as macroeconomic factors (including general economic 

conditions).  For example, the introduction of indexation to the retail investment market and the 

subsequent increase in index products (and providers) and reduction in the costs of indexing for 

retail investors have had substantial effects on the market for retail investment advice and 

services.  The more recent introduction of ETFs has had similar unanticipated and 

underestimated effects, including, in general, reducing investor costs and increasing tax 

efficiency, as well as increasing the array of product offerings.  Developments such as the 

employer-driven shift from defined benefit plans to defined contribution plans also have had 

significant effects on the market for investment advice.  We expect these and other factors, 

including factors not currently identified, will continue to affect the market and, accordingly, 

may change the economic effects of the rule.  These sources of uncertainty and complexity make 

meaningfully quantifying many of the costs and benefits of the rule difficult and, particularly 

over long time periods, inherently speculative. 

a. Broad Commenter Concerns with Respect to Costs and Benefits 

We received many comments regarding our analysis in the Proposing Release of the 

benefits and costs.  In this section, we discuss comments that address broader aspects of our 



513 

 

analysis.  Comments that address costs and benefits of more specific components of Regulation 

Best Interest are discussed in the corresponding sections for each rule component that follows. 

Some commenters stated that our analysis in the Proposing Release did not properly 

incorporate current market practices into the baseline.1157  As discussed above, we have revised 

the discussion to include those practices, which may reflect guidance by SROs such as FINRA, 

requirements and obligations under state laws, practices implemented by broker-dealers in 

response to the (now vacated) DOL Fiduciary Rule that have not been reversed, and any 

practices implemented by broker-dealers to fulfill their obligations under existing federal 

securities laws.1158  While we acknowledged in the Proposing Release that variation in the extent 

to which broker-dealers with different business practices already engage in disclosure and 

conflict mitigation activities makes quantifying Regulation Best Interest’s costs and benefits with 

meaningful precision difficult, we more explicitly emphasize how this variation in current 

market practices affects the costs and benefits of Regulation Best Interest in the discussion that 

follows.1159  In general, to the extent that broker-dealer practices are already aligned with the 

requirements of Regulation Best Interest, the anticipated magnitude of both the costs and the 

benefits associated with a given component of Regulation Best Interest will be correspondingly 

reduced, and vice versa. 
                                                                                                                                                             

 

1157  See, e.g., CFA August 2018 Letter; CCMC Letters. 
1158  See supra Section III.B.2. 
1159  See Proposing Release at 21643. 



514 

 

As discussed above,1160 commenters noted the existence of fiduciary standards in various 

states.  One commenter provided an overview of the fiduciary obligations of state-registered 

investment advisers, “typified by an expectation of undivided loyalty where the adviser acts 

primarily for the benefit of its clients.”1161  This commenter also stated that “[s]ome states also 

extend these fiduciary obligations beyond investment advisers to brokers, especially in dual-

hatted scenarios,” and that these fiduciary obligations were extended even when broker-dealers 

handled non-discretionary accounts.1162  We recognize that there is substantial variation in the 

sources, scope, and application of state fiduciary law.  And we acknowledge that such state-level 

obligations for broker-dealers mean that they may already engage in practices under the baseline 

that overlap with certain requirements under Regulation Best Interest.  To the extent that state-

level law incorporates fiduciary principles similar to those reflected in Regulation Best Interest, 

the magnitude of the costs and benefits discussed below that stem from the application of those 

principles to broker-dealers will be correspondingly reduced.  However, costs and benefits that 

arise from obligations under Regulation Best Interest that differ from obligations under state law, 

such as the Conflict of Interest Obligation, will be maintained.1163 

                                                                                                                                                             

 

1160  See supra Section III.B.2. 
1161  See NASAA February 2019 Letter at 22 and footnote 40. 
1162  Id. at 23-24. 
1163  Whether Regulation Best Interest would have a preemptive effect on any state law would 

be determined in future judicial proceedings, and would depend on the language and 
operation of the particular state law at issue.  We considered whether we could determine 

 

 



515 

 

Some commenters suggested that certain types of costs should remain outside the scope 

of our analysis.  Some stated that our analysis should not consider, for example, costs to broker-

dealers resulting from lost revenues on securities they cease offering or costs associated with any 

potential increase in arbitration claims as a result of Regulation Best Interest, except to the extent 

that they are passed on to investors in the form of higher fees.1164  These commenters suggested 

that because these types of costs are a direct result of policies that make investors better off, they 

should not factor into an assessment of Regulation Best Interest.  The Commission has an 

obligation to consider the economic effect of Regulation Best Interest on affected parties, 

including broker-dealers, even when those costs are associated with benefits to investors.  

However, in the specific discussion of each rule component that follows, we highlight instances 

where a given cost is directly associated with a benefit to investors. 

                                                                                                                                                             

 

the economic impact of possible, future state-law preemption on retail customers, but 
concluded that we cannot analyze the economic effects of the possible preemption of 
state law at this point because the factors that will shape those judicial determinations are 
too speculative.  Among the unknown factors are: (1) the final language in any proposed 
state legislation or regulation adopting a fiduciary or other standard for broker-dealers; 
(2) whether that language would constitute the type of law, rule, or regulation that is 
expressly preempted by the securities law or impliedly preempted under principles 
applied by courts; and (3) whether, if there was preemption, that preclusion of state law 
would have any positive or negative effects on investors when compared with the 
economic effects of Regulation Best Interest. 

1164  See AARP August 2018 Letter; EPI Letter; Better Markets August 2018 Letter; Cetera 
August 2018 Letter. 



516 

 

Commenters raised several issues related to the quantification of costs and benefits, or 

lack thereof, in the Proposing Release.  They asserted that our analysis focused too much on 

Regulation Best Interest’s costs and did not quantify any of the benefits, such as the reduction in 

investor harm.1165  As discussed above, some studies present anecdotal evidence of behavior by 

certain broker-dealers, such as recommending investments that are inferior to available 

alternatives, that is harmful to investors.1166  A potential benefit of Regulation Best Interest is 

therefore a reduction in that harm, as asserted by commenters.  However, the anecdotal evidence 

of investor harm in these studies does not lend itself to aggregation. 

Commenters also stated that we should have incorporated the approach used by the DOL 

RIA and the CEA to quantify aggregate investor harm.1167  While both of these analyses 

surveyed a broad literature on the relative performance of broker-sold versus direct-sold mutual 

funds, they both relied on a particular study to estimate aggregate investor harm, extrapolating 

the effect of “excess loads” on the performance of broker-sold funds to total industry-wide 

AUM.1168  We disagree with this approach because, as noted by commenters, we believe these 

                                                                                                                                                             

 

1165  See AARP August 2018 Letter; Better Markets August 2018 Letter; CFA August 2018 
Letter. 

1166  See supra footnotes 1068 and 1075. 
1167  See Better Markets August 2018 Letter. 
1168  See supra footnotes 1081 and 1099. 



517 

 

analyses misapplied the particular study’s results.1169  When the results of the study are correctly 

applied, the aggregate estimate of investor harm obtained using this approach is negligible.1170 

Another commenter advocated a similar approach, claiming that risk-adjusted returns net 

of fees, which calculate the excess return of an investment above a benchmark that matches the 

risk of the investment, are the only appropriate measure of whether a recommendation is in a 

retail customer’s best interest.1171  While there are studies showing that broker-sold mutual funds 

underperform direct-sold funds to varying degrees,1172 we do not believe, for the reasons 

explained below, that applying estimates of this under-performance to industry-wide AUM 

produces a meaningful estimate of the aggregate investor harm attributable to recommendations 

made by broker-dealers that is sufficiently precise to inform our policy choices.  First, as 

discussed above, these studies do not necessarily cleanly distinguish under-performance 

attributable to broker-dealers from under-performance attributable to investment advisers.1173  

Second, interpreting the relative underperformance of broker-sold funds as a measure of 

investor harm due to conflicts of interest implicitly evaluates investor harm against a benchmark 

                                                                                                                                                             

 

1169  See, e.g., Lewis (2017), supra footnote 1099. 
1170  See id. 
1171  See EPI Letter.  See also Former SEC Senior Economists Letter, stating that risk-adjusted 

returns are an appropriate measure of investor harm. 
1172  See, e.g., Bergstresser et al. (2009), supra footnote 1048; Del Guercio & Reuter (2014), 

supra footnote 1081.  
1173  See supra footnote 1097. 



518 

 

that does not include financial advice.  However, that benchmark does not necessarily reflect the 

appropriate alternative available to investors in broker-sold funds.  Extrapolating from these 

studies leads to the conclusion that investors would do better investing on their own, yet there are 

other studies showing that is not the case, at least not for all investors.1174  We further note that 

calculating the investor harm against a benchmark that includes the fees retail customers would 

pay for equivalent advice could significantly reduce the magnitude of these estimates.1175 

Finally, while risk-adjusted returns may be useful in comparing the performance of 

particular mutual funds, particularly when trying to evaluate fund manager skill, they do not 

necessarily reflect the utility that investors achieve from their investments.1176  Heterogeneous 

investors value investments and the services provided by financial professionals differently 

depending on their investment profile and preferences, and risk-adjusted returns do not 

necessarily represent aggregate utility across all investors in a way that permits us to arrive at an 

aggregate measure of investor harm.  For example, consumers invest in various forms of 

insurance products in order to hedge their exposure to bad outcomes (e.g., home insurance 

policies), even though the expected returns on such investments are generally negative.  The 
                                                                                                                                                             

 

1174  See supra footnotes 1045-1048. 
1175  See also supra footnote 1103.  
1176  Even in the context of evaluating fund manager skill, there is debate about whether risk-

adjusted returns are an appropriate measure of fund performance.  See e.g., Vincent 
Glode, Why Mutual Funds “Under Perform”, 99 J. FIN. ECON. 546 (2011); Jonathan B. 
Berk & Jules H. van Binsbergen, Measuring Skill in the Mutual Fund Industry, 118 J. 
FIN. ECON. 1 (2015).   



519 

 

relative underperformance of broker-sold mutual funds also may not capture any intangible 

benefits investors derive from receiving tailored financial advice.1177  Alternatively, the relative 

performance of mutual funds sold through these two channels may reflect other factors that are 

unrelated to conflicts of interest.1178 Accordingly, while we do not dispute the existence of 

broker-dealer behavior under the baseline that is harmful to investors, based on our analysis, 

including our analysis of the comments received, we continue to believe that quantifying that 

harm, and therefore quantifying the benefits associated with reducing it, depends on many 

contingent factors that would render any estimates insufficiently precise to inform our policy 

choices.1179   

With respect to the magnitude of the costs we assessed in the Proposing Release, some 

commenters asserted that our analysis underestimated the costs of complying with Regulation 

                                                                                                                                                             

 

1177  See, e.g., Bergstresser et al. (2009), supra footnote 1048, who note that “[o]ne possibility 
is that brokers provide other intangible benefits, which we cannot measure” when 
interpreting the relative performance of broker-sold versus direct-sold mutual funds. 

1178  See, e.g., The DOL RIA, supra footnote 1002, at footnote 473, noting that the relative 
performance of broker-sold versus direct-sold funds “…is an imperfect measure of the 
impact of conflicts of interest; other factors, aside from conflicts of interest, affect the 
relative performance of mutual funds sold through the two distribution channels.” 

1179  See Discussion following footnote 1156 for a discussion of these factors.  See also infra 
Section III.C.7, where we have endeavored to estimate some of the potential benefits of 
Regulation Best Interest based on many assumptions. 



520 

 

Best Interest, though only a few provided estimates of these costs.1180  Where commenters 

provided estimates for a specific component of Regulation Best Interest, particularly the 

Disclosure Obligation, we discuss those estimates when discussing that component of Regulation 

Best Interest below.  Based on its experience with the DOL Rule, one commenter provided a 

broad estimate of the compliance costs associated with the entire package of rules we proposed, 

including Regulation Best Interest and Form CRS, indicating that the rule package would entail 

initial costs of $20 million and ongoing costs of $5 million per year for their firm, but that these 

costs would be manageable.1181  Another commenter stated that for a small broker-dealer with 

$500,000 in net capital, the compliance costs estimated in the Proposing Release could constitute 

12% of that net capital, making compliance with Regulation Best Interest burdensome for such 

broker-dealers.1182  We acknowledge that the costs of Regulation Best Interest could be more 

burdensome for small broker-dealers and discuss any corresponding competitive effects in 

Section III.D.1. 

Although the majority of the industry studies provided by commenters focused on the 

effects of the DOL Fiduciary Rule on broker-dealers and their customers, one industry survey 

provided information about industry beliefs about potential effects of proposed Regulation Best 
                                                                                                                                                             

 

1180  See Schwab Letter; ICI Letter; Letter from James J. Angel, Associate Professor of 
Finance, Georgetown University (Aug. 7, 2018) (“Angel Letter”); LPL August 2018 
Letter; NSCP Letter. 

1181  See Raymond James Letter.   
1182  See NSCP Letter.521 

 

Interest.1183  The survey consisted of approximately 30 individual financial professionals across a 

mix of 15 companies providing financial advisory services and products, including broker-

dealers and dually registered firms, with $23 trillion in AUM and administration and nearly 79 

million investment accounts.  All of the participants surveyed stated that it was unlikely that they 

would reconsider their broker-dealer registration status, while nearly 40% stated that they may 

alter their investment choices and 35% could alter the services that they offer.  With respect to 

the costs of Regulation Best Interest and Form CRS, approximately 36% of respondents stated 

that the implementation costs could be between 1% and 5% of annual profits; however, nearly 

80% of respondents noted that costs are likely to decline over time.1184  We note that one of the 

cost estimates provided by a commenter above is consistent with this range.1185  One commenter 

suggested that for firms that offer access to thousands of unique securities, many of which likely 

                                                                                                                                                             

 

1183  See Center for Capital Markets Competitiveness, SEC Regulation Best Interest Rule 
Proposals: Request for Information Analysis, FTI Consulting Report Presented to the 
U.S. Chamber of Commerce (Jul. 25, 2018), available at 
https://www.centerforcapitalmarkets.com/wp-content/uploads/2018/08/Reg-BI-Rule-
Proposal-Research_8.7.18_FTI-Updated_final.pdf.  See CCMC Letters.  Survey 
participants also addressed questions related to beliefs regarding investor protection, 
choices for retail customers, and the standard of conduct for broker-dealers. 

1184  One commenter stated that the “costly” recordkeeping requirements described in the 
Proposing Release “are unnecessary as self-interest will lead firms to keep proof of 
compliance” and should be eliminated. See Angel Letter. 

1185  See supra footnote 1181.  Relative to this commenter’s 2018 fiscal year profits, its initial 
cost estimate of $20 million would represent approximately 2% of annual profits for this 
firm. See https://www.sec.gov/Archives/edgar/data/720005/000072000518000083/rjf-
20180930x10k.htm. 



522 

 

have similar strategies (e.g., index mutual funds or ETFs), requiring broker-dealers to “consider 

reasonably available alternatives offered by the broker-dealer as part of having a reasonable basis 

for making the recommendation” would make it cost prohibitive for broker-dealers and financial 

professionals to evaluate the costs associated with “every similar investment product available 

through the broker-dealer’s platform.”1186  Many survey participants, although they believed that 

the Commission underestimated the aggregate costs of Regulation Best Interest and Form CRS, 

agreed that the benefits to investors were likely to justify the costs. 

Other commenters stated that a number of elements of the Proposing Release potentially 

could increase litigation exposure for some broker-dealers.  For example, one commenter 

discussed that, because proposed Regulation Best Interest did not “expressly define ‘financial 

incentive’” for purposes of the proposed requirement of policies and procedures designed to 

disclose and mitigate, or eliminate, conflicts arising from financial incentives, broker-dealers 

could face challenges to “design and maintain effective compliance programs that appropriately 

address the conflicts inherent in their particular business models” thereby potentially increasing 

litigation risks.1187  Another commenter indicated that, with respect to proprietary products, 

“[s]tate courts in enforcement actions and in review of such actions” may find it difficult to 

distinguish the best interest standard for broker-dealers from a fiduciary standard for investment 

                                                                                                                                                             

 

1186  See LPL December 2018 Letter. 
1187  See Primerica Letter. 



523 

 

advisers, and may cause certain associated persons of broker-dealers to “shy away from the risks 

of litigation in this regulatory environment, causing a substantial market contraction away from 

middle class investors.”1188 

In the Proposing Release, we were able to quantify costs for limited portions of 

Regulation Best Interest, particularly those stemming from requirements related to document 

creation for purposes of the Paperwork Reduction Act.  While we have updated these estimates 

in Section IV.B, we continue to believe that it is not possible to meaningfully quantify the full 

costs and benefits of Regulation Best Interest because such analysis would depend on many 

contingent factors that render any estimate insufficiently precise to inform our policy choices.1189  

So while we acknowledge, for example, that Regulation Best Interest may impose costs that are a 

significant portion of the estimate of initial and ongoing costs of $20 million and $5 million by 

the commenter cited above, we cannot anticipate the associated costs for all firms because of the 

wide variation in size and scope of business practices across firms as well as the many unknown 

factors associated with the principles-based nature of Regulation Best Interest.  In discussing 

Regulation Best Interest’s component obligations below, we address any estimates provided by 

commenters where we can and otherwise explain the specific factors that preclude quantifying 

                                                                                                                                                             

 

1188  See Letter from Douglas M. Ommen, Iowa Insurance Commissioner (Aug. 6, 2018) 
(“Iowa Insurance Commissioner Letter”). 

1189  See Discussion following footnote 1156 for a discussion of these factors.  See also infra 
Section III.C.7, where we have endeavored to estimate some of the potential benefits of 
Regulation Best Interest based on many assumptions. 



524 

 

the costs of Regulation Best Interest with meaningful precision beyond our Paperwork Reduction 

Act estimates. 

b. Broad Investor Protection Benefits 

As discussed above, in addition to any enhancements provided above and beyond current 

requirements and market practices, each of the component obligations of Regulation Best 

Interest share features with market best practices under the baseline, as shaped by FINRA’s 

guidance on relevant rules or as described in its Report on Conflicts of Interest.  Given this 

overlap, FINRA, in response to a congressional request, enumerated the ways it believes 

Regulation Best Interest enhances existing broker-dealer obligations under current FINRA 

rules.1190 

In addition to the enhancements that each of Regulation Best Interest’s component 

obligations provide above and beyond existing broker-dealer obligations under the baseline, 

which we discuss below, Regulation Best Interest increases retail customer protections by 

establishing these obligations under the Exchange Act so that the Commission may enforce them 

directly and examine for compliance.  Additionally, to the extent that market best practices may 

reflect some FINRA guidance that is not required by FINRA’s rules, some broker-dealers may 

not currently implement these practices.  To the extent that broker-dealers and their associated 

persons do not currently implement existing best practices that will be codified in Regulation 

                                                                                                                                                             

 

1190  See FINRA 2018 Letter. 



525 

 

Best Interest, retail customers will benefit because it will increase the implementation of these 

best practices throughout the industry. 

2. Disclosure Obligation 

As adopted, the Disclosure Obligation of Regulation Best Interest’s requires a broker-

dealer, prior to or at the time of the recommendation, to provide to the retail customer, in writing, 

full and fair disclosure of all material facts relating to the scope and terms of the relationship and 

all material facts relating to conflicts of interest that are associated with the recommendation.  

Regulation Best Interest explicitly requires 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 or 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 material limitations on the securities or investment strategies 

involving securities that may be recommended to the retail customer; and all material facts 

relating to conflicts of interest that are associated with the recommendation. 

Under the baseline, some disclosure obligations already exist, as do an array of market 

practices with respect to the disclosure of capacity, fees, services, and conflicts of interest.1191 

                                                                                                                                                             

 

1191  For instance, broker-dealers are subject to a number of disclosure obligations under the 
Exchange Act when they effect certain customer transactions.  These disclosure 
obligations include written disclosure about capacity, compensation, and third-party 

 

 



526 

 

The Disclosure Obligation will enhance disclosure obligations that exist under the baseline and 

bring greater alignment to market practices by establishing an explicit and broad disclosure 

requirement under the Exchange Act that applies to all broker-dealers when they make a 

recommendation to a retail customer.  We expect this change to improve the quality and 

consistency of disclosures and thus (1) reduce the information asymmetry that may exist between 

a retail customer and her broker-dealer, and (2) facilitate customer comparisons of different 

broker-dealers which we expect will, in turn, increase competition among broker-dealers, 

including with respect to fees and costs, as discussed below.1192 

Relative to the baseline, the Disclosure Obligation will change how broker-dealers 

disclose information to their retail customers in several specific ways.  First, under the baseline, a 

                                                                                                                                                             

 

remuneration related to the transaction, and disclosures about whether the broker-dealer 
has any control, affiliation, or interest in the security or the issuer of the security being 
offered. Broker-dealers also face liability under the antifraud provisions of the federal 
securities laws for failure to provide disclosure, such as disclosure of “honest and 
complete information” or any material adverse facts or materials conflicts of interest, 
including any economic self-interest, when recommending a security (see supra footnote 
988). In addition, broker-dealers must comply with a number of SRO disclosure 
obligations—such as FINRA Rule 2124 (Net Transactions with Customers), FINRA Rule 
2262 (Disclosure of Control Relationship with Issuer), and FINRA Rule 2269 (Disclosure 
of Participation or Interest in Primary or Secondary Distribution). Finally, broker-dealers 
may also adjust their practices consistent with existing SRO guidance on specific 
disclosures—such as FINRA Regulatory Notice 13-23, Brokerage and Individual 
Retirement Account Fees (July 2013) on fee disclosure. See Proposing Release at 
footnotes 175, 176, 177, and 192; supra footnotes 303 and 985-988 for a more detailed 
discussion on existing disclosure practices.  

1192  See supra footnote 1072 for a discussion of potential information asymmetries between 
broker-dealers and retail customers. 



527 

 

broker-dealer and its associated persons are not explicitly required to disclose that they are acting 

in a broker-dealer capacity when making a recommendation.  We also clarify above that the use 

of the terms “adviser” or “advisor” in a name or title by (i) a broker-dealer that is not also 

registered as an investment adviser, or (ii) a financial professional that is not also a supervised 

person of an investment adviser would presumptively violate this particular disclosure 

requirement.  Second, Regulation Best Interest requires that any disclosure made by a broker-

dealer be “full and fair,” meaning that the broker-dealer is required to provide sufficient 

information to enable a retail investor to make an informed decision with regard to the 

recommendation, even where this information is about aspects of the relationship between a 

retail customer and a broker-dealer that may already require disclosure, implicitly or explicitly, 

under the baseline.  We expect the “full and fair” requirement to benefit retail customers in cases 

where it results in disclosures that are not currently required under broker-dealer antifraud 

provisions.  Finally, Regulation Best Interest requires that broker-dealers provide these 

disclosures to retail customers in writing at or before the time of a recommendation.  However, 

we are permitting oral disclosures prior to or at the time of a recommendation and written 

disclosures after a recommendation under the circumstances outlined in Section II.C.1, Oral 

Disclosure or Disclosure After a Recommendation.1193  We focus our discussion of both the 

benefits and costs of the Disclosure Obligation on these changes relative to the baseline.1194 

                                                                                                                                                             

 

1193  For example, when oral disclosures are used prior to or at the time of a recommendation, 
 

 



528 

 

Regulation Best Interest’s Disclosure Obligation is different from the Proposing 

Release’s Disclosure Obligation in two ways.  First, while the Proposing Release required that a 

broker-dealer “reasonably disclose” material facts to retail customers, Regulation Best Interest 

requires that a broker-dealer provide retail customers with “full and fair” disclosure of material 

facts.  As discussed above, this change from the Proposing Release does not have a substantive 

effect on the expected economic effect of the Disclosure Obligation.  Specifically, in both the 

Proposing Release and Regulation Best Interest, the formulation of the Disclosure Obligation, as 

described in the release text, required that a broker-dealer provide sufficient information to 

enable a retail investor to make an informed decision with regard to a recommendation.1195  

Therefore, we do not expect this change to affect our assessment of Regulation Best Interest’s 

costs and benefits.  Second, whereas the Proposing Release’s Disclosure Obligation did not 

explicitly require a broker-dealer to disclose particular types of material facts relating to the 

scope and terms of its relationship with a retail customer, Regulation Best Interest explicitly 

requires that these material facts include the capacity in which the broker-dealer is acting, fees 

and costs, and the type and scope of services provided, including material limitations on the 

                                                                                                                                                             

 

broker-dealers must maintain a record of the fact that oral disclosure was provided.  See 
supra footnotes 301 and 507-508 and surrounding discussion for more detail on when 
oral disclosure prior to or at the time of a recommendation and disclosure in writing after 
a recommendation are permitted. 

1194  See supra footnotes 1157-1159. 
1195  See Proposing Release at Section II.D.1.c. 



529 

 

securities or investment strategies that may be recommended.  We include any economic effects 

associated with this change in our discussion of Regulation Best Interest’s benefits and costs.  

Finally, while we discuss the direct benefits and costs of the Disclosure Obligation in this section, 

retail customers, broker-dealers, investment advisers, and their financial professionals may 

experience indirect benefits or costs due to competitive effects caused by the Disclosure 

Obligation.  We discuss any competitive effects below in Section III.D.1. 

a. Benefits 

Regulation Best Interest requires that brokers, dealers, or natural persons associated with 

a broker-dealer disclose that they are acting as a broker, dealer, or an associated person of a 

broker-dealer prior to or at the time of a recommendation to a retail customer.  Broker-dealers 

are not explicitly required to disclose this information prior to or at the time of a 

recommendation under the baseline, though they may disclose it to comply with other federal 

securities laws and SRO rules, or because they consider it to be a market best practice.1196  This 

requirement is most likely to have economic effects when retail customers have both brokerage 

and advisory accounts with the same financial professional, as may be the case if the financial 

professional is dually-registered.  It is designed to make all retail customers aware of the capacity 
                                                                                                                                                             

 

1196  For example, under the baseline, broker-dealers may decide that disclosing the capacity 
in which it is acting is necessary in order to meet its duty of fair dealing under the 
antifraud provisions of the federal securities laws.  In addition, broker-dealers must 
disclose whether they effected the transaction as a principal or agent in the customer 
confirmation statement pursuant to Exchange Act Rule 10b-10, which a retail customer 
generally receives after the trade is completed. 



530 

 

in which their broker-dealer is acting when a recommendation is made, which may help the retail 

customer better evaluate the advice they receive.  For instance, the cost to the retail customer of 

acting on such advice will typically depend on whether the advice is tied to the retail customer’s 

brokerage or advisory account.  In addition, understanding the capacity in which a financial 

professional is acting may provide the retail customer with context for, and facilitate review of, 

other relevant disclosures by the broker-dealer. Knowing that she is receiving advice from a 

broker-dealer, or an associated person of a broker-dealer, may focus the retail customer’s 

attention on any potential conflicts of interest specifically associated with receiving a 

recommendation from a broker-dealer.  For example, a disclosure that a firm is acting in the 

capacity of a broker-dealer may encourage a retail customer to seek additional information about 

commissions, which could give the firm or its financial professional an incentive to recommend 

transactions that may be inconsistent with the client’s most efficient investment strategy, such as 

a buy-and-hold strategy.   

While the capacity disclosure requirement and the disclosures investors will receive in 

Form CRS will increase the likelihood that retail customers understand the nature of their 

relationship with a broker-dealer or financial professional, and hence how this relationship might 

affect the recommendations retail customers receive, some investors may form beliefs about the 

nature of their relationship with a broker-dealer or financial professional based on their use of 

particular names and titles such as “adviser” or “advisor,” as well as how their services are 

marketed.  In cases where these terms are used by (i) a broker-dealer that is not also registered as 

an investment adviser, or (ii) a financial professional that is not also a supervised person of an 

investment adviser, some retail customers may not fully understand that their broker-dealer or 

financial professional is not acting in the capacity of an investment adviser, even though 



531 

 

investors receive some information about the capacity their broker-dealer or financial 

professional is acting in on Form CRS or other disclosures.1197 

To the extent that, despite the disclosures provided on Form CRS, the use of the titles 

“adviser” and “advisor” causes investor confusion about the nature of the relationship retail 

investors have, or will have, with a broker-dealer or financial professional, the presumption that 

the use of these titles by (i) a broker-dealer that is not also registered as an investment adviser, or 

(ii) a financial professional that is not also a supervised person of an investment adviser would 

violate the capacity disclosure requirement will potentially benefit investors in two ways.1198  

First, certain investors may seek an advisory relationship and would be better off receiving 

advice from an investment adviser.  In situations where confusion associated with titles might 

cause such an investor to mistakenly engage in a relationship with a broker-dealer or an 

associated person of a broker-dealer, the presumption should mitigate costs the investor might 

incur associated with receiving and, potentially, acting on recommendations from a broker-dealer, 

                                                                                                                                                             

 

1197  Investors may not fully understand this capacity disclosure because, for example, their 
financial professional is not a supervised person of an investment adviser but works for a 
dual-registrant, and they interpret Form CRS as suggesting the financial professional also 
provides both types of services.  Alternatively, even if an investor’s broker-dealer or 
financial professional solely offers services in a broker-dealer capacity, the use of the 
titles “adviser” or “advisor” may leave her confused about the nature of the services 
provided, despite the capacity disclosure on Form CRS.  See Relationship Summary 
Proposal at footnotes 411-412. 

1198  Several commenters generally ascribed benefits to restricting the usage of the terms 
“adviser” and “advisor.”  See supra footnotes 326-330. 



532 

 

as well as costs associated with correcting this mismatch by switching to an investment 

adviser.1199  Second, to the extent that, as a result of the use of the titles “advisor” or “adviser,” 

any confusion might remain about the capacity in which a broker-dealer or its associated person 

is acting, the presumption should alleviate that confusion and thus increase the likelihood that 

retail customers focus their attention on any potential conflicts of interest specifically associated 

with receiving a recommendation from a broker-dealer. Any benefits associated with the 

presumption will apply for current and potential retail customers of the approximately 100 

broker-dealers with retail customers that are not also investment advisers and use the terms 

“adviser” or “advisor” in their names, and for current and potential retail customers of the 

approximately 16% of all registered representatives that use these titles and are not dually 

registered.1200  These benefits will be limited to the extent that broker-dealers and their financial 

professionals choose other names or titles that may indicate that they provide advisory services 

or use marketing materials that hold them out as providing advisory services but do not trigger 

                                                                                                                                                             

 

1199  See Relationship Summary Proposal at footnote 674 for further discussion of the costs 
associated with a mismatch between an investor and their preferred type of investment 
advice provider.  

1200  Staff analysis found that 100 retail-facing broker-dealers as of December 2018 use either 
“adviser” or “advisor” in their firm names.  See Relationship Summary Proposal at 
footnote 685 for more discussion of the estimate that approximately 16% of all registered 
representatives use these titles and are not dually registered. 



533 

 

the presumption or preclude application of the solely incidental prong of the broker-dealer 

exception to the definition of investment adviser.1201 

As discussed above, under the baseline, broker-dealers may, in practice, already disclose 

information about the fees they charge, the type and scope of services they provide, and any 

conflicts of interest associated with their recommendations.1202  However, Regulation Best 

Interest’s explicit requirement that broker-dealers disclose all material facts related to the scope 

and terms of their relationship with a retail customer and all material facts relating to conflicts of 

interest that are associated with a recommendation may provide retail customers with useful 

information that they may not currently receive, enabling them to make more informed 

investment decisions.  The magnitude and nature of this benefit will depend on the extent to 

which a broker-dealer already discloses these material facts and how broker-dealers choose to 

disclose this information.  For example, if broker-dealers choose to disclose all material facts in 

one consolidated document, the disclosure may, depending on the facts and circumstances of the 

disclosure, be more informative to some retail customers than disclosures that are provided 

                                                                                                                                                             

 

1201  See supra footnotes 336-340. 
1202  These disclosures may stem from implicit or explicit requirements under federal 

securities laws.  For example, broker-dealers are explicitly required to disclose certain 
aspects of the fees their retail customers pay, directly and indirectly, under Exchange Act 
Rule 10b-10 (see, e.g., 913 Study at footnotes 256-259).  In other cases, courts have 
found that broker-dealers may implicitly be required to disclose conflicts of interest or 
other material facts related to the scope and terms of their relationship with retail 
customers (see, e.g., 913 Study at footnotes 249-255).  See also NASD Notice to 
Members 92-11. 



534 

 

across many documents. In other cases, layered disclosures may allow broker-dealers to target 

their disclosures to their particular retail customer base at the relevant point in time, increasing 

the likelihood that investors read these disclosures.1203 

While the Proposing Release’s Disclosure Obligation did not explicitly require a broker-

dealer to disclose particular types of material facts relating to the scope and terms of its 

relationship with a retail customer, Regulation Best Interest explicitly requires that these material 

facts include: (1) the capacity in which the broker-dealer is acting; (2) fees and costs; and (3) the 

type and scope of services provided, including material limitations on the securities or 

investment strategies that may be recommended.  We generally anticipate greater benefits under 

Regulation Best Interest than under the Proposing Release.  Specifically, to the extent that 

broker-dealers may not have disclosed the types of information we are requiring under 

Regulation Best Interest, Regulation Best Interest should increase the consistency of disclosure 

practices across broker-dealers, which may make it easier for investors to compare disclosures 

from and services offered by different broker-dealers or other firms.  In addition, if some broker-

dealers would not have disclosed the specific types of information required under Regulation 

Best Interest, and retail customers find that information useful, Regulation Best Interest may 

facilitate more informed decisions by retail customers when they are deciding whether or not to 

open an account or use a recommendation.  For example, disclosures about the scope and terms 
                                                                                                                                                             

 

1203  See the discussion of layered disclosure in supra Section II.C.1.c.  See also supra 
footnote 540 on the potential benefits of layered disclosure. 



535 

 

of services offered by a broker-dealer or about their fees and costs may facilitate more informed 

decisions by retail customers as to which type of account is appropriate for them and whether 

they should open an account with a given broker-dealer.  Alternatively, disclosures about 

conflicts of interest or fees and costs may facilitate more informed decisions by retail customers 

as to whether or not they should use a recommendation of a securities transaction or investment 

strategy. 

Regulation Best Interest also explicitly requires that disclosures be “full and fair,” and 

thus that a broker-dealer must provide sufficient information to enable a retail customer to make 

an informed decision with regard to a recommendation.1204  Broker-dealers may disclose, for 

example, certain conflicts of interest associated with their recommendations under the baseline.  

However, under existing federal securities laws and SRO rules, they are not expressly required to 

provide full and fair disclosure in the manner required under Regulation Best Interest.  As a 

result, existing disclosure practices may not be designed to specifically help retail customers 

make informed decisions about the recommendations they receive.  By explicitly requiring that 

broker-dealers provide sufficient information to enable retail investors to make an informed 

decision with regard to a recommendation, Regulation Best Interest imposes a minimum 

standard on disclosures that may increase the consistency of disclosure practices across broker-

dealers relative to the baseline.  This may also cause such disclosures to be more useful to retail 

                                                                                                                                                             

 

1204  See discussion at supra footnotes 463-469. 



536 

 

customers in evaluating the advice they receive, thereby enabling them to make more informed 

decisions about the recommendations they receive.  To the extent that disclosure obligations 

under the baseline already result in broker-dealers providing sufficient information to enable a 

retail customer to make an informed decision with regard to a recommendation, the magnitude of 

the benefits from this component of the Disclosure Obligation is likely to be correspondingly 

reduced.1205 

Regulation Best Interest’s Disclosure Obligation also establishes a standard for the form 

and timing of disclosures by requiring that they be made in writing prior to or at the time of a 

recommendation.  While broker-dealers may already disclose information on the fees they 

charge, the type and scope of services they provide, and any conflicts of interest associated with 

their recommendations under the baseline, federal securities laws and SRO rules may not 

explicitly specify the form and timing of such disclosures.  In cases where these requirements are 

explicit, they may not require delivery at or prior to a retail customer’s evaluation of the 

recommendations they receive and any corresponding investment decision.  In contrast, while 

broker-dealers will have some flexibility regarding the form and timing of their disclosures under 

Regulation Best Interest, retail customers will receive standardized disclosures about the fees and 

costs, as well as any conflicts of interest, associated with a recommendation prior to or at the 

time of receiving the recommendation.  The Disclosure Obligation should increase the 
                                                                                                                                                             

 

1205  See supra footnote 1191 for more on disclosure obligations and requirements under the 
baseline.  



537 

 

consistency of disclosure practices across broker-dealers and across different types of 

information relative to the baseline, thereby increasing the likelihood that retail customers have 

the information they need to make a more informed and efficient investment decision at the time 

they receive a recommendation.   

As noted above, we are permitting oral disclosure prior to or at the time of a 

recommendation and written disclosure after a recommendation has been made under the 

circumstances outlined in Section II.C.1, Oral Disclosure or Disclosure After a 

Recommendation.1206  Because oral disclosure is permitted in cases where written disclosure 

prior to or at the time of recommendation is not feasible or practical, investors may benefit by 

receiving information that otherwise may not have been available to them at the time they make 

an investment decision.  In contrast, because written disclosure is permitted in instances where 

existing regulations permit disclosure after a recommendation, the benefits associated with the 

form and timing of disclosures under Regulation Best Interest may be reduced if the information 

in such disclosures would have been useful to investors in making an investment decision.  

However, for both oral disclosure prior to or at the time of a recommendation and written 

disclosure after a recommendation has been made as permitted under the circumstances outlined 

in Section II.C.1, Oral Disclosure or Disclosure After a Recommendation, retail customers will 

still receive disclosures in writing prior to a recommendation regarding the circumstances under 

                                                                                                                                                             

 

1206  See supra footnote 1193. 



538 

 

which oral disclosure or disclosure after a recommendation will occur and the material facts that 

will be disclosed under these circumstances.1207 

Several commenters stated that there are limits to the effectiveness of disclosure and cited 

a number of studies suggesting that disclosure alone is unlikely to solve the issues surrounding, 

for example, the conflicts of interest between a broker-dealer or the associated person of a 

broker-dealer and a retail customer.1208  Another commenter cited the 2008 RAND Study, 

concluding that investors do not have the education or background to understand financial 

disclosures and do not read long, formulaic documents.1209  Other commenters claimed that 

numerous academic studies demonstrate that disclosing conflicts of interest does not adequately 

address the potential harm they cause to investors.1210  Another commenter provided studies 

showing that disclosure can encourage better behavior by broker-dealers, improving investor 

welfare.1211 

As discussed above, we acknowledge studies showing disclosure can vary in its 

effectiveness depending on the issue it is intended to address, its intended audience, and the 

                                                                                                                                                             

 

1207  See discussion following supra footnote 301. 
1208  See Morningstar Letter; EPI Letter; Better Markets August 2018 Letter; St. John’s U. 

Letter; Letter from Tom C.W. Lin, Professor of Law, Temple University Beasley School 
of Law (Jul. 11, 2018) (“Lin Letter”). 

1209  See Galvin Letter and discussion of 2008 RAND Study. 
1210  See State Treasurers Letter; Better Markets August 2018 Letter; PIABA Letter. 
1211  See Morningstar Letter. 



539 

 

format in which it is delivered.1212  To the extent some retail customers are not able to 

understand the information disclosed by a broker-dealer regarding the scope of services it 

provides and the conflicts of interest associated with the recommendations it makes, the benefits 

of the Disclosure Obligation will not directly affect those investors, and may not increase the 

efficiency of their investment decisions.  However, Regulation Best Interest is not limited to 

disclosure; rather, the Disclosure Obligation is just one component of Regulation Best Interest 

that as a whole will enhance the efficiency of recommendations that broker-dealers provide to 

retail customers, help retail customers evaluate the recommendations received, and improve 

retail customer protection when receiving recommendations from broker-dealers.  In particular, 

in addition to the Disclosure Obligation, both the Care Obligation and the Conflict of Interest 

Obligation, discussed below, are designed to promote more efficient investment decisions by 

imposing affirmative obligations on the broker-dealer that cannot be fulfilled through disclosure 

alone, regardless of whether the retail customer fully incorporates disclosed information into its 

investment decisions.   

Additionally, to the extent that the information disclosed by broker-dealers as a result of 

Regulation Best Interest increases the comparability of the securities and services offered by 

different broker-dealers, it may foster competition between broker-dealers that benefits even 

those retail customers who are not able to understand the information disclosed by broker-

                                                                                                                                                             

 

1212  See supra Section III.B.4.c. 



540 

 

dealers.1213  For example, if an increase in comparability promotes competition on the basis of 

recommendation quality, it may cause broker-dealers to mitigate or eliminate conflicts even in 

cases where the Conflict of Interest Obligation does not expressly require policies and 

procedures to mitigate or eliminate such conflicts.  Because the Disclosure Obligation provides 

broker-dealers with some flexibility as to the form and timing of their disclosures, the magnitude 

of this benefit will depend on the extent to which these disclosures are comparable across broker-

dealers or to which the disclosures made by one broker-dealer draw attention to practices at other 

broker-dealers that may not be in the best interest of retail customers. 

The magnitude of the Disclosure Obligation’s benefits will depend on a number of 

factors, including which facts about the scope and terms of their relationship with retail 

customers are material, the extent to which broker-dealers already disclose information in a 

manner that is consistent with the Disclosure Obligation under the baseline, the manner in which 

they choose to disclose this information, the extent to which retail customers understand such 

disclosures and would use them in making investment decisions, and the extent to which such 

disclosures would improve the efficiency of retail customers’ investment decisions, which varies 

with the specific circumstances of each retail customer.   

                                                                                                                                                             

 

1213  See Relationship Summary Adopting Release at footnote 1035 for similar discussion of 
the potential benefits comparability can have on competition.541 

 

b. Costs 

We expect broker-dealers and their financial professionals to incur costs as a result of 

Regulation Best Interest’s Disclosure Obligation, and retail customers may incur indirect costs as 

well. In this section, we analyze these costs in terms of how Regulation Best Interest changes 

disclosure requirements for broker-dealers relative to the baseline. 

The requirement that broker-dealers or their associated persons disclose the capacity in 

which they or their associated persons are acting prior to or at the time of making a 

recommendation may be fulfilled by delivering the Relationship Summary, depending on the 

facts and circumstances.1214  For example, a standalone broker-dealer may satisfy this 

requirement of the Disclosure Obligation by delivering the Relationship Summary to the retail 

customer, as required pursuant to Form CRS.  In contrast, for broker-dealers who are dually 

registered, and 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, delivering 

the Relationship Summary will not be sufficient to disclose the capacity in which they are acting.  

Thus, while standalone broker-dealers that deliver the Relationship Summary generally will not 

incur additional costs to comply with this requirement of the Disclosure Obligation, dual-

registrants will incur additional costs, which could include the creation of disclosure materials as 

well as policies and procedures to assist their associated persons in determining when they are 

                                                                                                                                                             

 

1214  See supra footnotes 320-321 and surrounding discussion. 



542 

 

acting in a broker-dealer capacity.  However, dual-registrants and their associated persons will 

have some flexibility with respect to the form, timing, or method of satisfying this requirement 

of the Disclosure Obligation when they or their associated persons make recommendations 

acting as brokers, dealers, or associated persons of a broker or dealer.1215 

The presumption that the use of the titles “adviser” and “advisor” would violate the 

capacity disclosure requirement may impose costs on certain broker-dealers and their financial 

professionals, investors, and other affected parties.  Broker-dealers and their associated persons 

currently using names and titles containing the terms “adviser” and “advisor” will incur direct 

costs, including those associated with changing firm names, written and/or electronic marketing 

materials, advertisements, and personal communication tools that use these titles, among other 

items, as well as any costs associated with voluntary outreach to customers to inform them of 

these changes.1216  While commenters did not provide specific estimates of these costs, they 

                                                                                                                                                             

 

1215  See supra footnote 306. 
1216  See e.g., HD Vest Letter (stating that “[t]he term ‘Advisor’ permeates nearly every HD 

Vest disclosure, representative agreement, selling agreement, client agreement, client 
communication, marketing piece, and website” and noting that broker-dealers would need 
to develop compliance policies to ensure oversight of the names and titles used by their 
financial professionals); LPL August 2018 Letter (stating that “legal entities with so-
called ‘doing business as’ (d/b/a) names containing the term ‘advisor’ or ‘adviser’—
through which many securities professionals operate their business practices—will be 
required to rename their businesses and incur significant costs and disruption in updating 
all marketing materials with the prior name.”); SIFMA August 2018 Letter; Morgan 
Stanley Letter. 



543 

 

described them as “very real costs,”1217 “significant costs and disruption,”1218 and “burdensome 

and costly.”1219  To the extent that a broker-dealer’s company name that includes “adviser” or 

“advisor” is recognized as a brand in the market and therefore represents a valuable intangible 

asset to the broker-dealer, the broker-dealer may also incur indirect costs if some of its “brand 

value” is lost following a company name change.1220  Additionally to the extent that investors 

who have a preference for receiving advice from a broker-dealer or an associated person of a 

broker-dealer search exclusively for such advice using the terms “adviser” or “advisor,” they 

may experience a reduction in the choice of service providers available to them (e.g., they might 

only find dual-registrants).1221  Finally, organizations that award credentials or certifications to 

broker-dealers and financial professionals that include the terms “adviser” or “advisor” may lose 

revenues associated with a reduction in future demand for these credentials and certifications, or 
                                                                                                                                                             

 

1217  See HD Vest Letter. 
1218  See LPL August 2018 Letter.  See also NAIFA Letter (noting the “significant costs to 

update all materials, marketing, signage, legally-required disclosure documents, etc.…”); 
SIFMA August 2018 Letter (noting the “significant costs and burdens” that would be 
involved with “[e]xtensive repapering.”).  

1219  See Morgan Stanley Letter.  

1220  Academic evidence suggest corporate brands are valuable intangible assets to firms.  See, 
e.g., Mary E. Barth et al., Brand Values and Capital Market Valuation, 3 REV. ACCT. 
STUD. 41 (1998).  

1221 The extent of this potential cost depends on how likely it is that investors rely on the titles 
“adviser” and “advisor” in finding a broker-dealer.  For example, one survey suggests 
that 40-50% of investors find their financial professionals through personal 
recommendations, not via searches for these titles (see supra footnote 946 and discussion 
in Relationship Summary Adopting Release at Section IV.B.2.a). 



544 

 

lose revenues associated with the maintenance of current credentials or certifications by 

awardees.1222  Relatedly, affected financial professionals may experience a loss associated with 

any value they currently derive from the use of these credentials or certifications.1223  Rather than 

incur any of the costs associated with changing names and titles discussed above, some broker-

dealers may choose to register as investment advisers if they determine it will be less costly, in 

which case these broker-dealers will incur any costs associated with dual registration.  The 

potential costs associated with the presumption apply for the approximately 100 broker-dealers, 

as of December 2018, with retail customers that are not also investment advisers and use either 

“adviser” or “advisor” in their firm names, and for the approximately 16% of all registered 

representatives that use these titles and might be affected by the presumption.1224 

The requirement that broker-dealers disclose material facts relating to the material fees 

and costs that apply to a retail customer’s transactions, holdings, and accounts may also be 

partially fulfilled by delivering the Relationship Summary.  Form CRS will require broker-

dealers to provide retail investors a high-level summary of principal fees and costs, including 

transaction-based fees, as well as a narrative discussion of other fees that retail investors will pay 

                                                                                                                                                             

 

1222  See IWI Letter (noting that “Title Restrictions, as proposed, have a potential to impact the 
long-term growth of two of the Institute’s registered marks.”).  This commenter did not 
provide specific data or estimates on the potential magnitude of this effect. 

1223  See NAIFA Letter.  This commenter did not provide specific data or estimates on the 
potential magnitude of this effect. 

1224  See supra footnote 1200. 



545 

 

directly or indirectly.  However, while providing such high-level summaries partially complies 

with the Disclosure Obligation, the Relationship Summary is unlikely to provide retail customers 

with all of the material facts about the fees and costs that apply to a particular 

recommendation.1225  As a result, Regulation Best Interest will impose costs on broker-dealers 

associated with assessing whether facts about the fees and costs that apply to a retail customer’s 

transactions, holdings, and accounts are material and delivering those material facts to retail 

customers.   

Broker-dealers will have some flexibility in how they comply with this requirement, 

which will allow them to tailor these disclosures to the needs of their retail customers and to 

implement them in a manner that is as cost efficient as possible, given their business models. In 

addition, the Disclosure Obligation may be satisfied by providing documents that broker-dealers 

are already required to produce or voluntarily produce under the baseline, such as prospectuses, 

in which case they may only incur costs associated with determining the timing and method by 

which they deliver these disclosures.1226  For example, under the baseline, broker-dealers may 

currently deliver prospectuses to retail customers after the completion of a transaction under the 

baseline, but would need to deliver them prior to or at the time of a recommendation under 

Regulation Best Interest, unless made under the circumstances outlined in Section II.C.1, Oral 

                                                                                                                                                             

 

1225  See the discussion following supra footnote 368. 
1226  See discussion at supra footnotes 495-496. 



546 

 

Disclosure or Disclosure After a Recommendation, allowing them to rely on delivery of 

information after the fact.  In cases where required disclosures are already produced under the 

baseline, broker-dealers and their associated persons may still incur costs associated with 

delivering these disclosures prior to or at the time of a recommendation if they are not delivered 

by that time under the baseline. 

Broker-dealers may also incur costs as a result of Regulation Best Interest’s requirement 

that they disclose material facts about the type and scope of services provided to a retail 

customer, including any material limitations on the securities or investment strategies involving 

securities that may be recommended to the retail customer.  As discussed above, some broker-

dealers may be able to fulfill their obligation to disclose these material facts, such as those 

related to account monitoring, account minimums, or material limitations on the securities or 

investment strategies that may be recommended, by complying with Form CRS or by using 

disclosures included in account opening agreements or other customer disclosures.1227  For these 

broker-dealers, this requirement of the Disclosure Obligation should not cause them to incur 

additional costs beyond an initial assessment of whether they can comply with the Disclosure 

Obligation using Form CRS or pre-existing disclosures.  In cases where a broker-dealer is not 

able to disclose all material facts relating to the type and scope of services they provide by 

complying with Form CRS or in combination with existing disclosures, broker-dealers will incur 

                                                                                                                                                             

 

1227  See supra footnote 1203. 



547 

 

costs associated with assessing which facts about the type and scope of services provided to 

retail customers are material and delivering written disclosure of those material facts to retail 

customers.  As discussed above, broker-dealers will have some flexibility in how they comply 

with this requirement, allowing them to tailor these disclosures to the needs of their retail 

customers and to their business models and to implement these disclosures in a cost efficient 

manner. 

While the Proposing Release’s Disclosure Obligation did not explicitly require broker-

dealers or their associated persons to disclose particular types of material facts relating to the 

scope and terms of their relationship with a retail customer, Regulation Best Interest explicitly 

requires that these material facts include the capacity in which the broker-dealer or its associated 

person is acting; material fees and costs; the type and scope of services provided, including 

material limitations on the securities or investment strategies that may be recommended; and all 

material facts relating to conflicts of interest that are associated with a recommendation.  To the 

extent that broker-dealers are not disclosing this information or are not disclosing it by the time 

of a recommendation, broker-dealers may incur higher costs associated with disclosing these 

material facts under Regulation Best Interest compared to the baseline. 

In general, for any material facts relating to the scope and terms of its relationship with 

retail customers, a broker-dealer may have to determine how to disclose those facts in a manner 

that is “full and fair,” as required by Regulation Best Interest, which will cause it to incur costs.  

Similarly, the requirement that broker-dealers disclose all material facts in writing prior to or at 

the time of a recommendation may also impose costs on broker-dealers.  For example, even if a 

broker-dealer currently discloses some information about its fees under the baseline, it may not 

currently disclose that information prior to the time of a recommendation, and may incur costs 



548 

 

updating systems and processes to ensure the information is disclosed in a manner that complies 

with Regulation Best Interest’s requirements, including any costs associated with delivery of the 

information to retail customers.  

Broker-dealers may incur costs associated with the full and fair disclosure of all material 

facts relating to conflicts of interest that are associated with a recommendation.  As discussed 

below in our analysis of the Conflict of Interest Obligation, broker-dealers currently have 

obligations to disclose certain material conflicts of interest under the baseline.1228  To the extent 

that broker-dealers will be required to disclose material facts about conflicts of interest that they 

do not currently disclose to retail customers under the baseline, broker-dealers will incur costs 

associated with assessing whether facts about these conflicts are material and delivering those 

facts to retail customers.  They also may incur costs associated with identifying particular 

conflicts of interest to disclose.1229 

As discussed above, there are circumstances where broker-dealers and their associated 

persons may make oral disclosures or written disclosures after the time of a recommendation 

under the circumstances outlined in Section II.C.1, Oral Disclosure or Disclosure After a 

Recommendation.  Where oral disclosures are made, broker-dealers and their associated persons 

may incur costs associated with subsequently documenting such disclosures.  These costs may 

                                                                                                                                                             

 

1228  See infra footnote 1261.  See also supra footnotes 985-988. 
1229  See infra Section III.C.4 for a discussion of costs associated with identifying conflicts of 

interest as part of the Conflict of Interest Obligation. 



549 

 

include the time spent documenting such disclosures, the development of systems and processes 

necessary to document such disclosures, training associated persons to use these systems and 

processes, and supervising the compliance by associated persons with this obligation.  For both 

oral disclosures and written disclosures made after a recommendation, broker-dealers and their 

associated persons may incur costs associated with developing initial disclosures about the 

material facts subject to oral disclosures and written disclosures after a recommendation, the 

circumstances under which such disclosures will be made, as well as costs associated with 

training financial professionals to make such disclosures in a manner that complies with 

Regulation Best Interest. 

While most of the costs associated with preparing and delivering disclosures are likely to 

be incurred by broker-dealers, their associated persons may incur costs as well.  For example, 

when a financial professional is aware that the broker-dealer’s disclosure is insufficient to 

describe “all material facts,” the associated person must supplement that disclosure, and may 

incur costs in developing such disclosure on their own to ensure they are in compliance with the 

Disclosure Obligation.1230  The magnitude of this cost will depend on the extent to which the 

financial professional cannot rely on the disclosure made by the broker-dealer.   

                                                                                                                                                             

 

1230  See discussion following supra footnote 307 for an example of a case where an 
associated person of a broker-dealer may be required to provide her own disclosures in 
order to comply with the Disclosure Obligation. 



550 

 

As discussed above, while we are unable to quantify the full costs of Regulation Best 

Interest, including the Disclosure Obligation, we are able to estimate some of the costs associated 

with the Disclosure Obligation, specifically the costs related to information collection 

requirements as defined by the Paperwork Reduction Act.  As discussed further below in Section 

IV.B.1, the Commission estimates that the preparation and delivery of standardized language, fee 

schedules, and standardized conflict disclosures that broker-dealers are required to provide to 

retail customers to comply with the Disclosure Obligation will impose on broker-dealers an 

initial aggregate burden of 6,216,125 hours and an additional initial aggregate cost of $42.84 

million as well as an ongoing aggregate burden of 2,101,493 hours.1231 Thus, the Disclosure 

                                                                                                                                                             

 

1231  The estimate of the initial aggregate burden is based on the following calculation: 5,630 
hours + 7,560 hours + 40,200 hours + 2,040,000 hours + 3,780 hours + 20,100 hours + 
2,040,000 hours + 3,780 hours + 15,075 hours + 2,040,000 hours = 6,216,125 hours. As 
discussed in more detail in infra Section IV.B.1, 5,630, 7,560, and 40,200 hours are 
estimates of the initial aggregate burden for the preparation of disclosure of capacity, 
type, and scope, for dual-registrants and small and large broker-dealers, respectively. 
2,040,000 hours is the estimate of the initial aggregate burden for the delivery of the 
disclosure of capacity, type, and scope to retail customers. 3,780 and 20,100 hours are 
estimates of the initial aggregate burden for the preparation of disclosure of fees for small 
and large broker-dealers, respectively. 2,040,000 hours is the estimate of the initial 
aggregate burden for the delivery of the disclosure of fees to retail customers. 3,780 and 
15,075 hours are estimates of the initial aggregate burden for the preparation of 
disclosure of material conflicts of interest for small and large broker-dealers, 
respectively. 2,040,000 hours is the estimate of the initial aggregate burden for the 
delivery of the disclosure of material conflicts of interest to retail customers. The estimate 
of the initial aggregate cost is based on the following calculation: $2.80 million + $3.80 
million + $15.00 million + $1.88 million + $9.99 million + $1.88 million + $7.49 million 
= $42.84 million. As discussed in more detail in supra Section V.D, $2.80 million, $3.80 
million, and $15.00 million are estimates of the initial aggregate cost for the preparation 

 

 



551 

 

Obligation will impose an estimated initial aggregate cost of at least $1,508.88 million and an 

ongoing aggregate annual cost of at least $499.59 million on broker-dealers.1232  We note that 

these estimates assume broker-dealers are not currently producing and delivering documents 

                                                                                                                                                             

 

of disclosure of capacity, type, and scope, for dual-registrants and small and large broker-
dealers, respectively. $1.88 million and $9.99 million are estimates of the initial 
aggregate cost for the preparation of disclosure of fees for small and large broker-dealers, 
respectively. $1.88 million and $7.49 million are estimates of the initial aggregate cost 
for the preparation of disclosure of material conflicts of interest for small and large 
broker-dealers, respectively. The estimate of the ongoing aggregate burden is based on 
the following calculation: 3,941 hours + 3,024 hours + 40,200 hours + 408,000 hours + 
1,512 hours + 8,040 hours + 816,000 hours + 756 hours + 4,020 hours + 816,000 hours = 
2,101,493 hours. As discussed in more detail in supra Section V.D, 3,941, 3,024, and 
40,200 hours are estimates of the ongoing aggregate burden for the preparation of 
disclosure of capacity, type, and scope, for dual-registrants and small and large broker-
dealers, respectively. 408,000 hours is the estimate of the ongoing aggregate burden for 
the delivery of the disclosure of capacity, type, and scope to retail customers. 1,512 and 
8,040 hours are estimates of the ongoing aggregate burden for the preparation of 
disclosure of fees for small and large broker-dealers, respectively. 816,000 hours is the 
estimate of the ongoing aggregate burden for the delivery of the disclosure of fees to 
retail customers. 756 and 4,020 hours are estimates of the ongoing aggregate burden for 
the preparation of disclosure of material conflicts of interest for small and large broker-
dealers, respectively. 816,000 hours is the estimate of the ongoing aggregate burden for 
the delivery of the disclosure of material conflicts of interest to retail customers.  

1232  These estimates are calculated as follows: (96,125 hours of in-house legal counsel) x 
($415.72/hour for in-house counsel) + (6,120,000 hours for delivery for each customer 
account) x ($233.02/hour for registered representative)  + (90,763 hours for outside legal 
counsel) x ($497/hour for outside legal counsel) = $1,508.88 million, and (35,056 hours 
of in-house legal counsel) x ($415.72/hour for in-house counsel) + (2,040,000 hours for 
delivery for each customer account) x ($233.02/hour for registered representative)  + 
(26,437 hours for in-house compliance counsel) x ($365.39/hour for outside legal 
counsel) = $499.59 million. The hourly wages for in-house legal and compliance counsel 
and registered representatives are obtained from SIFMA. The hourly rates for outside 
legal counsel are discussed in supra Section V.D.  



552 

 

associated with the Disclosure Obligation.  To the extent that broker-dealers are already doing so, 

these estimates may overstate the costs associated with the information collection requirements 

as defined by the Paperwork Reduction Act. 

Several commenters stated that we underestimated the compliance costs of Regulation 

Best Interest in the Proposing Release, particularly with respect to the potential transaction-based 

nature of the Disclosure Obligation and the resultant record-making and recordkeeping 

requirements.1233  One commenter stated that if the Disclosure Obligation is a transaction-based 

requirement, its costs were significantly underestimated in the Proposing Release, citing an 

estimate that an earlier proposal of a point-of-sale disclosure requirement would cost between $1 

million and $1.2 million per firm.1234  We first note that, given that there are approximately 

2,766 broker-dealers with retail-facing operations, the commenter’s cited estimate implies initial 

costs of approximately $1.4 billion and ongoing costs of approximately $1.4 billion,1235 so the 

commenter’s implied estimate of $1.4 billion in initial costs associated with the Disclosure 
                                                                                                                                                             

 

1233  See Schwab Letter; ICI Letter; Angel Letter; Vanguard Letter; LPL August 2018 Letter; 
NSCP Letter. 

1234  See Schwab Letter, citing April 12, 2004 comment letter from George Kramer of the 
Securities Industry Association (“SIA”).  This estimate is based on a point-of-sale 
disclosure requirement in proposed rule 15c2-3, for which SIA estimated that 
implementation costs would be in the order of $500,000 per firm, as would annual costs 
associated with maintaining and updated necessary systems and procedures.  See also 
SIFMA August 2018 Letter at footnote 38 referencing the same estimate. 

1235  These estimates are calculated as follows: (2766 retail-facing broker-dealers) x ($500,000 
per firm in initial costs) = $1.383 billion.  Implied ongoing costs are calculated the same 
way. 



553 

 

Obligation is consistent with our estimate of initial costs above.1236 Second, we note that, as 

discussed in more detail above in Section II.C.1.d, the Disclosure Obligation only requires that 

certain disclosures be made prior to or at the time of a recommendation, and broker-dealers may 

use standardized disclosures at an earlier point than the time of a recommendation to the extent 

such disclosures satisfy the Disclosure Obligation.  In this regard, while the commenter’s 

estimate may be indicative for some firms, the cost per firm will vary widely depending on the 

scope and business model of each broker-dealer.  Because Regulation Best Interest provides 

broker-dealers with some flexibility regarding both the form and timing of the Disclosure 

Obligation, its costs are likely to be lower than a pure point-of-sale requirement.1237   

Beyond the estimates provided above for that are derived from estimates developed for 

purposes of the Paperwork Reduction Act in Section IV.B.1, the Commission is unable to fully 

quantify the costs of the Disclosure Obligation because the magnitude of these costs depend on 

firm-specific factors that are inherently difficult to quantify given the principles-based nature of 

Regulation Best Interest.1238  These factors include the extent to which current disclosure 

practices under the baseline are different from the requirements of the Disclosure Obligation, the 

manner in which broker-dealers choose to comply with the Disclosure Obligation given the 
                                                                                                                                                             

 

1236  See supra footnote 1232. 
1237  See supra footnotes 531-533 for a discussion of layered disclosure and footnotes 541-542 

for a discussion of the Disclosure Obligation’s requirements with respect to timing of 
disclosures. 

1238  See supra Section III.C.1. 



554 

 

flexibility it provides, how broker-dealers assess whether facts relating to the scope and terms of 

their relationship with a retail customer are material, how they determine whether their 

disclosure of such material facts is full and fair, or the extent to which they will satisfy the 

Disclosure Obligation’s requirements by delivering the Relationship Summary or pre-existing 

documents. 

3. Care Obligation 

Under the baseline, broker-dealers are subject to suitability obligations and requirements 

under the anti-fraud provisions of the federal securities laws and the Suitability Rule when 

making recommendations to retail customers.  The Care Obligation incorporates and adds to 

existing suitability requirements applicable to broker-dealers, thereby reducing the incidence of 

inefficient recommendations to retail customers. 

FINRA rules require broker-dealers making recommendations to have, based on a 

particular customer’s investment profile, a reasonable basis to believe that the recommendation 

is suitable for that customer.  In addition, FINRA guidance and Commission opinions interpret 

suitability as prohibiting a broker-dealer from placing its interests ahead of the customer’s 

interest and requiring the recommendations to be consistent with the customer’s best interest.1239  

However, this obligation is not explicitly required by FINRA’s rule (or its supplementary 

material).  Under the baseline, a recommendation by a broker-dealer or its associated persons 

                                                                                                                                                             

 

1239  See supra footnote 570 and 913 Study at footnote 270. 



555 

 

may be consistent with a retail customer’s best interest but broker-dealers and their associated 

persons are not required to make recommendations in the best interest of these customers, as will 

be required under Regulation Best Interest.  Relative to the baseline, the Care Obligation will 

change how broker-dealers and their associated persons make recommendations to retail 

customers in several ways, some of which differ from the Proposing Release. 

First, the Care Obligation explicitly includes cost as a factor for consideration when 

determining whether a recommendation is in a retail customer’s best interest.  In contrast, the 

Proposing Release emphasized cost as an important factor to consider and stated that broker-

dealers may be required to consider cost as a factor when making recommendations, but did not  

explicitly require its consideration when making a recommendation.1240  In addition, we clarify 

above in Section II.C.2 that, when determining whether a recommendation is in a retail 

customer’s best interest with respect to cost or other relevant factors, broker-dealers and their 

associated persons should consider reasonably available alternatives.  Conversely, under FINRA 

suitability obligations, broker-dealers and their associated persons are not required to consider 

reasonably available alternatives when determining whether a recommendation is suitable for a 

retail customer.1241  

                                                                                                                                                             

 

1240  See supra footnote 572 and preceding text. 
1241  See id. 



556 

 

Second, under the baseline, FINRA rules require that a broker-dealer or associated person 

who has actual or de facto control over a customer’s account must have a reasonable basis for 

believing that a series of recommended transactions, even if suitable when viewed in isolation, is 

not excessive and unsuitable for the customer when taken together in light of the customer’s 

investment profile.  In contrast, the Care Obligation requires that a broker-dealer or its associated 

person has a reasonable basis to believe that a series of recommended transactions is not 

excessive and is in that retail customer’s best interest.  This is the case at all times—when the 

broker-dealer or associated person has actual or de facto control over a customer’s account as 

well as when no control exists (whether actual or de facto).   

Finally, FINRA’s suitability standard applies to recommendations of rollover decisions 

that involve securities transactions, but not necessarily in the absence of a securities 

transaction.1242  In addition, FINRA’s suitability standard does not explicitly apply to 

recommendations of account types and implicit hold recommendations resulting from agreed 

upon account monitoring.1243  In contrast, Regulation Best Interest explicitly applies to account 

recommendations as an “investment strategy involving securities,” including recommendations 

of securities account types, as well as rollovers or transfers of assets from one account to another.  

In addition, under Regulation Best Interest, implicit hold recommendations resulting from agreed 

                                                                                                                                                             

 

1242  See FINRA Regulatory Notice 13-45 and supra footnote 172. 
1243  See supra footnote 170. 



557 

 

upon account monitoring constitute recommendations of “any securities transaction or 

investment strategy involving securities,” and are therefore within the scope of Regulation Best 

Interest.  Moreover, recommendations to open an IRA or to roll over assets into an IRA are 

subject to Regulation Best Interest, including the Care Obligation, thereby requiring a broker-

dealer or its associated persons 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, 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 retail customer’s 

existing 401(k) or other retirement account.  We focus our discussion of both the benefits and 

costs of the Care Obligation under Regulation Best Interest on these changes relative to the 

baseline.  

Regulation Best Interest’s Care Obligation differs from the Proposing Release’s Care 

Obligation in two ways that respond to commenter concerns but that we do not expect to have 

significant economic effects.1244  First, the general best interest standard of conduct from the 

Proposing Release is incorporated into Regulation Best Interest’s Care Obligation, which, as 

adopted, also requires that a broker-dealer or its associated persons have a reasonable basis to 

believe that a recommendation, or series of recommendations, does not place the financial or 

other interest of the broker-dealer or its associated persons ahead of the interest of the particular 

                                                                                                                                                             

 

1244  See discussion at supra footnotes 147, 606, and 577-584. 



558 

 

retail customer.  Broker-dealers and their associated persons can comply with Regulation Best 

Interest as a whole by complying with its four component obligations, which now explicitly 

include the Proposing Release’s general best interest standard in elements of the Care Obligation.  

This change to the Care Obligation, as compared to the Proposing Release, is intended 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 interest; however, we do not believe there will be significant economic effects 

associated with this change from the Proposing Release.1245  Second, Regulation Best Interest, as 

adopted, does not explicitly require broker-dealers or their associated persons to exercise 

“prudence” in making recommendations.  Instead they must exercise reasonable diligence, care, 

and skill in making such recommendations.  While we removed the term “prudence” to address 

commenter concerns that it might create legal confusion and uncertainty, this does not change 

the requirements or obligations under the Care Obligation as compared to the Proposing 

Release.1246  Therefore, we do not expect this change to have a significant economic effect, as 

compared to the Proposing Release. 

                                                                                                                                                             

 

1245  If anything, to the extent that broker-dealers or their associated persons might have 
misunderstood the Proposing Release with respect to their obligation to provide 
recommendations that are in the best interest of retail customers, Regulation Best Interest, 
as adopted, emphasizes the importance of determining that each recommendation is in the 
best interest of the retail customer will benefit retail customers. 

1246  See supra footnotes 579-585 and surrounding discussion. 



559 

 

a. Benefits 

As described in the Proposing Release, the Care Obligation did not explicitly require 

broker-dealers and their associated persons to consider the costs associated with a 

recommendation when determining whether it was in a retail customer’s best interest, though the 

Proposing Release discussed cost as a relevant factor in making this determination, and noted 

that broker-dealers might be required to consider cost as a factor when making recommendations 

under the baseline.1247  The Care Obligation under Regulation Best Interest includes an explicit 

requirement to consider the cost of a recommendation.  If this causes broker-dealers and their 

associated persons to more carefully consider cost in relation to other factors, compared to the 

baseline, it should reduce the incidence of recommendations of higher cost investments from a 

set of reasonably available alternatives that achieve the retail customer’s objective.  If the 

explicit requirement to consider the cost of a recommendation encourages broker-dealers and 

their associated persons to more carefully consider cost, compared to the baseline, the final rule 

makes it less likely that a broker-dealer or its associated persons could have a reasonable basis to 

believe such investments are in the retail customer’s best interest because it would be difficult to 

have such a belief for investments that are identical beyond their costs.  Therefore, including cost 

                                                                                                                                                             

 

1247  See supra footnote 572. 



560 

 

as a required factor in Regulation Best Interest should enhance the efficiency of 

recommendations to retail customers relative to the baseline.1248   

As discussed above, while a “quantitative suitability” requirement applies to series of 

recommended transactions under the baseline, it only applies in cases where a broker-dealer has 

“control” over a customer account.  Relative to the baseline, broker-dealers and their associated 

persons will be required to have a reasonable basis to believe that any series of recommended 

transactions is in the retail customer’s best interest, not just series of recommended transactions 

that occur in an account they control.  This change relative to the baseline should enhance 

investor protection by reducing the incidence of cases where a broker-dealer or its associated 

persons recommend an excessively high rate of portfolio turnover, or “churn,” for accounts that 

they do not control.  In addition, the discussion above regarding the potential benefits from the 

increased standard of conduct required by the Care Obligation in the context of individual 

recommendations also applies to series of recommended transactions.  Enhancing the standard of 

conduct that applies to series of recommended transactions and reducing the incidence of 

recommendations that result in excess portfolio turnover should result in more efficient 

recommendations, benefiting retail customers.  We are unable to specifically quantify these 

potential benefits because, in addition to the reasons cited above, we do not have and cannot 

reasonably obtain comprehensive data on how often broker-dealers, for accounts they do not 

                                                                                                                                                             

 

1248  See discussion surrounding supra footnotes 563-565.561 

 

control, recommend series of transactions that result in excessive portfolio turnover and are 

therefore not in the best interest of their retail customers.    

Regulation Best Interest applies to account recommendations, including 

recommendations to open an IRA or to participate in an IRA rollover.  Accordingly, these types 

of recommendations are subject to the Care Obligation (as well as the other components of 

Regulation Best Interest).  Several commenters highlighted the heightened risk of harm 

associated with IRA and IRA rollover recommendations because the amount of assets associated 

with such recommendations can be a significant portion of a retail customer’s net worth, and one 

commenter cited academic and industry studies that identify activities that are particularly prone 

to conflicts of interest, including IRA rollovers.1249  We acknowledge the heightened effect that 

recommendations to open an IRA or to participate in an IRA rollover can have on the financial 

well-being of retail customers.1250  While FINRA’s suitability standard under the baseline 

applies to rollover recommendations involving securities transactions, the suitability standard 

does not necessarily apply to a rollover recommendation if that recommendation does not 

involve a securities transaction.1251  To the extent that broker-dealers and their associated persons 

currently make recommendations to open an IRA or to participate in an IRA rollover that do not 

                                                                                                                                                             

 

1249  See CFA August 2018 Letter; AARP August 2018 Letter; Morningstar Letter; CFA 
Institute Letter. 

1250  See supra footnotes 191-192.  See also Fiduciary Benchmarks Letter. 
1251  See supra footnote 1242. 



562 

 

involve securities transactions under the baseline, Regulation Best Interest should result in IRA 

and IRA rollover recommendations to retail customers that are more efficient because they will 

be in the retail customer’s best interest regardless of whether or not they involve securities 

transactions.  

Regulation Best Interest also applies to other account type recommendations.  Broker-

dealers may offer different types of brokerage accounts that include different levels of services 

and costs.  The choice of account type can have a significant effect on the financial wellbeing of 

a retail customer.  For example, a recommendation to open an advisory over a brokerage account, 

or vice versa, can have a substantial long-term effect on a retail customer’s assets.  This effect 

may depend on the costs the retail customer incurs through the particular account as well as the 

retail customer’s investment profile.1252  Regulation Best Interest should result in 

recommendations regarding account type that are in the best interest of the retail customer, 

particularly with respect to cost, increasing the efficiency of the account type recommendations 

retail customers receive relative to the baseline. 

Finally, by clarifying that implicit hold recommendations resulting from agreed-upon 

account monitoring services constitute recommendations of “any securities transaction or 

investment strategy involving securities,” the Care Obligation will apply at the point in time at 

which their broker-dealer or associated person performs the agreed-upon monitoring, regardless 

                                                                                                                                                             

 

1252  See supra footnote 191. 



563 

 

of whether the broker-dealer or an associated person communicates any recommendation.  This 

should increase the efficiency of the implicit hold recommendations retail customers receive 

relative to the baseline. 

b. Costs 

We expect broker-dealers and their associated persons to incur costs as a result of the 

Care Obligation, and, to the extent broker-dealers pass these costs on to retail customers, these 

customers may incur costs as well.  In this section, we analyze these costs in terms of how 

Regulation Best Interest, as adopted, changes the required standard of care broker-dealers owe 

their retail customers relative to the baseline.  We also highlight any changes in our assessment 

of these costs as compared to the Proposing Release.  We discuss the costs of complying with the 

Care Obligation, such as those associated with training employees or developing policies and 

procedures, in Section III.C.5.    

To comply with the Care Obligation, some broker-dealers may stop offering certain 

securities to retail customers, or their associated persons may stop recommending certain 

securities to retail customers.  These decisions may be based on determinations that offering or 

recommending those securities typically would not satisfy the Care Obligation.  To the extent 

that they earn revenue from offering and recommending such securities, broker-dealers and their 

associated persons may incur costs associated with the determination to cease offering or 

recommending these products.   



564 

 

Commenters stated that our analysis should not consider lost revenue as a cost of 

complying with Regulation Best Interest, except to the extent that the lost revenue is passed on to 

investors in the form of higher fees, because these types of costs are a direct result of policies 

that make investors better off.1253  As discussed above, our economic analysis must consider the 

costs Regulation Best Interest may impose on all affected parties, including broker-dealers.  

However, we believe that any loss of revenues associated with recommendations that would not 

satisfy the Care Obligation is compensated by the corresponding benefit to retail customers—

namely the provision of more efficient recommendations by their financial professionals.1254  In 

addition, even if broker-dealers or their associated persons have a reasonable basis to believe that 

a certain investment could be in the best interest of some retail customers, they may forgo 

offering or recommending the investment if, for example, they think that it may increase their 

exposure to regulatory enforcement risk over their compliance with Regulation Best Interest.1255  

This could result in costs to both the broker-dealer and any retail customers for whom the 

investment would be an efficient investment choice.  

Because the Care Obligation holds broker-dealers and their associated persons to an 

enhanced standard of conduct, they may incur costs associated with increased legal exposure if, 

for example, Regulation Best Interest results in increased retail customer arbitrations or litigation.  
                                                                                                                                                             

 

1253  See supra footnote 1164. 
1254  See supra Section III.A.2 for a more detailed discussion of efficient recommendations. 
1255  See, e.g., Iowa Insurance Commissioner Letter. 



565 

 

For example, one commenter stated that the lack of clarity in how to weight various factors 

associated with the potential risks and rewards of a recommendation could lead to arbitrary 

claims regarding other alternative recommendations that, ex-post, would have performed 

better.1256  Similarly, because the Care Obligation also requires that a series of recommended 

transactions be in the best interest of a retail customer, regardless of whether a broker-dealer or 

an associated person controls the retail customer’s account, a broker-dealer could incur the same 

types of costs associated with increased arbitration or litigation risk relative to the baseline.  We 

cannot anticipate the extent to which Regulation Best Interest will increase retail customer 

claims, but many retail customer arbitrations are already predicated in whole or in part on facts 

alleging that a broker-dealer breached a fiduciary duty or its suitability obligations.  Additionally, 

the clarity in the rule text and this release regarding the Care Obligation, as well as the other 

aspects of Regulation Best Interest that bring enhanced conduct and clarity (e.g., the policies and 

procedures requirement and that Regulation Best Interest applies only at the time a 

recommendation is made) should mitigate against an increase in the likelihood and cost of such 

claims.  

The Care Obligation explicitly requires that cost be considered as a factor when 

determining whether a recommendation is in the best interest of a retail customer.  Several 

commenters stated that the Proposing Release’s guidance emphasizing cost as a specific factor in 

                                                                                                                                                             

 

1256  See CCMC Letters. 



566 

 

the Care Obligation could create uncertainty around how the cost of a recommendation should be 

weighed with other factors.1257  As discussed above, the inclusion of cost as a factor in the Care 

Obligation does not require that the “least expensive” recommendation be made by a broker-

dealer or its associated person; cost is one factor, but not the only relevant factor.  Nonetheless, 

to the extent that the inclusion of cost as a factor in the Care Obligation increases the arbitration 

or litigation risk to which broker-dealers or their associated persons are exposed, this change 

could impose additional costs on broker-dealers.  

Regulation Best Interest also expressly applies to account recommendations, including 

recommendations of securities account types, as well as rollovers or transfers of assets from one 

account to another. We also clarify above that implicit hold recommendations resulting from 

agreed-upon account monitoring are within the scope of Regulation Best Interest and are 

therefore subject to the Care Obligation.  Should they choose to discontinue offering certain 

services, as a result of Regulation Best Interest, broker-dealers could lose revenue associated 

with making recommendations for account types (including IRAs).  They may also decide to 

cease offering monitoring services on retail customer accounts.  However, as we discussed above 

with respect to recommendations more generally, we believe that any loss of revenues associated 

with recommendations that would not satisfy the Care Obligation is compensated by the 

                                                                                                                                                             

 

1257  See ICI Letter; CCMC Letters; LPL August 2018 Letter. 



567 

 

corresponding benefits to retail customers associated with more efficient account 

recommendations. 

The Commission is unable to fully quantify the costs that the Care Obligation will impose 

on broker-dealers, their associated persons, or their retail customers because the magnitude of 

these costs depends on firm-specific factors that are inherently difficult to quantify given the 

principles-based nature of Regulation Best Interest.1258  These factors include the extent to which 

broker-dealers and their associated persons currently engage in practices under the baseline that 

would satisfy the Care Obligation, either of their own volition or as a result of complying with 

other regulations; the extent to which broker-dealers and their associated persons will cease 

recommending certain securities or investment strategies; the likelihood that retail customers file 

more arbitration or litigation claims; and the extent to which broker-dealers pass on any cost 

increases to their retail customers.1259 

4. Conflict of Interest Obligation 

The Conflict of Interest Obligation under Regulation Best Interest is intended to reduce 

the agency costs that arise when a broker-dealer and its associated persons provide a 

recommendation to a retail customer by addressing the effect of the associated person’s or 

broker-dealer’s conflicts of interest on the recommendation.  

                                                                                                                                                             

 

1258  See also supra Section III.C.1.a.  
1259  See discussion following infra footnote 1330 for discussion of factors affecting whether 

broker-dealers pass on costs to their retail customers and the resultant competitive effects. 



568 

 

The Conflict of Interest Obligation would require that broker-dealers establish, maintain, 

and enforce written policies and procedures that are reasonably designed to address the effect of 

the broker-dealer’s and the associated persons’ conflicts of interest on a recommendation. At a 

minimum, a broker-dealer is required to address the effect of conflicts of interest on a 

recommendation.  At a minimum, a broker-dealer is required to address the effect of an 

identified conflict on a recommendation by disclosing the material facts associated with that 

conflict and by disclosing material limitations of the menu of securities when the conflict stems 

from such limitations.  In certain cases, a broker-dealer is required to address the effect of an 

identified conflict by either mitigating the conflict, or, in certain cases, by eliminating certain 

sales practices.  

The Conflict of Interest Obligation is intended to reduce the information asymmetry 

between a retail customer and a broker-dealer and its associated persons with respect to the 

broker-dealer’s conflicts of interest or those of its associated persons that may have an effect on 

the recommendations provided to the retail customer. This disclosure may help the retail 

customer form a better assessment of the efficiency of the recommendation received.  Moreover, 

reducing this information asymmetry may discourage broker-dealers from acting on incentives 

that differ from retail customer objectives. 

Similarly, by addressing the effect of certain conflicts of interest through mitigation, the 

Conflict of Interest Obligation is intended to reduce the effect incentives created by those 

conflicts may have on a recommendation provided to the retail customer. Depending on how 

effective the mitigation method is in reducing these incentives, the efficiency of the 

recommendation provided to the retail customer may increase.  



569 

 

Similarly, by addressing the effect of certain conflicts of interest through elimination, the 

Conflict of Interest Obligation is intended to neutralize the effect of incentives created by those 

conflicts may have on a recommendation provided to the retail customer.  In this case, the 

efficiency of the recommendations provided to the retail customer may increase. 

 The conflicts of interest that the broker-dealer or its associated persons have, and the 

incentives that these conflicts create, arise from, among other things, the manner in which 

broker-dealers generate revenue and the manner in which broker-dealers compensate their 

associated persons with respect to their dealings with retail customers. 

The compensation arrangement between a broker-dealer and its associated persons may 

reflect the amount of revenues that the associated persons generate for the broker-dealer from 

activities performed, including providing recommendations to retail customers. Such 

arrangements between the broker-dealer and its associated persons may create incentives for the 

associated person to take actions consistent with maximizing the broker-dealer’s objectives (e.g., 

expected profits). For instance, if an associated person’s compensation from providing 

recommendations to retail customers is tied to the amount of revenues that the associated person 

generates for the broker-dealer, the associated person may have an incentive to recommend 

securities or investment strategies that would bring more revenue to the broker-dealer, relative to 

other comparable securities or investment strategies. Furthermore, even if the compensation 

arrangement does not create an explicit incentive for the associated person, the broker-dealer 

may direct the attention of the associated person to certain securities. For instance, even if the 

revenues that the broker-dealer receives when its associated persons provide recommendations to 

retail customers are not passed on to the associated persons, the broker-dealer’s receipt of 



570 

 

compensation from some securities or their sponsors may lead the broker-dealer to emphasize to 

its associated persons the securities that are the source of such compensation.  

The revenues that a broker-dealer receives when a retail customer acts on an investment 

recommendation may depend on the broker-dealer’s compensation arrangement with the product 

sponsor. The broker-dealer may receive different compensation from different product sponsors 

for distributing comparable securities or investment strategies. If the objectives of the broker-

dealer are tied to the amount of revenues it receives from recommended securities or investment 

strategies, the broker-dealer may have an incentive to advise only, or predominantly, on  

securities or investment strategies that come with attractive compensation arrangements and less 

so, or not at all, on other comparable securities or investment strategies.  Accordingly, the 

incentives created by the compensation arrangements with the product sponsors may cause a 

broker-dealer to limit the menu of securities from which the broker-dealer or its associated 

persons make recommendations.  

 The conflicts of interest that can arise from the compensation arrangement between the 

broker-dealer and its associated persons, and from the compensation arrangement between the 

broker-dealer and the product sponsors, can create incentives that may affect the broker-dealer’s 

or its associated persons’ recommendations to retail customers. In certain circumstances, a 



571 

 

broker-dealer’s conflicts of interest, or its associated persons’ conflicts of interest, may result in 

recommendations that are not in the best interest of the retail customer.1260   

As discussed above, in Section III.B.2, broker-dealers are currently subject to 

Commission and SRO regulations and rules that govern their business conduct.  For example, 

with respect to the provision of advice, courts have found broker-dealers liable under the 

antifraud provisions of the federal securities laws for not giving “honest and complete 

information” or for not disclosing “material adverse facts of which it is aware” with regard to 

certain conflicts of interest, in certain circumstances.1261  Furthermore, broker-dealers are 

generally prohibited from making an unsuitable recommendation to a customer.1262   

In addition, broker-dealers may be liable under the Exchange Act for failure to supervise 

their associated persons when providing advice to retail customers.1263 Broker-dealers are 

generally required to establish policies and procedures that are reasonably designed to prevent 

and detect violations of the federal securities laws and regulations, as well as applicable SRO 

rules. Broker-dealers are also required to establish and maintain systems for applying these 

                                                                                                                                                             

 

1260  See FINRA Conflicts Report. 
1261  See the Suitability Rule; see also 913 Study at 55 for a detailed discussion of the broker-

dealers’ disclosure obligations and liabilities under the current regulatory regime.  
1262  See FINRA Rule 2111.03 (Recommended Strategies). 
1263  See 913 Study at 74. 



572 

 

procedures (e.g., identifying and reviewing red flags with respect to the recommendations 

provided by their associated persons).1264 

As discussed above, a number of studies and papers provide evidence suggesting that 

despite the current regulatory regime and observations that agency costs to retail customers from 

broker-dealer relationships may be trending downward, the effect of conflicts of interest on the 

provision of advice remains a concern.1265 We also noted in Section III.A.2 above that, more 

generally, the conflicts of interest of the broker-dealer and its associated persons and the 

incentives that these conflicts create may result in agency costs for the retail customers that 

persist despite the current regulatory regime.  

The Conflict of Interest Obligation in Regulation Best Interest is intended to reduce the 

agency costs associated with the conflicts of interest of the broker-dealers and its associated 

persons when they provide recommendations on securities transactions and investment strategies 

to retail customers. Below we discuss the economic implications of different requirements of this 

obligation, including their benefits and costs relative to the current regulatory regime. 

 

                                                                                                                                                             

 

1264 Id. at 75. In addition, FINRA Rule 3010 requires broker-dealers to establish and maintain  
 a system to supervise the activities of their associated persons that is reasonably designed 
 to achieve compliance with the applicable securities laws and regulations and FINRA 
 rules. FINRA Rule 3120 requires broker-dealers to have a system of supervisory control 
 policies and procedures that tests and verifies supervisory procedures. 
1265  See supra Section III.B.3.c. 



573 

 

a. Overarching Obligation Related to Conflicts of Interest 

The overarching obligation of the Conflict of Interest Obligation states that broker-

dealers must establish, maintain, and enforce written policies and procedures reasonably 

designed to identify and at a minimum disclose, or eliminate, all conflicts of interest associated 

with recommendations to retail customers.  

The requirement to establish written policies and procedures reasonably designed to 

identify conflicts of interest is a new requirement relative to the current regulatory regime.  This 

requirement may impose costs on those broker-dealers that currently do not implement such 

policies and procedures voluntarily. These costs stem from the resources that a broker-dealer 

would have to expend to identify existing and potential conflicts of interest and to design policies 

and procedures that can reasonably identify and manage circumstances when a conflict of 

interest arises within the broker-dealer. These circumstances would have to take into account, 

among other things, how the broker-dealer generates revenue from providing recommendations 

to retail customers and how associated persons of the broker-dealer are compensated for 

providing recommendations. In addition, these circumstances would have to account for the 

limitations of themenu of securities from which broker-dealers provide recommendations. 

Furthermore, broker-dealers may incur costs of reviewing and updating such policies and 

procedures as new conflicts of interest arise or as new circumstances develop that may cause the 

broker-dealer to identify an existing conflict of interest. The Commission is providing below a 

quantitative estimate of the cost to broker-dealers associated with designing and updating such 

policies and procedures under certain assumptions 

The requirement to establish policies and procedures reasonably designed to identify 

conflicts of interest may also create benefits for retail customers.  As noted above, the policies 



574 

 

and procedures would require broker-dealers to: (1) identify existing conflicts of interest and 

new circumstances in which an existing conflict of interest may arise, and (2) new conflicts of 

interest and the circumstances in which they may arise. Having a process in place to identify and 

address the conflicts of interest associated with a recommendation at the time the 

recommendation is made to a retail customer would reduce the likelihood that a broker-dealer 

may fail to disclose material facts relating to conflicts of interest. Thus, the process a broker-

dealer develops as a result of complying with the Conflict of Interest Obligation may improve 

the quality of the content of the disclosure of conflicts of interest that may affect a 

recommendation. To the extent such disclosure helps retail customers make a better assessment 

of the efficiency of the recommendation they receive, the requirement may benefit the retail 

customers.    

The Commission continues to believe that it is not possible to meaningfully quantify the 

potential costs and benefits of the Conflict of Interest Obligations because such analysis would 

depend on many contingent factors that render any estimate insufficiently precise to inform our 

policy choices.1266  For example, such an analysis of the Conflict of Interest Obligation would 

require strong assumptions about the circumstances under which a broker-dealer may fail to 

                                                                                                                                                             

 

1266  See discussion following supra footnote 1156 for a general discussion of these factors.  
See also infra Section III.C.7, where we have endeavored to quantify some of the 
potential benefits of Regulation Best Interest based on many assumptions. 



575 

 

identify a given conflict of interest, and also about the extent to which the disclosure of the 

conflicts of interest may enhance decision making for retail customers.     

The requirement to establish policies and procedures reasonably designed to, at a 

minimum, disclose identified conflicts of interest may help a retail customer evaluate the 

efficiency of the recommendation provided by a broker-dealer and its associated persons, and 

may affect the retail customer’s decision of whether, and how, to act on the recommendation.  As 

noted in Section III.A.2 above, reducing the information asymmetry between a retail customer 

and a broker-dealer and its associated persons may help the retail customer form a better 

assessment of the efficiency of the received recommendation.  

Disclosure requirements generally are intended to reduce information asymmetries 

between transacting parties. Whether such a reduction is likely to occur depends largely on the 

effectiveness of the disclosure. If the disclosure provides new information, transacting parties 

may make more informed decisions than they would without this new information, and, from this 

perspective, the disclosure may be effective. However, disclosure can be effective even if no new 

information is provided, to the extent the form and manner in which a disclosure requirement 

reaches the transacting parties facilitates a more informed decision. There is extensive academic 

literature on the factors that contribute to disclosure effectiveness.1267 Among these factors, those 

                                                                                                                                                             

 

1267  See supra Section III.B.4.c for a detailed discussion of the academic literature on 
disclosure effectiveness. 



576 

 

associated with bounded rationality, including financial literacy, are generally important.1268 In 

particular, disclosure effectiveness generally increases with the level of financial literacy of the 

transacting party.1269  It is also possible that if a broker-dealer’s retail customers have different 

degrees of financial literacy, the potential anticipated reaction of the retail customers that are 

financially literate to the disclosure of conflicts of interest may cause the broker-dealer to choose 

to eliminate certain conflicts, which, in turn, would benefit the population of retail customers that 

are less financially literate.  Specifically, the requirement to establish policies and procedures 

reasonably designed to, at a minimum, disclose identified conflicts of interest may have a 

deterrent effect on some broker-dealers to the extent that they anticipate that disclosing material 

facts about certain conflicts of interest may be effective in dissuading certain retail customers 

from seeking or accepting recommendations from their associated persons in the future. As noted 

above, such broker-dealers may choose to eliminate those conflicts instead.  

i. Disclosing Conflicts of Interest 

The requirement under the Conflict of Interest Obligation to develop reasonably designed 

policies and procedures to, at a minimum, disclose identified conflicts of interest would obligate 

a broker-dealer to provide information (e.g., material facts) about its conflicts of interest and 

those that its associated persons have when making a recommendation to a retail customer. As 

                                                                                                                                                             

 

1268  Id. 
1269  Id. 



577 

 

discussed above, this information may already be disclosed under the regulatory baseline and by 

broker-dealers that adopt best practices. However, it is currently not clear in what form and what 

manner this disclosure reaches the retail customer.1270 Under Regulation Best Interest, the 

Conflict of Interest Obligation is intended to require that such disclosure reach the retail 

customer more directly and in a more timely manner.1271 In addition, the material facts disclosed 

may increase the salience of the conflicts of interest to retail customers as being a potential factor 

contributing to an associated person’s recommendation. Salience detection is a key feature of 

human cognition allowing individuals to focus their limited mental resources on a subset of the 

available information and causing them to over-weight this information in their decision making 

processes.1272  Limited attention among individuals increases the importance of focusing on 

salient disclosure signals.  Research suggests that increasing signal salience is particularly 

helpful in reducing limited attention of consumers with lower education levels and financial 

literacy.1273  To the extent that this manner of disclosure and the associated increase in salience 

results in more informed decisions with respect to whether to act on a received recommendation, 
                                                                                                                                                             

 

1270  See e.g., 913 Study. 
1271  Broker-dealers satisfy their current disclosure obligations in the account opening 

agreement, account statements, and information made public on their websites.  
1272  See Daniel Kahneman, THINKING, FAST AND SLOW (2013);   Susan T. Fiske & Shelley E. 

Taylor, SOCIAL COGNITION: FROM BRAINS TO CULTURE (3rd ed. 2017). 
1273  See, e.g., Victor Stango & Jonathan Zinman, Limited and Varying Consumer Attention: 

Evidence from Shocks to the Salience of Bank Overdraft Fees, 27 REV. FIN. STUD. 990 
(2014). 



578 

 

the disclosure requirement resulting from the Conflict of Interest Obligation will benefit retail 

customers. 

It is also possible that the disclosure of material facts about a broker-dealer’s conflicts of 

interest or those of its associated persons related to a recommendation may not benefit the retail 

customer receiving that recommendation. As noted by one commenter, the academic literature on 

disclosure effectiveness notes that in certain circumstances, disclosure of financial information 

may induce a “panhandler effect”, whereby disclosure increases the pressure to comply with the 

advice if the advisee (e.g., the retail customer) feels obliged to satisfy the financial interest of the 

advice provider (e.g., the associated person).1274    

ii. Elimination of Conflicts of Interest 

 The policies and procedures that broker-dealers will need to maintain and implement to 

comply with the Conflict of Interest Obligation will also give them the option of addressing 

conflicts of interest associated with recommendations by eliminating such conflicts entirely, 
                                                                                                                                                             

 

1274  See, e.g., EPI Letter at 11, noting that “[a]s the SEC itself noted in its analysis of one of 
the proposed regulations, disclosure may even induce a ‘panhandler effect,’ whereby 
clients may go through with a transaction in response to social pressure to meet the 
professional's financial interests.” The Commenter also notes that generally disclosure 
may not incentivize a financial professional to change her behavior:  “The SEC also 
noted that disclosure could have an effect on the behavior of financial professionals 
through ‘moral licensing’—the belief that they have already fulfilled their moral 
obligations through disclosure, and ‘strategic biasing’—the desire to compensate for an 
anticipated loss of profit from disclosure.” As discussed above, Regulation Best Interest 
recognizes that certain conflicts of interest cannot be reasonably addressed with 
disclosure alone. See also supra Section III.B.4.c, which discusses in more detail these 
effects. 



579 

 

rather than just disclosing them to the retail customer. Depending on the effectiveness of the 

policies and procedures that a broker-dealer implements to comply with the Conflict of Interest 

Obligation, conflicts of interest that are not required to be eliminated and that remain may still 

have a significant effect on an associated person’s recommendation. If a broker-dealer considers 

that the effect of a conflict of interest on the recommendations of its associated persons cannot be 

adequately addressed by the broker-dealer, as required by the Conflict of Interest Obligation 

(discussed further below), the broker-dealer may consider modifying its practices to eliminate 

that conflict. By eliminating a conflict, the broker-dealer would neutralize the effect of this 

conflict on the recommendations provided by the broker-dealer or its associated persons to retail 

customers. The absence of this conflict of interest when the associated person is considering 

reasonably available alternatives for a recommendation to a retail customer, as noted above in 

the discussion of the Care Obligation, would likely result in an increase in the efficiency of the  

customers. As discussed above in Section III.A.2, this outcome would be consistent with the 

goals of Regulation Best Interest by reducing the agency costs associated with an associated 

person’s incentives created by these conflicts of interest, which would benefit the retail customer. 

Furthermore, the option to address conflicts of interest through elimination allows broker-

dealers to reduce the compliance costs associated with managing conflicts of interest. For 

example, if a broker-dealer determines it is too costly to just disclose a conflict of interest as 

required under the Conflict of Interest Obligation, the broker-dealer could choose to eliminate 

the conflict. On the other hand, by eliminating a conflict of interest, a broker-dealer may forgo 

the potential revenues associated with that conflict of interest.    

 



580 

 

b. Mitigation of Certain Incentives to the Associated Persons 

The requirement to establish, maintain, and enforce written policies and procedures 

reasonably designed to identify and mitigate conflicts of interest that create an incentive for the 

associated person of the broker-dealer to place the interest of the broker-dealer or the associated 

person ahead of the interest of the retail customer will likely affect the relationship between the 

broker-dealer and its associated persons, the  menu of securities that the broker-dealer makes 

available to its associated persons, and the recommendations that the broker-dealer and its 

associated persons provide to retail customers. In the employment relationship between a broker-

dealer and its associated persons, the broker-dealer generally hires and compensates associated 

persons to perform certain services (e.g., providing recommendations on securities transactions 

and investment strategies to retail customers) using the broker-dealer’s framework (e.g., policies 

and procedures to ensure compliance with applicable laws and rules, supervisory systems that 

monitor for potential violations of policies and procedures, etc.). The compensation that the 

associated person receives from the broker-dealer may reflect the level of effort that the broker-

dealer expects the associated person to exert when performing a service, given the broker-

dealer’s infrastructure. As noted above, the broker-dealer may also structure the associated 

person’s compensation to create incentives that are consistent with maximizing the broker-

dealer’s objectives.   

The requirement to establish, maintain, and enforce written policies and procedures 

reasonably designed to identify and mitigate conflicts of interest that create an incentive for the 

associated person of the broker-dealer to put the interest of the broker-dealer or the associated 

person ahead of the interest of the retail customer may affect the employment relationship 

between the broker-dealer and the associated person in several ways. First, the requirement may581 

 

change a broker-dealer’s existing policies and procedures that are designed to achieve 

compliance with the regulatory baseline as well as the supervisory systems that allow the broker-

dealer to monitor for potential violations by the associated persons of these policies and 

procedures.  To this end, broker-dealers will need to consider the amount of time and level of 

resources to devote to design and establish policies and procedures that seek to reduce the 

likelihood of an associated person placing its interest or the interest of the broker-dealer ahead of 

the interests of a retail customer when providing recommendations to retail customers.  

Another way that this requirement may affect the employment relationship between the 

broker-dealer and the associated person is by changing the level of effort that the associated 

person would have to exert to ensure that all recommendations supplied to retail customers are 

compliant with the Conflict of Interest Obligation. As a corollary, this requirement may also 

affect the level of effort that a supervisor would have to exert to ensure that the recommendations 

supplied by its associated persons to a retail customer comply with the obligations of Regulation 

Best Interest.  

As discussed above in the context of the Care Obligation, an associated person would 

have to not only consider a number of factors when making a recommendation to a retail 

customer, but also ensure that the recommendation is in the best interest of the retail customer. 

The determination that a recommendation is in the retail customer’s best interest may depend on 

the conflicts of interest that exist at the time the associated person makes the recommendation, 

and, importantly, on how the broker-dealer complies with the requirement to establish, maintain, 

and enforce policies and procedures reasonably designed to identify and mitigate or eliminate 

conflicts of interest that create an incentive for the associated person to put the interest of the 

broker-dealer or the associated person ahead of the interest of the retail customer. It is possible 



582 

 

that more effective policies and procedures may lower the level of effort an associated person 

would have to exert to have a reasonable basis to believe that recommendations are compliant 

with Regulation Best Interest, in the sense that a supervisor or the broker-dealer would determine 

whether the effect of the associated person’s or the broker-dealer’s conflicts of interest is reduced 

to the point where the incentives created by these conflicts do not have a negative effect on the 

recommendations.  However, the potential increase in the supervisor’s level of effort may 

substitute for the potential decrease in the associated person’s level of effort.  

One commenter had concerns about the discussion in the Proposing Release about the 

effect of the compensation arrangements between the broker-dealer and the associated person on 

the effort exerted by the associated person when providing a recommendation. 1275 This 

commenter stated that if the compensation leads to lower effort, the associated person would not 

make recommendations that are in the retail customer’s best interest. As discussed above, the 

Commission notes that the relationship between the effort exerted to make a recommendation 

and the efficiency of the recommendation is complex, and that lower effort may not necessarily 

be inconsistent with increasing the efficiency of the recommendation. 

Finally, the Conflict of Interest Obligation may affect the compensation arrangement 

between the broker-dealer and its associated persons. Certain compensation arrangements may 

create incentives for an associated person to place his or her interest of the interest of the broker-

                                                                                                                                                             

 

1275  See AARP August 2018 Letter. 



583 

 

dealer ahead of the interest of the customer, and therefore create conflicts of interest for the 

broker-dealer’s associated persons. For example, as discussed above in Section III.B.1.f, broker-

dealers commonly compensate their associated persons based on commissions and performance-

based awards. These compensation arrangements create incentives for associated persons to 

recommend securities or investment strategies that generate more commissions to the broker-

dealer and potentially themselves over other securities or investment strategies.  

The Conflict of Interest Obligation requires a broker-dealer to have policies and 

procedures that are reasonably designed to identify and disclose and mitigate, or eliminate, any 

conflicts of interest associated with recommendations that create an incentive for the associated 

person or the firm to place the interest of the associated person or the firm ahead of the interest 

of the retail customer, including conflicts of interest that arise from compensation arrangements 

between broker-dealers and their associated persons.  Depending on how a broker-dealer 

complies with the Conflict of Interest Obligation, compensation arrangements between broker-

dealers and their associated persons may change as a result of establishing these policies and 

procedures. For example, as discussed above in Section III.B.2.e, in response to the DOL 

Fiduciary Rule, which among other things, was designed to restrict broker-dealer activities and 

reduce the conflicts of interest of a broker-dealer and those of its associated persons, some 

broker-dealers altered the compensation for their associated persons. Specifically, some broker-

dealers chose to equalize commissions and deferred sales charges charged across similar 



584 

 

securities or investment strategies. Others chose to restrict or eliminate sales quotas, contests, 

special awards, and bonuses, including deferred bonuses as part of the recruitment efforts.1276 It 

is possible that some broker-dealers may choose to comply with the Conflict of Interest 

Obligation by establishing policies and procedures that would address conflicts using these or 

similar methods. It is also possible that some broker-dealers may rely on existing policies and 

procedures that address conflicts through methods such as compliance and supervisory systems 

that are consistent with the Conflict of Interest Obligation.  

Some of these methods may reduce the overall compensation of the associated person 

from providing recommendations (e.g., altering certain bonuses).  The same methods or others 

(e.g., altering deferred recruiting bonuses) may complicate a broker-dealer’s hiring of new 

associated persons.  However, to the extent that these methods address the conflicts of interest of 

a broker-dealer or those of its associated persons in an effective manner, these methods may 

enhance the efficiency of the recommendations provided by a broker-dealer and its associated 

persons, and, therefore benefit retail customers.     

                                                                                                                                                             

 

1276  However, we understand that following the decision by the Fifth Circuit to vacate the 
DOL Fiduciary Rule, some broker-dealers may have reverted back to compensation 
arrangements that they had in place prior to the DOL Fiduciary Rule. For instance, as 
discussed in Section III.B.2.e.ii, supra, some broker-dealers reinstated their deferred 
recruiting bonuses.   

 



585 

 

In general, if a broker-dealer implements policies and procedures pursuant to the Conflict 

of Interest Obligation that may result in a significant reduction in the overall compensation that 

an associated person receives from providing recommendations, the associated person may have 

an incentive to register as an investment adviser, if not already registered as one, and provide 

advice mostly or only in an investment adviser capacity.   

To the extent broker-dealers establish, maintain, and enforce policies and procedures that 

are effective at reducing the incentives of an associated person to put the interest of the broker-

dealer or the associated person ahead of the interest of the retail customer, the Conflict of Interest 

Obligation would reduce the effect of these conflicts on the recommendations provided by 

associated persons to retail customers. In this way, complying with the Conflict of Interest 

Obligation would increase the efficiency of the recommendations for retail customers, relative to 

the regulatory baseline. This, in turn, would reduce the agency costs associated with the broker-

dealer’s and its associated persons’ incentives that are created by their conflicts of interest. 

Lower agency costs at these broker-dealers would benefit retail customers. 

One commenter noted that the size of these benefits of Regulation Best Interest should be 

quantified relative to the baseline that includes the current regulatory regime as well as current 

practices.1277 The Commission agrees with the commenter and notes that, as discussed in Section 

III.B, broker-dealers may already have compliance and supervisory systems in place that are 

                                                                                                                                                             

 

1277  See CFA August 2018 Letter. 



586 

 

effective at reducing to a reasonable extent the effect of an associated person’s conflicts of 

interest on the recommendations provided to retail customers.1278 Therefore, for the retail 

customers of these broker-dealers, the potential benefits above may be small. In contrast, for the 

retail customers of the broker-dealers that are not currently addressing conflicts of interest in a 

manner consistent with Regulation Best Interest, the potential benefits above may be large. 

This commenter further stated that the economic analysis in the Proposing Release did 

not provide a thorough discussion of the relationship between the broker-dealer and its 

associated persons with a focus on the incentives of the associated persons.1279 The Commission 

notes that the analysis above about the incentives of the associated persons expands the analysis 

in the Proposing Release and establishes a clear link between compensation and incentives.  

As noted in the economic analysis of the Proposing Release,1280 broker-dealers may also 

adjust their menus of securities in response to the requirement to establish, maintain, and enforce 

written policies and procedures reasonably designed to identify and mitigate conflicts of interest 

that create an incentive for the associated person to place his or her interest or the interest of the 

broker-dealer ahead of the interest of the retail customer. It is possible that some broker-dealers 

may decide to expand their offerings to better comply with the process required pursuant to the 

Conflict of Interest Obligation. For instance, broker-dealers that currently offer advice only on a 
                                                                                                                                                             

 

1278  See FINRA Conflicts Report. 
1279  See CFA August 2018 Letter. 
1280  See Proposing Release at 21658. 



587 

 

limited set of securities (e.g., proprietary securities) would have to disclose and evaluate their 

menu of securities to ensure that their policies and procedures regarding their limited menus of 

securities and the disclosures of any conflicts associated with such limitations do not result in 

recommendations that place the interest of the broker-dealer or its associated persons ahead of 

the retail customer’s interest.  

Broker-dealers may also manage conflicts of interest by limiting their menu of securities 

on which they offer recommendations. Broker-dealers may prefer a limited menu of securities to 

better mitigate the potential costs associated with compliance of Regulation Best Interest.  For 

instance, a limited menu of securities may result in more homogenous product fees across 

comparable securities or investment strategies, which would help reduce the effect of certain 

conflicts of interest on the recommendations provided to retail customers. Broker-dealers may 

also respond by limiting their menus of securities because they may have conflicts of interest due 

to variation in the compensation they receive from product sponsors, as discussed above.   

It is possible that complying with the Conflict of Interest Obligation in this manner may 

result in securities menus that limit an associated person’s choices of investments when 

providing a recommendation to a retail customer.1281  However, as discussed below, the 

requirements of the Conflict of Interest Obligation and the Care Obligation are intended to 

                                                                                                                                                             

 

1281  See supra Section II.C.2. 



588 

 

reduce the likelihood that limitations on securities menus result in recommendations that are not 

in the best interest of the retail customer.1282  

It is also possible that broker-dealers that limit their menus of securities in response to the 

Conflict of Interest Obligation may eliminate securities or investment strategies that are inferior 

relative to other securities or investment strategies in terms of performance and costs. 

Recommendations based on menus of securities that do not contain inferior securities or 

investment strategies are more likely to be efficient for the retail customer. To the extent broker-

dealers eliminate inferior investments from their securities menus as a result of complying with 

the Conflict of Interest Obligation, Regulation Best Interest would provide a benefit for the retail 

customers of these broker-dealers.   

Broker-dealers may pass on some of the compliance costs to their retail customers. For 

instance, broker-dealers may increase their fees on the services that they provide to retail 

customers as part of the relationship, or may adopt new fees. Alternatively, broker-dealers may 

seek to renegotiate their compensation arrangements with the product sponsors in the hopes of 

extracting greater compensation (e.g., more attractive revenue-sharing agreements), relative to 

current practices. The likelihood of a favorable outcome for the broker-dealers may depend on 

whether product sponsors can charge their retail customers higher fees. However, it is likely that 

                                                                                                                                                             

 

1282  For example, if none of the securities on the menu would be in the best interest of the 
retail customer in a given set of circumstances, the associated person may not recommend 
any of the securities on the menu to the retail customer.  



589 

 

product sponsors are already charging fees that are privately optimal (e.g., maximize their 

revenue net of costs), and thus any deviations from these fees would lead to a suboptimal 

outcome for the product sponsors. In other words, product sponsors may not have an incentive to 

increase their fees. 

A number of commenters stated that policies and procedures that address how broker-

dealers manage conflicts of interest relating to limited menus of securities could impose costs on 

a retail customer when all securities on the menu have high fees or create a benefit for retail 

customers if securities with high fees are eliminated.1283 As noted in the Proposing Release and 

above, the Commission acknowledges the benefits to the retail customers of the broker-dealers 

that comply with Regulation Best Interest by eliminating inferior securities or investment 

strategies. The Commission also acknowledges the potential costs of limited menus of securities 

by expanding the Conflict of Interest Obligation to include requirements that would address 

specifically limited menus of securities and by providing a detailed analysis of the economic 

implications of these requirements, below.    

  

c. Material Limitations on Recommendations to Retail Customers 

The Conflict of Interest Obligation includes a requirement that specifically addresses 

material limitations on recommendations to retail customer (e.g., offering only proprietary or 
                                                                                                                                                             

 

1283  See, e.g., CFA August 2018 Letter; AARP August 2018 Letter; EPI Letter; Better 
Markets August 2018 Letter.  



590 

 

other limited range of securities). This provision requires broker-dealers to establish, maintain, 

and enforce written policies and procedures reasonably designed to identify and disclose any 

material limitations placed on securities or investment strategies that may be recommended to a 

retail investor and any conflicts of interest associated with such limitations in accordance with 

the Disclosure Obligation.  It further requires such policies and procedures to be reasonably 

designed to prevent such limitations and associated conflicts of interest from causing the broker-

dealer or its associated persons to make recommendations that place the interest of the broker-

dealer or associated persons ahead of the interest of the retail customer.  

As noted above, broker-dealers may limit their menus of securities in response to certain 

requirements of the Conflict of Interest Obligation. The requirements that address limited menus 

of securities are designed to help ensure that these limitations and associated conflicts of interest 

do not create incentives for the broker-dealer or its associated persons to make recommendations 

that are not in the best interest of the retail customer. The second aspect of the requirement 

would seek to ensure that the  menu of securities is not limited to the point where it restricts a 

broker-dealer and its associated persons from complying with the Care Obligation, and in 

particular with the requirement to provide recommendations that are in the customer’s best 

interest.1284 To the extent these requirements reduce the effect of the limitations of the menu of 

securities and the associated conflicts of interest on the recommendations provided by a broker-
                                                                                                                                                             

 

1284  Broker-dealers that offer a limited menu of securities may not be able to offer 
recommendations to certain clients. See also supra footnote 1282. 



591 

 

dealer or its associated persons, the Conflict of Interest Obligation would result in 

recommendations that are more likely to be efficient, relative to the baseline.  

 The requirements that address limitations of the menu of securities may have additional 

implications for certain product markets, and ultimately, retail customers. To better understand 

these implications we focus the discussion on the market for mutual funds.   

As discussed in Section III.B.3, academic literature has noted that in certain product 

markets, such as mutual funds, the different distribution channels that product sponsors use to 

reach the retail customer may cause these markets to fragment. In the market for mutual fund 

products, some products are sold to retail customers only through broker-dealers—the so-called 

“broker-sold” distribution channel—while other products are sold directly to retail customers—

the so-called “direct-sold” distribution channel.1285 The products that are sold through the 

broker-sold channel usually carry higher fees relative to comparable products that are sold 

through the direct-sold channel.1286 Higher fees on the broker-sold products reflect broker-

dealers’ compensation for distributing the product. In general, all transactions linked to the 

                                                                                                                                                             

 

1285  In this discussion, the broker-sold distribution channel includes sales that are the result of 
a recommendation provided by the broker-dealer but may also include sales that are 
solicited by the retail customer where no advice or recommendation was provided by the 
broker-dealer (i.e., unadvised sales). The direct-sold distribution channel includes 
unadvised sales through broker-dealer open platforms as well as sales that the retail 
customer solicits directly from the product sponsor. Investment advisers may also access 
products through the direct-sold distribution channel. 

1286  See, e.g., Del Guercio & Reuter (2014). 



592 

 

broker-sold distribution channel are triggered by a recommendation provided by an associated 

person of the broker-dealer. Most product sponsors currently rely on one of the two channels to 

distribute their products, but not on both.1287 

A retail customer that has an account with a broker-dealer that provides advice is not 

necessarily constrained to accessing products only through the broker-sold channel. A retail 

customer could access products from the direct-sold channel to transact on his or her own (for 

example, if the broker-dealer may not provide recommendations on a particular product).1288  A 

retail customer who has access to products from both distribution channels and who understands 

the effect of fees on a product’s performance may prefer to access a product through the broker-

sold channel if, for example, the combined cost of identifying (e.g., search costs) and accessing 

comparable direct-sold products (e.g., product fee) is higher than the total cost of the broker-sold 

product recommended by the associated person of the broker-dealer.1289 As more direct-sold 

                                                                                                                                                             

 

1287  See, e.g., Del Guercio & Reuter (2014), supra footnote 1081, and Reuter (2015), supra 
footnote 1095. 

1288  A retail customer could also access securities through financial professionals that are not 
broker-dealers, including investment advisers. 

1289  Some broker-dealers may offer securities to retail customers through both distribution 
channels, but these broker-dealers provide recommendations only on securities offered 
through the broker-sold channel. For example, some broker-dealers with open platforms 
may only provide recommendations on proprietary securities. 



593 

 

products enter the market,1290 the retail customer’s cost of identifying1291 direct-sold products 

that are comparable alternatives to a broker-sold product recommended by an associated person 

of the broker-dealer may become lower.1292  In turn, the retail customer’s demand for broker-sold 

products may decline.1293  

According to economic first principles, when enough retail customers exhibit a 

preference for direct-sold products over broker-sold products, the aggregate demand for broker-

                                                                                                                                                             

 

1290  See, e.g., ICI Letter, which shows an increasing trend in the number of mutual funds with 
no 12b-1 fees over the past 10 years. These funds are available through the direct-sold 
channel. 

1291  Broker-dealers with open platforms that allow retail customers to access securities on this 
platform without a recommendation from the broker-dealer and its associated persons 
generally provide extensive research and analytical tools. The Commission has recently 
adopted rule amendments that address research reports that broker-dealers make available 
to their retail customers. See Covered Investment Fund Research Reports, Release 33-
10580 (Nov 30, 2018); 83 FR 64180 (Dec. 13, 2018).  

1292  See, e.g., Ali Hortacsu & Chad Sylverson, Product Differentiation, Search Costs, and 
Competition in the Mutual Fund Industry: A Case Study of S&P 500 Index Funds, 119 Q. 
J. ECON. 403 (2004), who estimate an investor’s search costs for S&P500 index funds 
and show that, as the number of S&P500 index funds increased over their sample period 
spanning 1995 to 2000, the investor’s search costs generally declined. The authors further 
show that this downward trend was driven by funds that are in lower end of the search 
cost distribution and that these funds were mostly no-load funds. These no-load funds are 
usually available through the direct-sold channel.       

1293  However, a retail customer may value the services provided by a broker-dealer that 
extend beyond the provision of recommendations on securities transactions and 
investment strategies and continue to maintain an account with the broker-dealer. To 
counter the potential decline in the demand for broker-sold products, a broker-dealer may 
respond by offering more services and increasing the fee for the package of services or by 
trying to shift the retail customer to a potentially more profitable advisory account (to the 
extent that the broker-dealer offers this type of accounts).        



594 

 

sold products should decline. To remain competitive, product sponsors that rely on the broker-

sold channel to distribute their products would have to lower the fees on their products. Lower 

fees on broker-sold products may result in lower compensation for broker-dealers and their 

associated persons from providing recommendations on these products. Lower fees on broker-

sold products would benefit retail customers who access mutual fund products through the 

broker-sold channel. 

This market mechanism would allow retail customers’ demand to affect how product 

sponsors compensate broker-dealers for recommending broker-sold products. While this 

mechanism is currently available to retail customers and is considered generally effective, it is 

not clear how effective this mechanism is in all aspects of the market, particularly in the short 

run.1294 As noted by one commenter, the expense ratio for domestic equity mutual funds declined 

                                                                                                                                                             

 

1294  Recent academic research questions the effectiveness of the market mechanism, at least 
in the short run. See. e.g., Yang Sun, Does Competition Protect Retail Investors? Role of 
Financial Advice (Working Paper, Apr. 2017), available at 
https://coller.tau.ac.il/sites/coller-
english.tau.ac.il/files/media_server/Recanati/management/conferences/finance/2017/61.p
df. This research shows that the sudden entry of several low-cost index funds caused 
direct-sold actively managed funds with similar investment objectives to cut their fees by 
6.4 basis points. In contrast, broker-sold actively managed funds with similar investment 
objectives as the new entrant funds increased their fees by 12.2 basis points. The study 
further shows that while some of the fee increase in the broker-sold funds is accompanied 
by increased levels of active management, most of the fee increase (more than 60%) was 
passed on to broker-dealers. The author argues that the broker-sold actively managed 
funds are able to increase their fees only to the extent that they can signal to the market 
that they are not employing strategies that mimic index funds. 



595 

 

from 0.86 percent in 2007 to 0.59 percent in 2017, a 31% reduction over the ten year period.1295 

This commenter further notes that this downward trend in expense ratios reflects, among other 

things, a “long-running shift by investors toward lower-cost funds.” Because the number of low-

cost funds that enter the market over the period 2007-2017 has increased substantially, the 

assessment of this commenter would appear to be consistent with the market mechanism being 

effective in the long run.1296 

As noted above, the effectiveness of the market mechanism may depend on a number of 

factors, including the retail customer’s ability to understand the effect of fees on the performance 

of a product and willingness to shop around for comparable products, the product sponsor’s 

ability to signal how its broker-sold products stand out among comparable products, and the 

broker-dealer’s menu and the disclosure about potential limitations of this menu.1297  

The Conflict of Interest Obligation may improve the effectiveness of this market 

mechanism through the requirement that broker-dealers establish, maintain, and implement 

written policies and procedures reasonably designed to identify and disclose all material 

limitations of products that may be recommended and any associated conflicts of interest. This 

                                                                                                                                                             

 

1295  See ICI Letter. 
1296  Id. at 42. 
1297  As noted in supra footnote 1292, the effectiveness of this market mechanism may also 

depend on whether broker-dealers offer advisory accounts and whether these broker-
dealers can convince retail customers to switch to an advisory account rather than to a 
self-directed account. 



596 

 

requirement would result in disclosures that, while not necessarily new relative to the regulatory 

baseline, may increase the salience of the limitations of product menus and the associated 

conflicts of interest for the retail customers.1298 The added focus on these limitations may cause 

some retail customers to question whether the recommendations that they are receiving are 

taking into consideration a reasonable set of alternatives. Thus, this disclosure may encourage 

retail customers to shop for comparable products that they may prefer (e.g., based on cost 

factors) over the broker-sold products that are being recommended to them.   

As an example, a broker-dealer that is providing recommendations only for proprietary 

products would have to disclose, the material limitation that the products on the menu are all 

proprietary, and the material fact of the conflict of interest that the broker-dealer and its 

associated persons are being compensated for selling these products. As discussed above in 

Section II.C.3.f, there are a number of other potential conflicts of interest associated with 

proprietary products. While broker-dealers may disclose this information under the regulatory 

baseline, it is not clear the manner in which this disclosure currently reaches the retail 

customer.1299 The new required disclosure with respect to conflicts of interest (under the 

Disclosure Obligation) is intended to be more comprehensive and more specific, and is also 

intended to reach the retail customer more directly. From this perspective, the disclosure of the 

                                                                                                                                                             

 

1298  See supra footnote 1272 and accompanying text. 
1299  See, e.g., 913 Study. 



597 

 

limitations of the product menu and its associated conflict of interest may better inform retail 

customers’ choices and, therefore, may be more effective, compared to current disclosure forms 

of the same information.  While, generally, the effectiveness of disclosure depends on many 

factors that are well known in the academic literature, the disclosure requirement of the Conflict 

of Interest Obligation may also depend on the range of material facts that the broker-dealer 

deems necessary to disclose in order to be in compliance with the obligation.1300  

The Conflict of Interest Obligation addresses limited product menus by requiring that 

broker-dealers take measures through reasonably designed written policies and procedures to 

evaluate and prevent the limitations and the associated conflicts of interest from causing 

associated persons of the broker-dealer to make recommendations that are inconsistent with the 

requirements of Regulation Best Interest. The requirement seeks to address specific firm-level 

conflicts—namely, the conflicts associated with the establishment of a product menu—which are 

likely to affect recommendations made to retail customers and may result in recommendations 

that place the interest of the broker-dealer or its associated persons ahead of the interest of the 

retail customer.  

This requirement may have a direct effect on the relationship between broker-dealers and 

product sponsors.  To the extent that enough broker-dealers decide to no longer offer 

recommendations on certain types of products that carry higher fees (i.e., exclude them from the 
                                                                                                                                                             

 

1300  See supra Section III.B.4.c for a detailed discussion of the academic literature on 
disclosure effectiveness.  



598 

 

menus), the aggregate demand for such products may decline. Product sponsors that face 

declining demand for some of their products may respond by lowering the fees on these products 

or by repackaging these products into new and more competitive products that may again draw 

the interest of the broker-dealers. 

 

d. Elimination of Certain Sales Practices 

As part of the Conflict of Interest Obligation in Regulation Best Interest, broker-dealers 

are required to establish, maintain, and enforce 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 sales of specific securities or specific types of securities 

within a limited period of time. The Commission believes that the conflicts of interest associated 

with these practices that may create high-pressure situations for the associated persons of the 

broker-dealer to recommend a specific security over another cannot be reasonably addressed 

through disclosure and mitigation and should be addressed through elimination in order to 

comply with the requirements of Regulation Best Interest.1301  

Relative to the regulatory baseline, this requirement would provide benefits to retail 

customers. Conflicts of interest that create incentives for the associated persons to recommend a 

specific security (or specific types of securities) over another are likely to have a significant 

                                                                                                                                                             

 

1301  See also the discussion in Section II.C.3.g, supra. 



599 

 

effect on an associated person’s recommendation, even if such conflicts were disclosed and 

mitigated via policies and procedures established, maintained and enforced by the broker-dealer. 

By explicitly requiring policies and procedures reasonably designed to eliminate sales practices 

that may result in such conflicts, the requirement should neutralize the effect of these conflicts on 

the recommendations provided by associated persons to retail customers. The absence of these 

conflicts when the associated person is considering reasonably available alternatives for a 

recommendation to a retail customer, as noted in the discussion of the Care Obligation, may 

increase the efficiency of the recommendation for their retail customers. As discussed above in 

Section III.A.2, this outcome is consistent with Regulation Best Interest reducing the agency 

costs associated with a broker-dealer’s incentives or the incentives of its associated persons 

created by these conflicts of interest, which, in turn, would benefit the retail customer. 

The requirement to establish policies and procedures reasonably designed to eliminate 

certain sales practices may reduce the total compensation that a broker-dealer and its associated 

person receives from providing recommendations to retail customers. As discussed above, to the 

extent that the reduction in an associated person’s total compensation is sufficiently large, the 

associated person may have an incentive to register as an investment adviser and provide 

investment advice only in his or her advisory capacity.  Furthermore, the potential decline in the 

total compensation of an associated person of the broker-dealer due to this requirement may 

dissuade financial professionals from providing advice in the capacity of a broker-dealer, and as 

a result, broker-dealers may find it more difficult to hire new associated persons, relative to the 

baseline.  

In addition, the types of sales practices that this requirement is meant to address generally 

create incentives for associated persons to recommend certain types of securities or investment 



600 

 

strategies over certain time periods over other types of securities or investment strategies. By 

requiring broker-dealers to establish policies and procedures reasonably designed to eliminate 

certain sales practices that create these types of incentives, broker-dealers may experience a 

reduction in the revenue stream associated with certain securities or investment strategies. Thus, 

through this requirement, Regulation Best Interest may impose a cost on the broker-dealers that 

currently rely on these types of practices in order to incentivize sales. On the other hand, retail 

customers who have born costs associated with such practices will benefit from the cessation of 

these sales practices. 

As discussed above, while we are unable to quantify the full costs of Regulation Best 

Interest, including the Conflict of Interest Obligation, we are able to estimate some of the costs 

associated with the Conflict of Interest Obligation, specifically the costs related to information 

collection requirements as defined by the Paperwork Reduction Act.  As discussed further in 

Section IV.B.1, the Commission believes that broker-dealers would update their policies and 

procedures to comply with this requirement and would incur an initial aggregate burden of 

approximately 128,160 hours and an additional initial aggregate cost of approximately $25 

million, as well as an ongoing aggregate annualized burden of approximately 27,900 hours, and 

an ongoing aggregate annualized cost of approximately $2.91 million.1302 Furthermore, the 

                                                                                                                                                             

 

1302  These estimates are based on the following calculations: 120,600 hours + 7,560 hours = 
128,160 hours; $10 million + $15 million = $25 million; and 24,120 hours + 3,780 hours 
= 27,900 hours. As discussed in more detail in infra Section V.D, 120,600 hours and601 

 

Commission believes that in order to identify conflicts of interest and determine whether the 

conflicts are material, broker-dealers would incur an initial aggregate burden of approximately 

69,150 hours and an additional initial aggregate cost of approximately $15.71 million as well as 

an ongoing aggregate annualized burden of approximately 27,660 hours.1303 Thus, we estimate 

the Conflict of Interest Obligation of proposed Regulation Best Interest would impose an initial 

aggregate cost of at least $110.73 million and an ongoing aggregate annual cost of at least $20.44 

million on broker-dealers.1304 

                                                                                                                                                             

 

7,560 hours are preliminary estimates for the initial aggregate burdens for large and small 
broker-dealers, respectively, $10 million and $15 million are preliminary estimates for 
the initial aggregate costs for large and small broker-dealers, respectively, and 24,120 
hours and 3,780 hours are preliminary estimates for the ongoing aggregate burdens for 
large and small broker-dealers, respectively.  

1303  The estimate of the initial aggregate burden is based on the following calculations: 
13,830 hours + 55,320 hours = 69,150 hours, where, as discussed in more detail in 
Section V.D, 13,830 hours and 55,320 hours are estimates for the initial aggregate 
burdens for identifying conflicts of interest and determining whether the conflicts are 
material for all broker-dealers, respectively. 

1304  These estimates are calculated as follows: (90,450 hours of in-house legal counsel) x 
($415.72/hour for in-house counsel) + (27,660 hours for in-house compliance counsel) x 
($365.39/hour for in-house compliance counsel)  + (27,660 hours for identifying conflicts 
of interest) x ($229.74/hour for business line personnel) + (51,540 hours for review of 
policies and procedures) x ($309.60/hour for in-house compliance manager) + (50,302 
hours for outside legal counsel) x ($497/hour for outside legal counsel)  + (55,317 hours 
for modifying existing technology) x ($284/hour for outside senior programmer) = 
$110.73 million, and (8,040 hours of in-house legal counsel) x ($415.72/hour for in-
house counsel)  + (21,870 hours for in-house compliance counsel) x ($365.39/hour for in-
house compliance counsel)  + (21,870 hours for identifying conflicts of interest) x 
($229.74/hour for business line personnel) + (3,780 hours for review of policies and 
procedures) x ($309.60/hour for compliance manager) + (3,783 hours for outside legal 

 

 



602 

 

 

5. Compliance Obligation 

The Compliance Obligation of Regulation Best Interest requires broker-dealers to 

establish, maintain, and enforce written policies and procedures reasonably designed to achieve 

compliance with Regulation Best Interest.1305  This obligation creates an affirmative obligation 

under the Exchange Act with respect to Regulation Best Interest as a whole, while providing 

sufficient flexibility to allow broker-dealers to establish compliance policies and procedures that 

accommodate a broad range of business models.1306 

The Compliance Obligation is designed to ensure that broker-dealers have internal 

controls in place to prevent violations of Regulation Best Interest.  The policies and procedures 

required to comply with this obligation would allow the Commission to identify and address 

potential compliance deficiencies or failures (such as inadequate or inaccurate policies and 

                                                                                                                                                             

 

counsel) x ($497/hour for outside legal counsel)  + (3,773 hours for outside compliance 
services) x ($273/hour for outside compliance services) = $20.44 million. The hourly 
wages for in-house legal and compliance counsel, registered representatives, senior 
business analyst, compliance manager, and business-line personnel are obtained from 
SIFMA. The hourly rates for outside legal counsel, outside senior programmer, systems 
analyst or programmer and outside compliance services are discussed in infra Section 
V.D.  

1305  These policies and procedures are in addition to the policies and procedures required 
under the Conflict of Interest Obligation. 

1306  See supra Section II.C.4. 



603 

 

procedures, or failure to follow the policies and procedures) early on, reducing the chance of 

retail customer harm.1307     

As discussed above in Section III.B.2.d, under the regulatory baseline, broker-dealers are 

subject to supervisory obligations that, among other things, require them to establish policies and 

procedures reasonably designed to prevent and detect violations of, and achieve compliance 

with, the federal securities laws and regulations,1308 as well as applicable SRO rules.1309 Broker-

dealers would have the ability to update these policies and procedures to comply with the 

Compliance Obligation, rather than create new policies and procedures. 

The obligation indirectly benefits retail customers by ensuring that broker-dealers have 

sufficient internal controls in place to support compliance with Regulation Best Interest.  

The obligation will impose compliance costs on broker-dealers. However, these costs are 

likely to be smaller for those broker-dealers that already have effective compliance systems in 

place, including effective policies and procedures.   

Broker-dealers may incur operational costs related to training their associated persons 

and developing policies and procedures to ensure compliance with the Care Obligation.  For 

example, broker-dealers may have to provide training to their employees and other associated 

persons on how to make recommendations that do not place the interest of the broker-dealer or 
                                                                                                                                                             

 

1307  See supra Section II.C.4. 
1308  See Section 15(b)(4)(E) of the Exchange Act. 
1309  See FINRA Rule 3110 (Supervision). 



604 

 

their associated persons ahead of the interest of the retail customer.  In the Proposing Release, 

these training costs were discussed as part of a separate general best interest obligation, and our 

assessment of those costs has not changed.1310  Broker-dealers also may incur costs related to 

training their associated persons on how to determine that they have a reasonable basis to believe 

that a recommendation is in a retail customer’s best interest.  This may include training on how 

to evaluate the potential risks, rewards, and costs associated with a recommendation as well as 

how a retail customer’s investment profile affects this determination.  Additionally, broker-

dealers may incur costs related to training their associated persons on any relevant factors 

specific to making recommendations regarding IRAs, IRA rollovers, or other account types, as 

well as implicit hold recommendations resulting from agreed-upon account monitoring.  These 

training costs will be lower for broker-dealers that already operate in a manner that is consistent 

with the requirements of the Care Obligation and higher for those that do not.  Firms may already 

comply with the requirements of the Care Obligation, to varying degrees, either of their own 

volition or because they are already subject to and comply with similar obligations.  

As discussed above, while we are unable to quantify the full costs of Regulation Best 

Interest, including the Compliance Obligation, we are able to estimate some of the costs 

associated with the Compliance Obligation, specifically the costs related to information 

collection requirements as defined by the Paperwork Reduction Act.  As discussed further in 

                                                                                                                                                             

 

1310  See Proposing Release at Section IV.C.2.a. 



605 

 

Section IV.B.1, the Commission believes that broker-dealers would update their policies and 

procedures to comply with this requirement.  We estimate that broker-dealers would incur an 

initial aggregate burden of 524,404 hours and an additional initial aggregate cost of 

approximately $76.3 million, as well as an ongoing aggregate annualized burden of 452,524 

hours, and an ongoing aggregate annualized cost of approximately $2.91 million.1311 Thus, the 

Compliance Obligation of Regulation Best Interest would impose an initial aggregate cost of at 

least $214.66 million and an ongoing aggregate annual cost of at least $110.86 million on 

broker-dealers.1312 

                                                                                                                                                             

 

1311  These estimates are based on the following calculations: 80,400 hours + 4,536 hours + 
11,064 hours + 428,404 hours= 524,404 hours; $6 million + $7.5 million + $62.8 million 
= $76.3 million; and 24,120 hours + 428,404 hours = 452,524 hours. As discussed in 
more detail in infra Section V.D, 80,400 hours, 4,536 hours, 11,064 hours and 428,404 
hours are estimates for the initial aggregate burdens for large and small broker-dealers, 
updating training module, and training, respectively. In addition, $6 million, $7.5 million, 
and $62.8 million are estimates for the initial aggregate costs for large and small broker-
dealers and updating training modules, respectively. Furthermore, 24,120 hours and 
428,404 hours are estimates for the ongoing aggregate burdens for large broker-dealers 
and training, respectively. Finally, $2.91 million is the estimate of the ongoing aggregate 
cost for small broker-dealers. 

1312  These estimates are calculated as follows: (65,832 hours of in-house legal counsel) x 
($415.72/hour for in-house counsel) + (4,536 hours for in-house compliance counsel) x 
($365.39/hour for in-house compliance counsel)  + (10,050 hours for reviewing policies 
and procedures) x ($446.04/hour for in-house general counsel) + (15,582 hours for 
reviewing policies and procedures and update existing training systems) x ($309.60/hour 
for in-house compliance manager) + (428,404 hours for training) x ($233.02/hour for 
registered representative) + (27,163 hours for outside legal counsel) x ($497/hour for 
outside legal counsel) + (221,127 hours for updating training module) x ($284/hour for 
outside senior programmer or systems analyst)= $214.66 million, and (8,040 hours of in-
house legal counsel) x ($415.72/hour for in-house counsel)  + (8,040 hours for in-house 

 

 



606 

 

 

6. Record-Making and Recordkeeping 

Regulation Best Interest will also impose record-making and recordkeeping requirements 

on broker-dealers with respect to certain information collected from, or provided to, retail 

customers.  The Commission is amending Rules 17a-3 and 17a-4 of the Exchange Act, which 

specify minimum requirements with respect to the records that broker-dealers must make, and 

how long those records and other documents must be kept, respectively.  We are amending Rule 

17a-3 by adding a new paragraph (a)(35) that requires a record of all information collected from, 

and provided to, the retail customer pursuant to Regulation Best Interest, as well as the identity 

of each natural person who is an associated person of a broker or dealer, if any, responsible for 

the account.  This requirement applies to each retail customer to whom a recommendation of any 

securities transaction or investment strategy involving securities is provided.  The neglect, 

refusal, or inability of a retail customer to provide or update any information about the customer 

                                                                                                                                                             

 

compliance counsel) x ($365.39/hour for in-house compliance counsel)  + (8,040 hours 
for updating policies and procedures) x ($229.74/hour for business line personnel) + 
(8,040 hours for reviewing policies and procedures) x ($309.60/hour for compliance 
manager) + (3,783 hours for outside legal counsel) x ($497/hour for outside legal 
counsel)  + (3,773 hours for outside compliance services) x ($273/hour for outside 
compliance services) + (428,404 hours of training) x ($233.02/hour for registered 
representative) = $110.86 million. The hourly wages for in-house legal and compliance 
counsel, registered representatives, senior business analyst, compliance manager, and 
business-line personnel are obtained from SIFMA. The hourly rates for outside legal 
counsel, outside senior programmer, systems analyst or programmer and outside 
compliance services are discussed in infra Section V.D.  



607 

 

investment profile will, however, excuse the broker-dealer from obtaining that information.  Rule 

17a-4(e)(5) will be amended to require that broker-dealers retain all records of the information 

collected from or provided to each retail customer pursuant to Regulation Best Interest for at 

least six years after the earlier of the date the account was closed or the date on which the 

information was last replaced or updated.     

The requirement to create certain written records of information collected from or 

provided to a retail customer under the Disclosure Obligation will trigger a record-making 

obligation under paragraph (a)(35) of Rule 17a-3 and a recordkeeping obligation under Rule 17a-

4(e)(5) that may impose additional compliance costs on broker-dealers.  In cases where broker-

dealers choose to meet part of the Disclosure Obligation orally under the circumstances outlined 

above in Section II.C.1, Oral Disclosure or Disclosure After a Recommendation, the requirement 

to maintain a record of the fact that oral disclosure was provided to the retail customer will 

trigger a record-making obligation under paragraph (a)(35) of Rule 17a-3 and a recordkeeping 

obligation under Rule 17a-4(e)(5) that may impose additional compliance costs on broker-

dealers.  Furthermore, the Care Obligation may require creating new documents or modifying 

existing documents to reflect standardized questionnaires seeking customer investment profile 

information.  These requirements will also trigger a record-making obligation under paragraph 

(a)(35) of Rule 17a-3 and a recordkeeping obligation under Rule 17a-4(e)(5) that will impose 

additional compliance costs on broker-dealers. Currently, under Rule 17a-3(a)(17), broker-

dealers that make recommendations for accounts with a natural person as customer or owner are 

required to create, and periodically update, specified customer account information.  However, 

the information collection requirements of Rule 17a-3(a)(17) do not cover all aspects of the 



608 

 

“customer investment profile” that broker-dealers may attempt to obtain to make a customer-

specific suitability determination under the Suitability Rule.   

As noted above, the Conflict of Interest Obligation requires broker-dealers to establish 

policies and procedures that are reasonably designed to address conflicts of interest, including 

disclosing material facts associated with the conflicts.  The disclosures will be made pursuant to 

the Disclosure Obligation and are not expected to trigger record-making or recordkeeping 

obligations outside the Disclosure Obligation.  

The Commission is providing estimates of the initial and ongoing burden hours 

associated with the record-making and recordkeeping obligations of the Disclosure, Care, and 

Conflict of Interest Obligations, under certain assumptions.  These estimates are discussed in 

Section IV.B.5.  Based on these burden hours estimates, the Commission expects that the record-

making and recordkeeping obligations of Regulation Best Interest will impose an initial 

aggregate burden of 17,684,020 hours and an additional initial aggregate cost of $375,732 as 

well as an ongoing aggregate annualized burden of 5,520,800 hours on broker-dealers.1313 After 

                                                                                                                                                             

 

1313  These estimates are based on the Commission’s estimates, discussed in Section IV.B.5, 
with respect to the initial and ongoing aggregate costs and burdens imposed on broker-
dealers by the record-making obligation of proposed Rule 17a-3(a)(35) and the 
recordkeeping obligation of the proposed amendment to Rule 17a-4(e)(5) associated with 
all component obligations of Regulation Best Interest. The estimate of the initial 
aggregate burden is based on the following calculation: 4,020 hours + 4,080,000 hours + 
13,600,000 hours = 17,684,020 hours, where, as discussed in more detail in Section 
IV.B.5, 4,020 hours is the estimate of amending the account disclosure agreement by 
large broker-dealers, 4,080,000 hours is the estimate of the burden associated with filling 

 

 



609 

 

monetizing the burden hours, the record-making and recordkeeping obligations will impose an 

initial aggregate cost of at least $4,121.73 million and an ongoing aggregate annual cost of at 

least $1,736.52 million on broker-dealers.1314  

7. Approaches to Quantifying the Potential Benefits 

As discussed above, several commenters suggested that we quantify the existing harm to 

investors under the baseline and the corresponding benefit resulting from Regulation Best 

Interest.  We continue to believe that it is not possible to quantify, with meaningful precision, 

                                                                                                                                                             

 

out the information disclosed pursuant to Regulation Best Interest in the account 
disclosure agreement, and 13,600,000 hours is the estimate of the burden to broker-
dealers for adding new documents or modifying existing documents to the broker-
dealer’s existing retention system. $375,732 is the estimate of amending the account 
disclosure agreement by small broker-dealers pursuant to the record-making obligation of 
Rule 17a-3(a)(35). The estimate of the ongoing annual burden is 3,400,00 hours + 
1,060,000 hours + 1,060,000 hours = 5,520,800 hours where 3,400,00 hours is the 
estimate of complying with the recordkeeping obligation of the amendment to Rule 17a-
4(e)(5) and 1,060,000 hours are estimates of both the record-making and recordkeeping 
obligations associated with oral disclosure. 

1314  These estimates are calculated as follows: (2,010 hours of in-house legal counsel) x 
($415.72/hour for in-house counsel) + (17,680,000 hours for entering and adding new or 
modifying existing documents in each customer account) x ($233.02/hour for registered 
representative) + (2,010 hours for in-house compliance counsel) x ($365.39/hour for in-
house compliance counsel)  + (756 hours for outside legal counsel) x ($497/hour for 
outside legal counsel) = $4,121.73 million, and (3,400,000 hours for recordkeeping) x 
($365.39/hour for in-house compliance counsel) + (1,060,000 hours for record-making 
associated with oral disclosure) x ($233.02/hour for registered representative) + 
(1,060,000 hours for record-keeping associated with oral disclosure) x ($233.02/hour for 
registered representative) = $1,736.52 million. The hourly wages for in-house legal and 
compliance counsel and registered representatives are obtained from SIFMA. The hourly 
rates for outside legal counsel are discussed in infra Section IV.B.5.  



610 

 

either the existing harm or the specific benefits we expect to flow from Regulation Best Interest.  

Such an analysis, including one that would produce ranges, depends on many contingent factors 

that render any estimate insufficiently precise to inform our policy choices.1315  Nonetheless, the 

Commission has endeavored to estimate some of the potential benefits that may result from 

Regulation Best Interest using a variety of methodologies, which are explained below in more 

detail along with certain caveats and the principal assumptions relied on.  Specifically, we have 

attempted to estimate the benefit that may result from a reduction in fees due to increased 

competition; we also consider the potential benefit arising from a reduction in the relative 

performance differences of broker-sold and direct-sold mutual funds. 

The quantification exercise below provides an estimate for some of the potential benefits 

associated with Regulation Best Interest.  For example, as discussed in more detail below, a 

potential reduction in fees can benefit retail customers in other ways beyond reducing the total 

dollar amount paid for investment services.  Furthermore, as discussed elsewhere in this 

economic analysis, the rule is expected to generate other benefits for retail customers that we are 

not able to meaningfully quantify. 

                                                                                                                                                             

 

1315  See supra footnote 1156 and subsequent text for a discussion of these factors.  For these 
reasons and because we believe that quantification of the costs and benefits of the 
alternatives discussed in infra Section III.E would require still further assumptions, lead 
to additional imprecision, and yield less meaningful results, we have not included 
quantified estimates of the economic effects of these alternatives. 



611 

 

a. Benefit to Investors Due to a Potential Reduction in Fees 

As discussed above, Regulation Best Interest may reduce the attractiveness of certain 

products to broker-dealers due to the Care Obligation (e.g., the emphasis on the need to consider 

cost, among other things) and the Conflict of Interest Obligation (e.g., addressing conflicts of 

interest, including product menu limitations) and/or may reduce retail customers’ aggregate 

demand for certain products due to the Disclosure Obligation (e.g., due to a reduction in any 

information asymmetry with respect to fees).  To the extent that Regulation Best Interest 

produces these effects on certain products, the affected product sponsors may react by lowering 

the fees that they charge retail customers on these products to be more competitive, or by 

repackaging these products into new products that are more competitively priced. The increased 

competition generated by the lower fees for affected products may further incentivize other 

product sponsors (i.e., those not directly affected by Regulation Best Interest) to lower their fees 

as well.1316  Alternatively, a product sponsor may preempt the potential decline in the aggregate 

demand for its products by lowering the fees before other sponsors do. 

For the purposes of calculation, we assume that this potential competition in prices results 

in a new long-run equilibrium in this product market, in which product sponsors charge fees that 

are close to or equal to their marginal costs.  Lower fees translate into direct savings to retail 
                                                                                                                                                             

 

1316  A product sponsor that does not lower its fees on a given product may risk experiencing 
low retail customer aggregate demand or low demand from broker-dealers as a result of 
Regulation Best Interest.  To stay competitive this product sponsor may have to lower the 
fees on its product. 



612 

 

customers.  If a portion of fees collected from retail customers serves to compensate broker-

dealers for selling certain investment products, then lowering those fees could also translate into 

less severe conflicts of interest.  Thus, a reduction in fees may improve the efficiency of the 

recommendations that broker-dealers make to retail customers.  This potential increase in the 

efficiency of the recommendations received also benefits retail customers.1317  

The market for mutual fund products may illustrate the potential for attaining such a new 

long-run equilibrium as a result of Regulation Best Interest.  We focus on mutual funds for this 

analysis because of the available data for mutual funds, but we expect the same or similar 

dynamics could apply to other financial products.  As this market transitions toward this new 

long-run equilibrium, total fund expenses (i.e., distribution expenses and management fees) that 

are in excess of the marginal cost of distributing and operating the fund may be reduced in a 

number of ways, including by lowering fees, reliance on alternative distribution channels, or 

exiting the market in whole or in part (i.e., by limitations on offerings).  Below we attempt to 

quantify the benefits associated with this potential long-run equilibrium in the market for mutual 
                                                                                                                                                             

 

1317  For purposes of this analysis, we assume that product sponsors respond to competitive 
pressures by lowering their fees.  However, competition may affect quality in addition to 
price.  For example, product sponsors may choose to offer higher quality products which 
may be costlier to produce (e.g., because they must hire more skilled managers or apply 
more costly technology) and as such require higher fees.  Alternatively, product sponsors 
may lower fees by reducing the quality of their product (e.g., hiring fewer skilled 
managers) and, as a result, offering lower fee products that may produce lower average 
returns. Competition along both of these dimensions may allow retail customers to 
choose different combinations of quality and price, depending on their individual 
preferences. 



613 

 

fund products as a result of such reduction in fees, relative to the baseline, assuming all funds 

reduced fees to marginal costs. To this end, we start with the current distribution of fees of funds 

within each Center for Research in Security Prices (CRSP) objective class.1318 We focus on 

funds that have reported this information in 2018 in CRSP.  We perform the analysis using total 

fees (i.e., fund expense ratios).  As an alternative, we also perform the analysis using the 

component of the total fees that are allocated toward distribution and marketing expenses, and 

that we can observe, namely 12b-1 fees.1319   

We estimate the marginal cost of distributing and operating a non-index fund in a given 

CRSP objective class (i.e., strategy) as the minimum total fee of the funds in that class, after 

excluding index funds. Similarly, we estimate the marginal cost of operating an index fund in a 

given CRSP objective class as the minimum total fee of the index funds in that class. We then 

calculate the maximum “excess fee” for a fund (index or non-index) as the difference between 

                                                                                                                                                             

 

1318  Calculated based on data from the Center for Research in Security Prices (CRSP), 
University of Chicago Booth School of Business.  Funds with different objectives may 
incur different marginal costs due to the frequency of trading in the markets that are 
reflective of the objective of the fund, advertising to reach a certain clientele, distribution 
costs, etc. The CRSP Mutual Fund dataset includes a breakdown of mutual funds by their 
objective types. 

1319  12b-1 fees are paid out of fund assets to cover the costs of marketing and selling fund 
shares. "Distribution fees" include fees to compensate brokers and others who sell fund 
shares, and to pay for advertising and printing and mailing prospectuses to new investors. 
"Shareholder service fees" are fees that cover the cost of responding to investor inquiries 
and providing investors with information.  This analysis excludes loads because, unlike 
12b-1 fees, loads cannot be separately broken out.    



614 

 

the actual total fee of the fund and the marginal cost of the CRSP objective class that contains the 

fund.  By construction, the excess fee cannot be negative.  

We obtain an aggregate amount of reduced fees of approximatively $22.2 billion for non-

index funds and $1.4 billion for index funds annually at the new potential equilibrium.1320 The 

aggregate amount of saved fees across index and non-index funds becomes approximatively 

$23.6 billion. Similarly, if we focus on 12b-1 fees only, the aggregate amount of saved fees are 

$9.13 billion for non-index funds and $0.32 billion for index funds, or $9.45 billion across both 

index and non-index funds. 

Using certain assumptions to calculate the present value of this potential fee 

reduction,1321 we calculate the net benefit of the new equilibrium as the difference between the 

                                                                                                                                                             

 

1320  We calculate the dollar value associated with these excess fees by multiplying the excess 
fees of a fund with total net assets (TNA) of the fund and then aggregating across funds. 
This amount represents the capital that would be reallocated towards more efficient funds 
and can be thought of as “fees saved” by retail customer as this product market shifts 
from the baseline equilibrium to the new equilibrium. 

1321  First, we note that expense ratios for equity mutual funds have declined at a rate of about 
3% per year since 2000.  This rate doubles to 6% if we focus on the period following 
FINRA’s adoption of the Suitability Rule in 2011. We assume that under the current 
equilibrium, or “baseline equilibrium,” excess fees—as defined above—would continue 
to decline at the rate of 3% per year. This rate of decay corresponds to a half-life of 
approximatively 23 years.  We further assume that as the product market shifts towards 
the new equilibrium, excess fees decline at a rate that is at least as high as the post-2011 
rate.  Because Regulation Best Interest enhances the broker-dealer standard of conduct 
established by the Suitability Rule—particularly with respect to the disclosure, mitigation, 
or elimination of conflicts of interest, which is not addressed by the Suitability Rule—and 
the federal securities laws, we believe that a rate of decay that is at least as large as the 
one observed in the post-2011 period is not unreasonable.  Under this assumption, we 

 

 



615 

 

two present values of declining perpetuities that pay the dollar value associated with excess fees 

under the baseline equilibrium and the new equilibrium, respectively, for each of the three 

scenarios. When using the total fees, we obtain an expected net benefit of $35.21 billion in the 

moderate decay scenario, $59.15 billion in the accelerated decay scenario, and $76.49 billion in 

the rapid decay scenario. Similarly, when using 12b-1 fees only, we obtain an expected net 

benefit of $14.10 billion in moderate decay scenario, $23.69 billion in the accelerated decay 

scenario, and $30.63 billion in the rapid decay scenario. 

b. Benefits to Investors Due to a Potential Reduction in the Relative 
Underperformance of Broker-versus Direct Sold Mutual Funds 

Another way to estimate the potential benefits of Regulation Best Interest is to use 

aspects of the approach used in the CEA Study and the DOL RIA, as suggested by several 

commenters.1322  Specifically, we rely on academic literature claiming that, to varying degrees, 

broker-sold mutual funds underperform direct-sold mutual funds and assume that 

underperformance reflects agency costs associated with the conflicts of interest that may be 

                                                                                                                                                             

 

consider three scenarios: (1) moderate decay at 6%; (2) accelerated decay at 9%; and (3) 
rapid decay at 12%.  The half-life for each of these scenarios is 11.5 years, 7.7 years, and 
5.8 years, respectively.  Finally, we assume that the opportunity cost of the excess fees is 
equal to the expected rate of return on the value-weighted market portfolio, as defined in 
CRSP, as these fees encumber capital that would have otherwise been invested in 
efficient funds. To estimate the expected return on the market portfolio, we assume that 
the discount rate is the geometric average of the annual rate of return on the market 
portfolio over the period 1927-2018, namely 9.76%. 

1322  See supra footnote 1167. 



616 

 

present in recommendations provided by broker-dealers.  Although this literature addresses only 

a portion of the AUM affected by Regulation Best Interest, we use methods from these studies to 

estimate the monetary effect the final rule might produce by reducing the effect that conflicts of 

interest have on the recommendations provided by broker-dealers.  

Total AUM of load and no-load long-term mutual funds in the U.S. as of the end of 2018 

are approximately $12.4 trillion, with $10.4 trillion attributable to no-load funds and $2.1 trillion 

attributable to load funds.1323  To estimate the monetary effect of potential conflicts of interest as 

they pertain to mutual funds, we use estimates of the difference in net returns (gross returns on a 

fund’s performance less fees and other expenses associated with the fund) between broker-sold 

funds and funds that are direct-sold from Reuter (2015).1324  We then apply this difference to the 

aggregate market capitalization of load funds, which we assume are sold with a recommendation 

from a broker-dealer because we cannot identify the channel through which mutual funds are 

sold or whether each sale through the broker-sold channel involves a recommendation.  To the 

extent that no-load funds are also sold by broker-dealers, this assumption may cause us to 

underestimate the portion of mutual fund AUM that are sold with a recommendation from a 

                                                                                                                                                             

 

1323  See Investment Company Institute 2019 Fact Book, Figure 6.12. 
1324  See Reuter (2015), supra footnote 1095.  In contrast to the DOL RIA, we do not base our 

analysis on excess loads, as estimated in Christoffersen et al. (2013), supra footnote 
1081.  Prior commenters noted that the average excess load, by definition, is zero and 
would likely yield a much lower estimate of aggregate harm, than the estimate published 
by the CEA and include in the DOL RIA.  See, e.g., Lewis (2017), supra footnote 1099.  
See also supra footnotes 1169 and 1170.   



617 

 

broker-dealer.1325  Because the data in Reuter (2015) ends in 2012, for the purposes of this 

approach we assume that the relative underperformance of broker-sold funds, and hence our 

application of this underperformance to load funds as a proxy for funds sold with a 

recommendation from a broker-dealer, remains unchanged from 2012.1326  

Reuter (2015) employs a variety of methods in computing the difference in net returns 

between broker-sold and direct-sold actively managed funds, including different ways of 

computing net returns (e.g., net return, net return plus 12b-1 fees, net alphas, and ordinary least-

squares and weighted least-squares regression methods), different samples (e.g. “non-specialized 

domestic equity”), and different weighting schemes (e.g. equally weighted or value weighted 

returns).  Reuter concludes by noting that the performance difference between broker-sold and 

direct-sold actively managed mutual funds is likely to fall between 0.20% and 0.47%, depending 

whether or not 12b-1 fees are included in the estimation.  Given that the underperformance only 

affects broker-sold funds, and applying these underperformance estimates to load funds, the 

estimated monetized underperformance of broker-sold funds ranges from $4.1 billion per year to 

$9.7 billion per year.   

                                                                                                                                                             

 

1325   Brokers may still be compensated for selling no-load funds by 12b-1 fees, revenue 
sharing, or other arrangements. 

1326  See supra footnote 1102 for discussion of how trends in the relative performance of load 
funds may have changed in more recent years. 



618 

 

As discussed elsewhere in this release, we expect Regulation Best Interest will reduce the 

severity of conflicts of interest that may contribute to the underperformance between broker-sold 

and direct-sold mutual funds.  However, the range noted above most likely overestimates the 

expected reduction in harm associated with broker-sold mutual funds due to Regulation Best 

Interest for a number of reasons. First, as discussed by Bergstresser et al. (2009), broker-sold 

funds can be sold by both broker-dealers and investment advisers (e.g., dually registered 

investment advisers), and the data these studies relied upon is not sufficiently granular to identify 

the fraction of broker-sold funds sold by each type of financial professional.1327  Because 

Regulation Best Interest applies to registered broker-dealers, this range would need to be 

narrowed to reflect the proportion of broker-sold funds sold by registered broker-dealers.  

Second, the estimated range fully attributes the differences between direct-sold funds and 

broker-sold funds to conflicts of interest between retail customers and broker-dealers.  This 

might over-estimate the benefits of Regulation Best Interest because there might be other 

unobservable systematic differences between investors who choose direct-sold funds versus 

those who choose to employ a financial professional.  For example, retail customers that buy 

broker-sold funds might be willing to pay more for those funds if they receive intangible benefits 

from a broker-dealer’s recommendation that are not reflected in the relative performance 

between funds sold through these two channels.  Furthermore, not all sales in the broker-sold 

                                                                                                                                                             

 

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



619 

 

channel are triggered by recommendations provided by broker-dealers or their associated persons.  

For example, customer-directed transactions may not involve a recommendation at all.  

Third, measuring a fund’s performance using its net return relative to a benchmark might 

not be the most accurate measure of a fund manager’s skill or the value created by a fund to an 

investor.1328  Therefore, estimating investor harm assuming this definition of the value created by 

a fund might potentially overstate or understate this harm.  

Taking into account these caveats,1329 to the extent that Regulation Best Interest mitigates, 

and in the limit, eliminates the adverse effects of conflicts of interest on broker-dealers’ 

recommendations, we estimate that the benefits attributable to Regulation Best Interest could be 

as large as $4.1 billion per year to $9.7 billion per year when estimated assuming that the relative 

underperformance of broker-sold mutual funds estimated in the academic literature reflects 

conflicts of interest that will eventually be eliminated. 

As with our other estimates of the benefits above, we assume that there is already a 

decreasing trend in the underperformance gap under the baseline that is consistent with the 

decreasing trend in mutual fund expense ratios of 3%, and that Regulation Best Interest will 

accelerate this trend to a decay rate under three scenarios: 1) moderate decay at 6%; 2) 

                                                                                                                                                             

 

1328  See supra footnote 1176. 
1329  See supra footnotes 1172–1178 for further discussion of the limitations that apply in 

using the relative underperformance of broker-sold mutual funds as an estimate of 
investor harm and, therefore, the benefits of Regulation Best Interest. 



620 

 

accelerated decay at 9%; and 3) rapid decay at 12%.  Similarly, we assume a discount rate of 

9.76% as above to value these cash flows.  Under these assumptions, the present value of the 

potential benefits of Regulation Best Interest in the mutual fund sector, relative to the baseline, 

from limiting or eliminating the adverse effects of conflicts of interest could be as large as 

approximately $6.8 to $16 billion in the moderate decay scenario, $11.4 to $26.7 billion in the 

accelerated decay scenario, and $14.7 to $34.5 billion in the rapid decay scenario. 

Finally, we can obtain an approximate estimate of the present value of the costs 

associated with Regulation Best Interest using the costs estimated in Section IV for purposes of 

the Paperwork Reduction Act, which imply aggregate initial costs of approximately $5.96 billion 

and ongoing costs of $2.37 billion.  Assuming the initial costs are incurred one year from the 

rule’s enactment, and using a discount rate of 9.76% as above, the present value of these costs is 

approximately $27.5 billion.  Note that this cost estimate cannot be directly compared with the 

benefit estimates above as the benefits estimates are with respect to mutual funds only. 

D. Efficiency, Competition, and Capital Formation 

As discussed above, Regulation Best Interest is designed to address the agency costs that 

arise when an associated person of the broker-dealer provides a recommendation to a retail 

customer that may not be fully addressed by the regulatory baseline. Regulation Best Interest is 

intended to reduce agency costs and other costs by enhancing the standard of conduct of broker-

dealers, increasing the effectiveness of disclosure to allow retail customers to make a more 

informed decision with respect to the recommendation they receive and by requiring broker-

dealers to implement policies and procedures reasonably designed to reduce the effect of 

conflicts of interest on recommendations to retail customers.  Specifically, the Disclosure 

Obligation and Conflict of Interest Obligation require broker-dealers to disclose information that,621 

 

while not necessarily new in all instances, will reach retail customers more directly and more 

timely than under the regulatory baseline. In addition, the disclosed information would raise a 

retail customer’s salience of fees, scope of the relationship, conflicts of interest, and limitations 

of the menu of securities from which the retail customer receives recommendations as potential 

factors affecting the recommendations of a broker-dealer or its associated persons. The content 

and form of disclosure may help some retail customers make more informed decisions with 

regards to whether to act on a recommendation provided by an associated person of the broker-

dealer. Regulation Best Interest may also reduce the agency costs faced by these retail customers.  

The Conflict of Interest Obligation also requires broker-dealers to implement policies and 

procedures to reduce the effect of conflicts of interest and securities menu limitations on 

recommendations to retail customers. For broker-dealers that implement more effective policies 

and procedures, the obligation may increase the efficiency of the recommendations for their 

retail customers. As a result, Regulation Best Interest may reduce the agency costs faced by these 

retail customers.  

The Care Obligation requires a broker-dealer and its associated persons to have a 

reasonable basis to believe that a recommendation provided to a retail customer is in the 

customer’s best interest. This reasonable basis should include factors similar to those identified 

by the Suitability Rule of the current regulatory regime as well as additional factors. For example, 

relative to the regulatory baseline, the Care Obligation requires that a broker-dealer and its 

associated persons consider costs, among other factors, and establish a direct link between the 

attributes of a security or investment strategy and the retail customer’s best interest. By requiring 

consideration of costs and by including an explicit link between the investment-related factors 

and the best interest, the obligation may increase the efficiency of the recommendations for the 



622 

 

retail customer. As a result, Regulation Best Interest may reduce the agency costs faced by these 

retail customers. 

Through these effects, as discussed below, Regulation Best Interest may have an effect 

on competition, capital formation, and efficiency. 

1. Competition 

Regulation Best Interest may have competitive effects for the market for investment 

advice and may affect how broker-dealers compete with each for retail customers. As discussed 

in Section III.C, the brokerage industry currently recognizes that broker-dealers and their 

associated persons may have conflicts of interest that create incentives for broker-dealers or their 

associated persons to make recommendations that, while suitable for their retail customers, may 

not be in the best interest of (and may not be the most efficient recommendations for) such 

customers. As noted above in Section III.B.2.c, a FINRA survey suggested that broker-dealers 

currently employ different methods for managing conflicts of interest, with some methods being 

more effective than others at reducing the effect of conflicts of interest on recommendations. 

These methods generally depend on the size and complexity of a broker-dealer’s business model. 

Against this backdrop, the cost of complying with Regulation Best Interest, scaled by the size 

and complexity of a broker-dealer’s business activities, may be higher for broker-dealers that 

currently employ less effective methods for managing conflicts of interest.  



623 

 

Relative to broker-dealers that face lower compliance costs, broker-dealers that face 

higher compliance costs may be at a disadvantage when competing for retail customers and may 

not be able to fully pass on these costs to their retail customers.  For example, the presumption 

related to the titles “adviser” and “advisor” may impose higher costs on broker-dealers that use 

these terms  in their names or titles, but that are not dual-registrants.1330  The extent to which 

broker-dealers are able to pass on costs to their retail customers depends on a number of factors 

that include the availability of close substitutes for the services provided by broker-dealers and 

the cost to retail customers of switching accounts to a competing broker-dealer, investment 

adviser, or other financial services provider.  If broker-dealers are unable to pass costs through to 

customers, it is possible that some of the broker-dealers that face high compliance costs may 

decide to exit the market for investment advice in the capacity of a broker-dealer. 

 The potential competitive effects associated with compliance costs could be further 

exacerbated by how broker-dealers choose to comply with the component obligations of 

Regulation Best Interest. As discussed in Section III.C.4, broker-dealers are given flexibility 

when addressing conflicts of interest through policies and procedures. Because Regulation Best 

Interest and the component obligations are generally principles-based, a broker-dealer would 

have to determine what constitutes effective means of addressing a given conflict of interest, and 

how it should relate to the size and complexity of a broker-dealer’s business model. For a broker-

                                                                                                                                                             

 

1330  See supra footnotes 1216-1220. 



624 

 

dealer that is dually registered or for a broker-dealer that is affiliated with an investment adviser, 

the overall costs of complying with Regulation Best Interest may encourage the broker-dealer to 

exit the market for providing investment advice in the capacity of a broker-dealer and, instead, 

provide advice only in the capacity of an investment adviser. Whereas broker-dealers have 

explicit requirements to establish written policies and procedures reasonably designed to disclose, 

mitigate or eliminate identified conflicts of interest that create an incentive for the associated 

persons to place their interest ahead of the retail customer, the fiduciary standard for investment 

advisers relies on full and fair disclosure and informed consent to address conflicts of 

interest.1331  Investment advisers must also adopt and implement written policies and procedures 

reasonably designed to prevent violations of the Advisers Act, including violations related to 

undisclosed conflicts of interest.1332  More generally, compliance costs may drive such firms to 

no longer offer advice in the capacity of a broker-dealer if firms anticipate the profitability of 

their broker-dealer business under Regulation Best Interest to be lower than the profitability of 

their advisory business.   

                                                                                                                                                             

 

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

1332 See Advisers Act Rule 206(4)-7. 



625 

 

 Similar concern over costs of complying with Regulation Best Interest may deter some 

broker-dealers from entering the market for investment advice. Higher entry costs may have 

long-run competitive effects on prices paid by retail customers, as incumbents adjust their 

strategic behavior to reflect a lower threat of competition from new entrants, relative to the 

baseline.1333 Regulation Best Interest may also encourage competition for retail customers to the 

extent that the Disclosure Obligation increases the retail customers’ salience to variables such as 

fees and conflicts of interest that would facilitate comparability across broker-dealers. For 

example, retail customers may form preferences over some or all of the disclosed variables, such 

as fees, securities or service offerings, and range of conflicts of interest, and may choose one 

broker-dealer over another or over an investment adviser based on these preferences. In turn, if 

firms anticipate that there is a possibility that retail customers may use the disclosed variables for 

comparability purposes, broker-dealers may compete over some or all of these variables to attract 

more retail customers. This potential competition may result in greater securities or service 

offerings, or lower fees for retail customers.  

Regulation Best Interest may also affect how broker-dealers compete with each other 

when negotiating with investment sponsors for access to securities. The findings of the 

aforementioned FINRA survey suggest that broker-dealers may face different degrees of 

                                                                                                                                                             

 

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

 



626 

 

competition when negotiating with product sponsors for access to certain securities. For instance, 

the survey observed that some product sponsors rate the broker-dealers that are interested in 

distributing their securities based on criteria such as product expertise and experience, the quality 

of the control environment, and the strength of their sales practices. Broker-dealers that have 

higher ratings, based on these criteria may be given access to a broader range of securities, 

including more complex securities. In contrast, broker-dealers that have lower ratings may be 

given access to a narrower range of securities. To the extent Regulation Best Interest has the 

effect of increasing and homogenizing the product expertise and experience (e.g., the Care 

Obligation) and the quality of the control environment (e.g., the Conflict of Interest Obligation) 

across the complying broker-dealers, the final rule may increase the competition across firms 

when negotiating with product sponsors. This increased competition may allow product sponsors 

to economize on the distribution costs, and may result in lower fees for retail customers. 

 Regulation Best Interest may also have competitive effects for the market for investment 

advice, more generally. Regulation Best Interest may affect how broker-dealers compete with 

firms that provide advice in a capacity other than as a broker-dealer, such as an investment 

adviser. Under the regulatory baseline, investment advisers owe a fiduciary duty to their clients. 



627 

 

Some commenters describe this standard of conduct as a “higher” standard compared to the 

standard of conduct applies to broker-dealers under the regulatory baseline.1334   

For some retail customers the duty owed to them by their firm or financial professional 

may be a determining factor when deciding which type of firm or financial professional they 

want to use.  As previously noted, key elements of the standard of conduct that applies to broker-

dealers, at the time a recommendation is made, under Regulation Best Interest will be 

substantially similar to key elements of the standard of conduct that applies to investment 

advisers pursuant to their fiduciary duty under the Advisers Act.  As such, the standard of 

conduct under Regulation Best Interest may make broker-dealers more attractive to certain retail 

customers who seek recommendations for securities transactions or investment strategies in a 

more cost effective manner, but worry about the duties owed to them by their financial 

professional. As a result, Regulation Best Interest may increase the competition between broker-

dealers and investment advisers for retail customers interested in obtaining investment advice.  In 

competing for business, broker-dealers and investment advisers may lower their fees, resulting in 

retail customers paying less for obtaining investment advice. To the extent that this potential 

lower cost causes an increase in the demand for investment advice in the capacity of a broker-

dealer, this positive competitive effect may offset some of the negative potential competitive 

                                                                                                                                                             

 

1334  See Letter from Ken Fisher, Fisher Investments (Jul. 31, 2018) (“Fisher Letter”); PIABA 
Letter; FPC Letter; NASAA August 2018 Letter; U. of Miami Letter; Rhoades August 
2018 Letter. 



628 

 

effects of Regulation Best Interest, such as higher cost of entry in the market for investment 

advice in the capacity of a broker-dealer relative to the baseline, as discussed above. 

The Disclosure Obligation may also encourage competition for retail customers across 

broker-dealers and investment advisers. As noted above, the Disclosure Obligation would require 

broker-dealers to make full and fair disclosure of all material facts relating to the scope and terms 

of the relationship with the retail customer and all material facts relating to conflicts of interest 

that are associated with a recommendation. Investment advisers are also required to provide full 

and fair disclosure of material facts about similar elements under the current regulatory regime. 

To the extent that the Disclosure Obligation raises the salience of variables that may facilitate 

comparison across broker-dealers and investment advisers, Regulation Best Interest may 

encourage competition between broker-dealers and investment advisers.  

Regulation Best Interest may also have competitive effects for financial professionals that 

offer investment advice in a capacity other than that of a broker-dealer (e.g., investment advisers 

and other financial professionals that are not registered with the Commission, such as insurance 

companies, banks, and trust companies). As discussed above in Section III.C.4, depending on the 

effectiveness of disclosure and the effectiveness of policies and procedures that address 

securities menu limitations (e.g., the Disclosure Obligation and Conflict of Interest Obligation), 

Regulation Best Interest may reduce the retail customers’ aggregate demand for certain securities 

that are distributed by broker-dealers and securities on which broker-dealers or their associated 

persons provide recommendations. Instead, retail customers may access some of these or 

comparable securities from other financial professionals. For example, a retail customer may 

access certain securities offered by broker-dealers through corporate fiduciaries such as 

commercial banks or trust companies. Alternatively, a retail customer may open an advisory 



629 

 

account and access securities that are comparable to those offered by the broker-dealer. To the 

extent that Regulation Best Interest causes a potential reduction in the retail customers’ 

aggregate demand for securities offered by broker-dealers, retail customers’ aggregate demand 

may increase for securities offered by non-broker-dealers.  Regulation Best Interest may also 

affect how product sponsors compete for flows from retail customers. As discussed above in 

Section III.C.4, depending on the effectiveness of disclosure and the effectiveness of policies and 

procedures that address limitations of the menu of securities (e.g., Disclosure and Conflict of 

Interest Obligations), Regulation Best Interest may reduce the aggregate demand for certain 

sponsors’ securities. To remain competitive, product sponsors that face decreased demand as a 

result of Regulation Best Interest may reprice their securities (e.g., by offering different share 

classes), lower their fees, or seek alternative distribution channels that are not affected by 

Regulation Best Interest.  For example, product sponsors may choose to distribute their securities 

through investment advisers or through commercial banks to the extent that the banks can engage 

in limited broker-dealer activity, subject to certain conditions, without having to register as 

broker-dealers.1335 Finally, product sponsors may choose to distribute their securities directly to 

retail investors rather than indirectly, through broker-dealers. The potential competitive effect of 

                                                                                                                                                             

 

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

 



630 

 

Regulation Best Interest on product sponsors may manifest itself in lower product fees for retail 

customers. 

2. Capital Formation and Efficiency 

Regulation Best Interest is designed to reduce the agency and other costs to retail 

customers associated with obtaining recommendations from broker-dealers. As discussed above, 

to reduce these costs, Regulation Best Interest would impose obligations on broker-dealers that 

are designed to increase the efficiency of the recommendations to retail customers relative to the 

recommendations that broker-dealers and their associated persons provide to retail customers 

under the regulatory baseline. 

To the extent retail customers receive recommendations that are more efficient relative to 

the baseline, Regulation Best Interest would increase the efficiency of the portfolio allocation 

that a retail customer makes as a result of the recommendation received. As discussed above in 

Sections III.A.2 and III.C, this would occur when a retail customer increases the allocative 

efficiency of his or her portfolio when the recommendation leads to a reallocation of resources 

across time and market and economic conditions that generate a higher net benefit to the retail 

customer, relative to the baseline. Thus, to the extent that Regulation Best Interest increases the 

efficiency of the associated persons’ recommendations to retail customers, the final rule would 

have a positive effect on the retail customers’ allocative efficiency. 

Regulation Best Interest may also increase the efficiency of the recommendations 

involving rollovers or transfers of assets from retirement accounts to other taxable or non-taxable 

accounts, relative to the baseline. As noted above, the incentives associated with this type of 

recommendation are particularly acute because of the size of the transaction and the importance 

to the retail customer (e.g., given that the amount of assets associated with such 



631 

 

recommendations can be a significant portion of a retail customer’s net worth). The potential 

increase in the efficiency of this type of recommendation may improve the allocative efficiency 

of assets held in retirement accounts, and may encourage retail customers to consider a rollover 

or transfer of assets recommendation to potentially increase the efficiency of their retirement 

asset allocation. 

Similarly, Regulation Best Interest may increase the efficiency of the recommendations 

regarding account types. As discussed above, currently, a dual-registrant may have an incentive 

to recommend the account type that benefits the dual-registrant at the expense of the retail 

customer. The potential increase in the efficiency of this type of recommendation under 

Regulation Best Interest relative to a similar recommendation that the dual-registrant may 

provide under the baseline may improve the allocative efficiency of the retail customer’s assets 

held in this account.  

The possibility that Regulation Best Interest may increase the efficiency of the 

recommendations provided by the associated persons of the broker-dealer may enhance the 

attractiveness of broker-dealer services for those investors who currently do not invest through 

broker-dealers. Although there are costs associated with these requirements, the protections 

deriving from these requirements may benefit investors, issuers, and intermediaries by helping to 

create a marketplace where a higher number of retail customers invest through broker-dealers, 

relative to the current regulatory regime. If retail customers are more willing to participate in the 

securities markets through broker-dealers, Regulation Best Interest would have a positive effect 

on capital formation. 

 



632 

 

E. Reasonable Alternatives 

Regulation Best Interest establishes a new standard of conduct for broker-dealers under 

the Exchange Act that is intended to address the agency costs that retail customers face when 

obtaining recommendations of securities transactions and investment strategies from broker-

dealers and their associated persons.  This new standard is intended to enhance investor 

protection, while preserving, to the extent possible, retail investor access (in terms of choice and 

cost) to differing types of investment services and securities.  As noted above, the Commission 

considered several reasonable alternative policy choices, including (1) applying the fiduciary 

standard under the Advisers Act to broker-dealers, and (2) adopting a “new” uniform fiduciary 

standard of conduct applicable to both broker-dealers and investment advisers, such as that 

recommended by the staff in the 913 Study.  The Commission also considered adopting similar 

standards to those the DOL had provided under its fiduciary rule to broker-dealers and 

investment advisers.1336  We examine the effects of these primary alternatives, as well as several 

other alternatives that we considered both in the Proposing Release and in response to comments.   

 

                                                                                                                                                             

 

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

 



633 

 

1. Fiduciary Standard for Broker-Dealers 

As discussed in the Proposing Release and as raised by commenters, instead of adopting 

our approach in Regulation Best Interest, the Commission could have alternatively imposed a 

form of fiduciary standard on broker-dealers providing recommendations to retail customers. The 

Commission recognized that fiduciary standards vary among investment advisers, banks acting 

as trustees or fiduciaries, or ERISA plan providers, but fiduciaries are generally required to act in 

the best interest of their clients.1337   

Under any of the options considered, the Commission would have to craft a mechanism 

to apply a uniform standard of conduct to all financial professionals regardless of how they 

engage with their retail customers.  This approach was advocated by certain commenters, many 

of whom asserted that it would reduce retail investor confusion as it would ensure that investors 

are provided the same standard of care and loyalty regardless of what type of financial 

professional they engage.1338  As discussed above and in detail further below we believe, in 

practice, that such uniformity would be difficult to implement and disruptive to pursue as a result 

of various factors, including the key differences in the ways broker-dealers and investment 

                                                                                                                                                             

 

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

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



634 

 

advisers engage with retail clients.  Achieving such uniformity could require narrowing the type 

and scope of services permitted to be provided by various types of financial professionals.  If we 

were to pursue such an approach, it could reduce retail customers’ confusion with respect to the 

duties owed to them by the broker-dealers and investment advisers and could reduce potential 

costs to some investors associated with choosing a type of relationship that is not well suited to 

them, because under a uniform standard, retail customers of each type of financial professional 

would be subject to the same standard of conduct. 

However, this uniformity could come at a cost to both investors and financial service 

providers. Such an approach could result in a standard of conduct for broker-dealers that is not 

appropriately tailored to the structure and characteristics of the broker-dealer model (i.e., 

transaction specific recommendations and compensation), and might not properly take into 

account, or build upon, existing obligations that apply to broker-dealers, including under FINRA 

rules.1339 A potential implication of this paradigm shift would be that broker-dealers would face 

significant compliance costs, at least in the short run, relative to the regulatory baseline. 

Potentially higher compliance costs could increase the incentive to offer investment advice in the 

capacity of investment adviser and could decrease the incentive to offer investment advice in the 

capacity of broker-dealer. To the extent broker-dealers act on the increased incentives and decide 

to participate in the market for investment advice only in the capacity of investment advisers, 

                                                                                                                                                             

 

1339  See also 913 Study at 139-143. 



635 

 

retail customers could experience an increase in the cost of obtaining investment advice, relative 

to the baseline. Furthermore, as noted above, the potential exit of broker-dealers from the market 

for investment advice in the broker-dealer capacity could limit how retail customers would 

access certain securities or investment strategies and how they would pay for investment advice, 

which, in turn, could increase their costs of obtaining investment advice, relative to the 

baseline.1340  To the extent broker-dealers decide to continue to participate in the market for 

investment advice in the capacity of broker-dealers, they could pass on increased compliance 

costs, in full or in part, to their retail customers.  As a result, retail customers could experience an 

increase in the cost of obtaining investment advice, relative to the baseline. The potential 

increase in the cost of accessing investment advice could push some retail customers outside the 

market for investment advice from Commission-registered broker-dealers and investment 

advisers.1341 

We discuss each of the three options for applying a uniform fiduciary standard in more 

detail below. We compare each of the three alternatives against the regulatory baseline, which is 

the current broker-dealer regulatory regime.  In addition, we briefly discuss the differences 

between the standard of conduct imposed by Regulation Best Interest and the fiduciary standard 

under the Advisers Act. As discussed above in Section I, we believe that our approach in 

                                                                                                                                                             

 

1340  See supra Section III.D.1. 
1341  See supra Section I.A for a discussion of access to investment advice in the context of the 

DOL Fiduciary Rule. 



636 

 

adopting Regulation Best Interest will best achieve the Commission’s important goals of 

enhancing retail investor protection and decision making, while preserving, to the extent possible, 

retail investor access (in terms of choice and cost) to differing types of investment services and 

securities. 

 

a. Fiduciary Standard under the Advisers Act Applied to Broker-Dealers 

A number of commenters discussed the viability of this alternative and stated that it 

would provide superior investor protection benefits relative to the standard that the Commission 

proposed.1342  At the outset, we note that, at the time a recommendation is made, key elements of 

the standard of conduct that applies to broker-dealers under Regulation Best Interest will be 

substantially similar to key elements of the standard of conduct that applies to investment 

advisers pursuant to their fiduciary duty under the Advisers Act.  Both standards of conduct 

require that, when making a recommendation or providing advice, firms and financial 

professionals act in the best interest of the retail investor and not place the financial professionals’ 

interests ahead of the retail investor.1343  Both standards provide methods for addressing conflicts 

                                                                                                                                                             

 

1342  See Betterment Letter; Warren Letter; Fein Letter; State Treasurers Letter; AARP August 
2018 Letter; ACLI Letter; Schwab Letter. 

1343  See supra Section I.A. 



637 

 

of interest, although the mechanics of those methods and their outcomes may be different,1344 

and both standards require full and fair disclosure of material facts that affect the relationship, 

including costs.  Both standards allow each type of financial professional to agree to provide 

account monitoring services to retail investor accounts, although continuous monitoring is 

embedded in the regulatory regime and market practices for investment advisers, whereas a 

broker-dealer may agree to provide account monitoring services only to the extent that it is solely 

incidental to the primary brokerage business.1345  

We recognize that there are certain notable differences between the Advisers Act 

fiduciary standard and the Regulation Best Interest standard we are adopting.  In particular, the 

investment adviser fiduciary duty is generally principles-based, in keeping with the regulatory 

tradition and market practices for advisers,1346 whereas Regulation Best Interest, while also 

largely principles-based, establishes minimum, obligations that are generally more prescriptive 

than the fiduciary obligations under Advisers Act.  Further, advisers are able to address conflicts 

                                                                                                                                                             

 

1344  Whereas, pursuant to Regulation Best Interest, broker-dealers are required to (i) to 
establish written policies and procedures reasonably designed to identify and at a 
minimum, disclose, or eliminate, all conflicts of interest; and (ii) to establish written 
policies and procedures reasonably designed to mitigate or eliminate identified conflicts 
of interest, the fiduciary standard for investment adviser relies on full and fair disclosure 
and informed consent.   

 
1345  See Solely Incidental Interpretation.  See also supra Section II.B.2.b. 
1346  See Fiduciary Interpretation. 



638 

 

of interest through full and fair disclosure and informed consent,1347 while broker-dealers must 

have policies and procedures that are reasonably designed to identify and disclose and mitigate, 

or eliminate, any conflicts of interest associated with recommendations that create an incentive 

for the broker-dealer or its associated persons to place the interest of the broker-dealer or its 

associated persons ahead of the interest of the retail customer.  With regard to the substance of 

both standards, the investment adviser fiduciary duty generally is broader and applies to the 

entire relationship between adviser and client, including providing non-securities advice,1348 

whereas Regulation Best Interest only applies at the time of a recommendation of any securities 

transaction or investment strategy by a broker-dealer to its retail customers.1349  Where 

application of the Advisers Act fiduciary standard to broker-dealers would impose on broker-

dealers obligations similar to those of Regulation Best Interest, we anticipate similar economic 

                                                                                                                                                             

 

1347  See id. 
1348  For example, an investment adviser may consider both securities annuity products (e.g., 

variable annuities) and non-securities annuity products (e.g., fixed annuities) when 
providing advice on annuity products to a client with an advisory retirement account. 

1349  However, under the current legal and regulatory regime, broker-dealers are subject to 
other rules that apply outside the context of a recommendation, including rules regarding 
how broker-dealers market securities and services (communications with the public), how 
they execute trades (best execution), and the fees that they charge (fair and reasonable 
compensation obligations).  Moreover, broker-dealers always a have a duty of fair 
dealing with their retail customers under SRO rules.  In addition, broker-dealers are 
subject to a number of obligations that attach when a broker-dealer makes a 
recommendation to a customer, as well as general and specific requirements aimed at 
addressing certain conflicts of interest, including requirements to eliminate, mitigate, or 
disclose certain conflicts of interest.  See Proposing Release Section I.A.1. 



639 

 

effects; in contrast, where this alternative would result in different obligations, it would generate 

economic effects distinct from those of Regulation Best Interest.   

i. Fiduciary Standard under the Advisers Act Relative to the Baseline 

Relative to the regulatory baseline, the fiduciary standard of this alternative applied to 

broker-dealers could benefit retail customers in some circumstances by extending the obligations 

of all firms and financial professionals to act in the best interest of retail customers (and to not 

place the interest of the firm or the interest of the financial professionals ahead of those of the 

retail customers) to aspects of the relationship other than providing personalized investment 

advice through recommendations.  For example, retail customers might benefit if broker-dealers 

were required (as advisers are under their current fiduciary standard) to disclose any material 

conflicts related to their execution of trades for retail customers in the case when the broker-

dealer has not provided a recommendation regarding the transaction (e.g., self-directed trade). In 

addition, under the fiduciary standard that applies to investment advisers, if an investment 

adviser cannot fully and fairly disclose a material conflict of interest to a client such that the 

client could reasonably be expected to provide informed consent, the investment adviser would 

be expected to either eliminate the conflict or adequately mitigate (i.e., modify its practices to 

reduce) the conflict to the point where full and fair disclosure of the conflict to the client and  

informed consent is possible.1350 To the extent that this approach of addressing conflicts of 

                                                                                                                                                             

 

1350  See Fiduciary Interpretation. 



640 

 

interest would extend to the fiduciary standard in this alternative, a broker-dealer would also 

have to eliminate or modify a conflict of interest to the point where full and fair disclosure and 

informed consent is possible.  The potential reduction in the effect of conflicts of interest on 

recommendations and the potential reduction in the information asymmetry  between a retail 

customer and a broker-dealer would likely increase the efficiency of the recommendation 

provided by the firm to the retail customer, relative to the baseline.  Thus, this alternative may 

reduce the agency costs of the relationship between a broker-dealer and a retail customer, which 

would benefit retail customers, relative to the baseline.      

However, any such benefits would come at a cost.  As an initial matter, the fiduciary 

standard under this alternative is a principles-based regime and shaped by decades of case law 

specific to investment advisory model. In contrast, the standard of conduct that applies to broker-

dealers under the baseline is more prescriptive, and governed by detailed SRO rules.  Therefore, 

if this alternative were adopted, broker-dealers would face increased compliance costs resulting 

from having to conform their advice models to a regulatory regime that was not formed for a 

transaction-based model governed by detailed SRO rules. 

The potential increased compliance costs associated with applying the fiduciary standard 

in this alternative to broker-dealers would likely increase the broker-dealers’ incentives to offer 

investment advice in the capacity of investment adviser and may decrease their incentive to 

continue offering investment advice in the capacity of broker-dealer dealer (on a transaction-by-641 

 

transaction basis), relative to the baseline.1351  For example, if this alternative were to create 

situations where the compensation to a broker-dealer for providing a recommendation in a 

commission-based brokerage account would be less than the compensation under a fee-based 

                                                                                                                                                             

 

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



642 

 

advisory account and/or where the perceived regulatory burden for an investment adviser is 

lower, relative to the baseline, a broker-dealer’s incentive to offer advice in the capacity of 

investment adviser would likely increase, relative to the baseline.1352     

To the extent broker-dealers act on the increased incentives and decide to participate in 

the market for investment advice only in the capacity of investment advisers—for example, dual-

registrants may prefer to offer investment advice only in the capacity of investment adviser—

retail customers may experience an increase in the cost of obtaining investment advice, relative 

to the baseline. Furthermore, as noted above, the potential exit of broker-dealers from the market 

for investment advice in the capacity of broker-dealer may limit how retail customers can access 

certain securities or investment strategies and how they can pay for investment advice, which, in 

turn, may further increase the cost of obtaining investment advice, relative to the baseline.1353  

Alternatively, to the extent broker-dealers decide to continue to participate in the market for 

investment advice in the capacity of broker-dealers, they may pass on the increased compliance 

costs, in full or in part, to their retail customers in the form of higher prices for services rendered. 

In particular, retail customers may experience an increase in the cost of obtaining investment 

advice, relative to the baseline. 

                                                                                                                                                             

 

1352  Broker-dealers that choose to deregister would eliminate the costs of complying with 
FINRA rules, which are broader than retail customer sales practice obligations, and 
submitting to FINRA examinations as well as compliance with other specific rules, which 
do not apply to advisers. 

1353  See supra Section III.D.1.  



643 

 

It is also possible that the fiduciary standard of this alternative may result in a different 

menu of choices that allows retail customers to access investment advice in a more cost-efficient 

manner relative to the baseline. For example, if more financial professionals decide to participate 

in the market for investment advice in the capacity of investment advisers, competitive pressure 

may result in investment advisers providing better pricing and/or more choices of accessing 

investment advice for retail customers.   

To the extent that the cost of accessing investment advice increases under the fiduciary 

standard of this alternative, some retail customers may be pushed outside the market for 

investment advice. For example, currently, a retail customer that prefers to receive 

recommendations from a broker-dealer or its associated persons to implement a buy-and-hold 

strategy may find a brokerage account to be better suited to his or her needs compared to an 

advisory account.1354 Under the fiduciary standard in this alternative, this retail customer may 

                                                                                                                                                             

 

1354  For example, Del Guercio & Reuter (2014), supra footnote 1081, document (Table 1 on 
page 1682) that retail customers can access index funds through both broker-dealers (i.e., 
the broker-sold channel, as discussed above) and directly from the fund sponsor (i.e., the 
direct-sold channel). Furthermore, in their sample, the average expense ratio for an index 
fund is 0.86 if sold through the broker-sold channel and 0.44 if sold through the direct 
channel. Assuming that a retail customer is interested in implementing a buy-and-hold 
strategy using index funds that carry no loads, the cost to the retail customer of 
implementing this strategy through a broker-dealer would be on average 86 basis points 
of the assets invested per year. In contrast, the cost to the retail customer of implementing 
the same strategy through an investment adviser would be on average 44 basis points plus 
the investment adviser’s AUM-based fee per year. Assuming that in the investment 
adviser’s fee is 100 basis points of AUM per year, the cost to the retail customer of 

 

 



644 

 

have to pay more for the broker-dealer services that come with his or her account, including 

obtaining investment advice, relative to the baseline.  If this increase in the cost for broker-dealer 

services outweighs the benefits of the potential improved efficiency of the recommendations 

provided by the broker-dealer for this retail customer, as noted above, the retail customer may 

prefer to switch to a more-limited brokerage account that does not come with personalized 

investment advice (e.g., an execution-only brokerage account).1355  Alternatively, and as noted 

by one commenter, the retail customer may switch to a light version of an advisory account that 

implements automated investment strategies tailored around a retail customer’s goals.1356  

However, this type of advisory account may not offer the flexibility of personalized investment 

advice to the evolving needs of the customer and may not be as responsive to market movements 

not anticipated by the automated investment strategies.     

b. Uniform Fiduciary Standard under 913(g) 

Another alternative approach to the standard of conduct imposed by Regulation Best 

interest is a “new” uniform fiduciary standard of conduct applicable to both broker-dealers and 
                                                                                                                                                             

 

implementing his or her strategy with an investment adviser would be on average 144 
basis points.   

1355  Relative to a brokerage account that offers personalized investment advice, execution-
only brokerage accounts may also come with enhanced research tools, more investment 
choices, and, potentially, other forms of impersonal advice. 

1356  See, e.g., CFA August 2018 Letter at 79, noting that “[f]or example, Vanguard charges 
0.30% for its Personal Advisor Services, Schwab charges 0.28% for its Intelligent 
Advisory Services, and Betterment charges 0.25% for its Digital offering and 0.40% for 
its Premium offering.” 



645 

 

investment advisers, such as that recommended by the staff in the 913 Study.1357  The fiduciary 

standard under this alternative would require firms “to act in the best interest of the customer 

without regard to the financial or other interest of the broker, dealer, or investment adviser 

providing the advice.” Based on the Commission staff’s recommendations about ways in which 

the fiduciary standard proposed by the 913 study could be implemented, the fiduciary standard 

under this alternative could have imposed any or all of the following requirements: (1) eliminate 

or disclose conflicts of interest; (2) prohibit certain conflicts of interest by requiring firms to 

mitigate conflicts through specific action, or to impose specific disclosure and consent 

requirements; and (3) specify the basis a broker-dealer or investment adviser has in making a 

recommendation to a retail customer by referring to and expanding upon broker-dealers’ existing 

suitability requirements. 

                                                                                                                                                             

 

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



646 

 

Some of the benefits of the investment advisers’ fiduciary standard of the previous 

alternative would carry over to the new uniform standard of this alternative. In particular, relative 

to the baseline, the new fiduciary standard of this alternative applied to broker-dealers could 

benefit retail customers in some circumstances by extending the obligations of all firms and 

financial professionals to act in the best interest of retail customers (and to not place the interest 

of the firm or those of the financial professionals ahead of the interest of the retail customer) to 

aspects of the relationship other than providing personalized investment advice through 

recommendations.  

In addition, the new fiduciary standard of this alternative applied to broker-dealers may 

create additional benefits for their retail customers, relative to the baseline. For example, 

requirements (1) and (2) may enhance the obligations under the baseline by requiring broker-

dealers to disclose conflicts of interest and to take actions to mitigate or eliminate certain 

conflicts of interest.  To the extent that these requirements reduce of the effect of the conflicts of 

interest on the recommendation provided by a broker-dealer or its associated persons and reduce 

the information asymmetry between retail customers and broker-dealers, the new fiduciary 

standard of this alternative may increase, relative to the baseline, the efficiency of the 

recommendations made by broker-dealers and their associated persons.  Furthermore, 

requirement (3) may enhance the existing suitability requirements that apply to broker-dealers 

and, to the extent that this requirement results in recommendations that are better aligned with 

the objectives of the retail customers, the new fiduciary standard of conduct of this alternative 

may further increase, relative to the baseline, the efficiency of the recommendations provided by 

broker-dealers and their associated persons. The potential increase in the efficiency of the 



647 

 

recommendations provided by broker-dealers and their associated persons under the new 

fiduciary standard of this alternative would benefit retail customers, relative to the baseline. 

Similarly, the new fiduciary standard of this alternative applied to investment advisers 

may create benefits for their clients, relative to the baseline. Requirements (1) and (2) would 

enhance the obligations of the investment advisers under the current fiduciary standard that 

applies to investment advisers by requiring investment advisers to take actions to mitigate or 

eliminate certain conflicts of interest.  To the extent that these requirements reduce of the effect 

of the conflicts of interest on the recommendation provided by an investment adviser or its 

associated persons and reduce the information asymmetry between retail customers and 

investment advisers, the new fiduciary standard under this alternative may increase the efficiency 

of the recommendations made by investment advisers and their associated persons, relative to the 

baseline.  

The new fiduciary duty of this alternative may also result in increased competition across 

financial professionals for retail customers or clients, relative to the baseline. This potential 

increase in competition, relative to the baseline, may benefit retail customers of broker-dealers 

and clients of investment advisers in the form of lower prices for investment advice. 

Turning to the potential costs imposed by this alternative, we note that some of the costs 

of the investment advisers’ fiduciary standard of the previous alternative carry over to the new 

fiduciary standard of this alternative. As noted above, this alternative would impose a new 

regulatory paradigm on broker-dealers relative to the baseline. The fiduciary standard of this 

alternative would be principles-based and shaped by common law.  In contrast, the standard of 

conduct that applies to broker-dealers under the baseline is more prescriptive and governed by 

detailed SRO rules. A paradigm shift from the standards of conduct under the current baseline to 



648 

 

the uniform standard in this alternative may increase compliance costs relative to the 

baseline.1358  

Furthermore, the potential increased compliance costs associated with applying the 

fiduciary standard of this alternative to broker-dealers may increase, relative to the baseline, a 

broker-dealer’s incentives to offer investment advice in the capacity of an investment adviser and 

may decrease their incentive to offer investment advice in the capacity of broker-dealer. For 

example, if this alternative creates situations where the compensation to a broker-dealer for 

providing a recommendation in a commission-based brokerage account would be less than the 

compensation under a fee-based advisory account while the perceived regulatory burden is equal 

to that of an investment adviser, a broker-dealer’s incentive to offer advice in the capacity of 

investment adviser may increase, relative to the baseline.1359  

To the extent broker-dealers act on the increased incentives and decide to participate in 

the market for investment advice only in the capacity of investment advisers—for example, dual-

registrants may prefer to offer investment advice only in the capacity of investment adviser—

retail customers may experience an increase in the cost of obtaining investment advice, relative 

to the baseline. Alternatively, to the extent broker-dealers decide to continue to participate in the 

market for investment advice in the capacity of broker-dealers, they may pass on the increased 

                                                                                                                                                             

 

1358  See also 913 Study at 156-159. 
1359  See supra footnote 1352. 



649 

 

compliance costs, in full or in part, to their retail customers in the form of higher prices for 

services rendered, relative to the baseline. In particular, retail customers may experience an 

increase in the cost of obtaining investment advice, relative to the baseline.1360 

Similarly, the new fiduciary standard of this alternative may also impose additional 

compliance costs for investment advisers relative to the baseline.1361 For example, to the extent 

that investment advisers currently provide investment advice to their clients in a manner that is 

not fully consistent with the requirements (2) and (3), investment advisers may incur compliance 

costs in adhering to these potentially more stringent requirements. 

Investment advisers would likely pass on the potential increase in the costs of complying 

with the new fiduciary standard of this alternative to their clients. In turn, under the new 

fiduciary standard of this alternative, clients may experience an increase in the cost of obtaining 

investment advice, relative to the baseline.  

It is also possible that the new fiduciary standard of this alternative may result in a 

different menu of choices that allows retail customers and clients to access investment advice in 

a more cost-efficient manner relative to the baseline. For example, if more financial 

professionals decide to participate in the market for investment advice as investment advisers, 

                                                                                                                                                             

 

1360  See also 913 Study at 159-162. 
1361  See id. at 159. 



650 

 

competitive pressure may result in better pricing and/or greater choice in accessing investment 

advice for retail customers and clients that choose to use an investment adviser.   

However, to the extent that the cost of accessing investment advice increases under the 

new fiduciary standard of this alternative, some retail customers may be pushed outside the 

market for investment advice, relative to the baseline. For example, currently, a retail customer 

who prefers to receive recommendations from a broker-dealer or its associated persons to 

implement a buy-and-hold strategy may find a brokerage account to be better suited to his or her 

needs than an advisory account. Under the new fiduciary standard of this alternative, this retail 

customer may have to pay more for the broker-dealer services that come with his or her account, 

including obtaining investment advice, relative to the baseline. If, from the perspective of a retail 

customer, this increase in the cost for broker-dealer services outweighs the expected benefits of 

the potential improved efficiency of the recommendations provided by the broker-dealer, the 

retail customer may prefer to switch to a more limited brokerage account that does not come with 

personalized investment advice (e.g., an execution-only brokerage account).1362 

Alternatively, and as noted by one commenter, the retail customer may switch to an 

advisory account that implements automated investment strategies.1363  However, this type of 

                                                                                                                                                             

 

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

1363  See, e.g., CFA August 2018 Letter at 79, noting that “[f]or example, Vanguard charges 
0.30% for its Personal Advisor Services, Schwab charges 0.28% for its Intelligent 

 

 



651 

 

advisory account may not offer the flexibility of personalized investment advice to the evolving 

needs of the customer, the level of contact a retail customer seeks from a relationship with a 

financial professional, and may not be as responsive to market movements not anticipated by the 

automated investment strategies. 

Similarly, under the new fiduciary standard of this alternative, clients of investment 

advisers may experience an increase in the cost of obtaining investment advice.  Some of these 

clients may not be able to afford the additional cost and may be pushed outside the market for 

investment advice, relative to the baseline.  As noted above, the options available to these clients 

may not offer the flexibility of tailored investment advice that may benefit a client with evolving 

needs. 

c. Fiduciary Standard under the DOL Rule and BIC Exemption 

A third alternative approach to addressing the agency costs associated with obtaining 

advice from broker-dealers is a fiduciary standard coupled with a series of disclosures and other 

requirements akin to the full complement of conditions of the DOL’s BIC Exemption adopted in 

connection with the DOL Fiduciary Rule. This alternative would mirror the key conditions that 

apply to an “adviser” under the BIC Exemption.1364 This alternative approach would apply to 

                                                                                                                                                             

 

Advisory Services, and Betterment charges 0.25% for its Digital offering and 0.40% for 
its Premium offering.” 

1364  For a discussion of key conditions of the BIC Exemption, see Section I.A.2 of the 
Proposing Release at 21581. As discussed above, the DOL Fiduciary Rule—including the 
BIC Exemption—was vacated by the United States Court of Appeals for the Fifth Circuit 

 

 



652 

 

broker-dealers when providing recommendations to retail customer for all types of retail 

accounts rather than retirement accounts only. At least one commenter signaled support for this 

alternative.1365  

Unlike other alternatives considered in this section, or Regulation Best Interest, this 

alternative can be analyzed, at least in part, based upon its previous adoption by the DOL and 

partial implementation. Because this alternative was already partly implemented, the market for 

investment advice, the securities market, and, ultimately investors have had an opportunity to 

partially adjust to it. Section III.B.2.e.ii summarizes the evidence about the response of firms, 

investors and product markets in response to the DOL Fiduciary Rule.  

The requirements of the standard of conduct in this alternative would enhance the 

obligations under the baseline by requiring broker-dealers to adhere to the impartial conduct 

standard, which included requirements to act in their retail customers’ best interest, disclose 

material conflicts of interest and designate a person responsible for addressing material conflicts 

of interest and monitoring the adherence of the associated persons of the broker-dealer to the 

impartial conduct standard.  To the extent that these requirements reduce the effect of the 

conflicts of interest on the recommendation provided by a broker-dealer or its associated persons 

                                                                                                                                                             

 

on March 15, 2018, although some firms may continue to seek comply with certain of its 
conditions under a DOL temporary enforcement policy. See also supra Section III.B.2.e. 
See also supra footnote 32. 

1365  See Galvin Letter. 



653 

 

and reduce the information asymmetry between retail customers and broker-dealers, the new 

standard of conduct in this alternative would increase the efficiency of the recommendations 

made by broker-dealers and their associated persons, relative to the regulatory baseline.  

Furthermore, the requirement to act in the retail customers’ best interest would enhance the 

existing suitability standard that applies to broker-dealers and, to the extent that the new standard 

of conduct of this alternative would result in recommendations that are better aligned with the 

objectives of the retail customers, this new standard would further increase the efficiency of the 

recommendations provided by broker-dealers and their associated persons, relative to the 

regulatory baseline. The potential increase in the efficiency of the recommendations provided by 

broker-dealers and their associated persons under the new standard in this alternative would 

benefit retail customers, relative to the baseline.   

This alternative may also affect product markets. As discussed above in Section III.B.2.ii, 

certain product sponsors introduced new products in the market for mutual funds, such as clean 

and T shares that were designed to facilitate compliance with various anticipated regulations, 

including the DOL Fiduciary Rule. In certain circumstances, these products may come with 

lower fees for retail customers. To the extent that this alternative would enhance this trend in 

product innovation, retail customers may benefit from this trend.     

However this alternative would also impose costs on broker-dealers and retail customers.  

Compliance costs would include costs associated with the contract provision, and the disclosure, 

policies and procedure, and record-making and recordkeeping requirements.  It is possible that 

broker-dealers would pass on these direct compliance costs, in part or in full, to retail customers. 

In addition to these costs, this alternative would likely cause some broker-dealers to 

change their current practices, which, in turn, may impose further costs on them or their retail 



654 

 

customers.  As discussed above in Section III.B.2.e.ii some studies find evidence suggesting that 

firms have adjusted their practices, at least in the short-run, in response to the DOL fiduciary 

Rule. In particular, certain of these studies observe that in certain cases some broker-dealers have  

either eliminated or reduced access to brokerage advice services. Other studies observe that some 

broker-dealers migrated toward fee-based advisory services or limited brokerage services (i.e., 

no provision of advice) and, in the process, offered their retail customers the option to shift from 

commission-based brokerage accounts to fee-based accounts,  automated investment accounts or 

self-directed accounts. Some of their customers chose to not move to a fee-based account.  

Certain studies provide evidence suggesting that some broker-dealers adjusted the range 

of their offerings.1366 Specifically, according to these studies, some of the respondents reduced or 

eliminated access to certain assets or share classes, such as certain mutual funds or mutual fund 

share classes, and or annuity securities offered.   

Finally, there is some anecdotal evidence that suggests that certain firms changed the 

compensation structure for their associated persons.1367 Specifically, some firms equalize 

commissions and deferred sales charges across similar securities, while other firms banned sales 

quotas, contests, and certain bonuses.  

                                                                                                                                                             

 

1366  See supra Section III.B.2.e.ii. 
1367  See id. 



655 

 

To the extent that the fiduciary standard in this alternative would result in similar 

responses by broker-dealers, the alternative would impose cost on retail customers relative to the 

baseline. For example, switching a retail customer from a commission-based brokerage account 

to a different type of account, such as fee-based advisory account, may leave a customer worse 

off in certain circumstances. For instance, a retail customer who is a buy-and-hold investor may 

overpay for the advice typically associated with this type of investment strategy if the retail 

customer were to shift from a brokerage account to a fee-based account.1368 As another example, 

a retail customer would lose access to occasional personalized advice if he or she were to shift 

from his or her brokerage account to a self-directed account.      

The cost to retail customers from switching to a suboptimal account is particularly 

important in the context of IRA brokerage accounts, because of the larger size of these accounts 

and the importance of these accounts for retail investors to meet their retirement needs.  These 

costs may also be higher for IRA brokerage accounts than for other account types to the extent 

that these accounts include long-term, buy-and-hold investments.  As discussed in Section 

III.B.2.e.ii, one study provided an estimate for this potential cost.1369 However, as discussed 

above, the estimates provided by various studies, including this one, or by commenters are 

                                                                                                                                                             

 

1368  See supra footnote 1354. 
1369  See SIFMA Study. 



656 

 

generally subject to assumptions or methodological limitations which may affect the inferences 

based on such estimates.    

In addition to the evidence discussed above, there are other potential economic 

implications of this alternative. For instance, this alternative may exclude from the market for 

investment advice those retail customers that have account balances that are below the account 

minimum for typical advisory accounts. The investment advisory industry might adjust to a lack 

of supply by accommodating lower account balances. However, because investment advisers 

have a fiduciary duty to all their clients, and because they have limited time and resources, there 

is likely a limit to how much an investment adviser can lower his or her account minimum to 

accommodate more advisory clients. Similarly, the product market may adjust by innovating new 

products to accommodate retail customers with account balances that are below the typical 

advisory account minimum.  For example, hybrid products that implement automated investment 

strategies tailored to a retail customer’s goals may substitute for the services of an investment 

adviser for customers with lower account balances.    

2. Prescribed Format for Disclosure 

Although Regulation Best Interest specifies the required content of disclosure necessary 

to meet a broker-dealer’s Disclosure Obligation, it does not prescribe a specific format for that 



657 

 

disclosure.  As an alternative, and as suggested by commenters,1370 we considered requiring 

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

Because this alternative would still impose all the obligations of Regulation Best Interest, 

all the benefits and the costs identified in Regulation Best Interest would carry over to this 

alternative as well. However, by changing the way broker-dealers would meet the Disclosure 

Obligation, this alternative may create additional benefits and impose additional costs.  
                                                                                                                                                             

 

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



658 

 

The requirement to use a form similar to Form ADV to meet the Disclosure Obligation would 

put more structure on the disclosure of material facts relating to the scope and terms of the 

relationship with the retail customer and material facts relating to conflicts of interest that are 

associated with a recommendation. This added structure would facilitate retail customers’ 

comparison of multiple broker-dealers, which would benefit retail customers. For example, the 

evidence provided by the investor testing surveys suggests that retail customers form preference 

over various variables that are being disclosed.1371 On the backdrop of this evidence, the 

structured disclosure provided by a specific form may enhance a retail customer’s ability to 

select a broker-dealer in a manner consistent with his or her preferences. In addition, the 

structured disclosure provided by a form may allow a third party to collect the information 

disclosed by firms, process it, and present it to retail customers in a way that would make it 

easier for the retail customer to select a broker-dealer. To the extent the format of disclosure 

under this alternative would result in this potential outcome, the alternative would further benefit 

retail customers.  

However, the requirement to use a form similar to Form ADV to meet the Disclosure 

Obligation may also impose costs on broker-dealers, at least in the short run, to the extent that 

this form of disclosure is different from the form of disclosure that firms employ currently to 

satisfy their disclosure obligations and liabilities under the baseline. In general it may be difficult 
                                                                                                                                                             

 

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



659 

 

to design a form that, while comprehensive in terms of capturing the diversity of business 

practices that broker-dealers employ, remains easy to understand for retail customers.  In general, 

given that there is a wide variety of business models and practices, there is value in providing 

broker-dealers with flexibility to enable them to better tailor disclosure and information that their 

retail customers can understand and may be more likely to read at relevant points in time, rather 

than, for example, mandating a standardized all-inclusive (and likely lengthy) disclosure. 

Depending on the specific form that is eventually mandated, some firms may incur more costs 

than others. To the extent firms pass on those costs to retail customers, the alternative would 

impose a cost on retail customers.  

3. Disclosure-Only   

Another potential alternative to addressing the agency costs of obtaining advice from 

broker-dealers is a disclosure-only alternative, which would require that broker-dealers satisfy 

only the Disclosure Obligation of Regulation Best Interest. In other words, broker-dealers would 

be required to provide the retail customer, in writing, full and fair disclosure of all material facts 

relating to the scope of the relationship with the retail customer and all material facts relating to 

the conflicts of interest associated with the recommendations to the retail customer, prior to or at 

the time of the recommendation. However, this alternative would not impose either the Care 

Obligation or the Conflict of Interest Obligation.   

As discussed in Sections III.C.2 and III.C.4, there may be substantial overlap between the 

disclosure requirements of Regulation Best Interest and the disclosure requirements under the 

regulatory baseline. From this perspective, relative to the regulatory baseline, the cost of this 

alternative to the broker-dealers may be small, at least for some broker-dealers. However, as 

pointed out above, a disclosure-only alternative is not likely to address the agency costs 



660 

 

associated with obtaining advice from broker-dealers.  As a result, the Commission believes both 

specific disclosure and mitigation requirements are needed to address those conflicts.  Also, we 

noted above that sales contests, sales quotas, bonuses, and non-cash compensation that are based 

on the sales of specific securities within a limited period of time create high-pressure situations 

for associated persons to increase the sales of specific securities by compromising the best 

interest of their customers; the Commission does not believe such conflicts of interest can be 

reasonably mitigated, let alone disclosed, in a manner that adequately prevents harm to retail 

customers and, accordingly, believes that these conflicts must be eliminated in their entirety.   

Finally, as we discussed earlier, commenters noted that there are limits to the 

effectiveness of disclosure and cited a number of studies suggesting that disclosure alone is 

unlikely to solve the issues surrounding, for example, the conflicts of interest between a broker-

dealer (or their associated persons) and a retail customer.1372   

IV. PAPERWORK REDUCTION ACT 

Certain provisions of Regulation Best Interest and the rule amendments that we are 

adopting today contain “collection of information” requirements within the meaning of the 

Paperwork Reduction Act of 1995 (“PRA”).1373  The Commission submitted Regulation Best 

Interest and the rule amendments to the Office of Management and Budget (“OMB”) for review 
                                                                                                                                                             

 

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

1373  44 U.S.C. 3501 et seq.661 

 

and approval in accordance with the PRA.1374  The Commission’s earlier PRA assessments have 

been revised to reflect the modifications to the rule and amendments from the Proposing Release, 

as well as additional information and data provided to the Commission by commenters.  An 

agency may not conduct or sponsor, and a person is not required to respond to, a collection of 

information unless it displays a currently valid OMB control number.  The titles and OMB 

control numbers for the collections of information are: 

Rule Rule Title OMB Control 
Number 

Rule 15l-1 Regulation Best Interest  

Rule 17a-3 Records to be made by certain exchange members, brokers and 
dealers1375 
 

3235-0033 

Rule 17a-4 Records to be preserved by certain exchange members, brokers 
and dealers1376 
 

3235-0279 

 

Regulation Best Interest enhances the broker-dealer standard of conduct beyond existing 

suitability obligations, and aligns the standard of conduct with retail customers’ reasonable 

expectations by requiring broker-dealers, among other things, to:  (1) comply with specific 

obligations to make recommendations that are in the best interest of the retail customer, and that 
                                                                                                                                                             

 

1374  See 44 U.S.C. 3507(d); 5 CFR 1320.11. 
1375  See 17 CFR § 240.17a-3.  The addition of paragraph (a)(35) to Rule 17a-3 would amend 

the existing PRA for Rule 17a-3. 
1376  See 17 CFR § 240.17a-4.  The amendment to Rule 17a-4(e)(5) would amend the existing 

PRA for Rule 17a-4.  



662 

 

do not place the broker-dealer’s interests ahead of the interests of the retail customer; and (2) 

address conflicts of interest by fully and fairly disclosing material facts about conflicts of interest, 

and in instances where we believe disclosure is insufficient to reasonably address the conflict, 

establish, maintain and enforce policies and procedures reasonably designed to mitigate or, in 

certain instances, eliminate the conflict.  Generally, in crafting Regulation Best Interest, we 

aimed to provide broker-dealers flexibility in determining how to satisfy the component 

obligations.  For purposes of this analysis, we have made assumptions regarding how a broker-

dealer would comply with the obligations of Regulation Best Interest, as well as the amendments 

under Rule 17a-3(a)(35) and Rule 17a-4(e)(5).   

In the Proposing Release, we requested comment on the matters discussed in the PRA, 

including our estimates for the new and recurring burdens and associated costs described in 

connection with Regulation Best Interest and the amendments under Rule 17a-3(a)(35) and Rule 

17a-4(e)(5).1377  In particular, we sought comment on estimates as to: (1) the number of natural 

persons who are associated persons; (2) the number of broker-dealers that make securities-related 

recommendations to retail customers; (3) the number of natural persons who are associated 

persons that make securities-related recommendations to retail customers; and (4) any other costs 

                                                                                                                                                             

 

1377  The Proposing Release proposed to add new paragraph (a)(25) of Rule 17a-3.  As noted 
above, we are adopting the provision substantially as proposed but redesignating it as 
new paragraph (a)(35) of Rule 17a-3.  See supra footnote 820 and accompanying text.  



663 

 

or burdens1378 associated with proposed Regulation Best Interest that had not been identified in 

the Proposing Release.  

As discussed in Sections I, II, and III, we received comments that addressed whether we 

could minimize the burden of the proposed collections of information.  We received several 

comments suggesting that our estimated burdens and costs for the rule as a whole were too 

low.1379  In addition, the Commission received some comments specifically addressing the costs 

to smaller broker-dealers.1380  Also, as discussed in the Economic Analysis section above, we 

received comments regarding the potential costs and burdens of proposed Regulation Best 

                                                                                                                                                             

 

1378  Throughout the PRA analysis in the Proposing Release, the burdens on in-house 
personnel were measured in terms of burden hours, and external costs were expressed in 
dollar terms.   

1379  See, e.g., NSCP Letter; see also CCMC Letters (costs to implement the proposal were 
underestimated and greater than 40% of firms surveyed anticipate having to spend a 
moderate or substantial amount to implement Regulation Best Interest and Form CRS); 
Raymond James Letter (noting the significant implementation costs of Regulation Best 
Interest and Form CRS for the industry); SIFMA August 2018 Letter (stating that 
implementation costs of Regulation Best Interest and Form CRS would be significant).   

1380  See, e.g., Chepucavage Letter (finding that the estimates in the proposal are severely 
understated unless they are excluding time needed for review of the proposal and final 
rule and suggesting the Commission reconsider the impact on small investors and small 
broker-dealers); NSCP Letter (requesting the Commission to consider the financial and 
operational impacts of the proposed rule, particularly on small firms, and to minimize 
those impacts, given that small firms do not have compliance departments adequate to 
deal with increasing regulatory demands). See also, e.g., Iowa Insurance Commissioner 
Letter; Letter from David S. Addington, National Federation of Independent Business 
(May 30, 2018) (“NFIB Letter”). 



664 

 

Interest on broker-dealers.1381  In response, we have modified several substantive requirements to 

the rule by, among other things, providing more specificity in the rule text in the Disclosure and 

Conflict of Interest Obligations, which we believe will mitigate some of these burdens and costs 

relative to the Proposing Release.1382  At the same time, certain modifications, such as 

maintaining a written record of oral disclosure, resulted in new burdens and costs, relative to 

those addressed in the Proposing Release, which are reflected below.    

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

1. Broker-Dealers 

Regulation Best Interest imposes a best interest obligation on a broker-dealer when 

making recommendations of any securities transaction or investment strategy involving 

securities to retail customers.  Except where noted, we have assumed that a dually registered 

firm, already subject to the Advisers Act, would be subject to new, distinct burdens under 

Regulation Best Interest.  

As of December 31, 2018, 3,764 broker-dealers were registered with the Commission, 

either as standalone broker-dealers or as dually registered entities.1383  Based on data obtained 

                                                                                                                                                             

 

1381  See supra Section III. 
1382  Throughout this PRA analysis, the burdens on in-house personnel are measured in terms 

of burden hours, and external costs are expressed in dollar terms.   
1383  The Commission estimated the number of respondents in the Proposing Release as of 

December 31, 2017.  The Commission is updating its estimated number of broker-dealers 
 

 



665 

 

from Form BR, the Commission believes that approximately 73.5% of this population, or 2,766 

broker-dealers, have retail customers and therefore would be subject to Regulation Best Interest 

and the amendments under Rules 17a-3(a)(35) and 17a-4(e)(5).1384  Further, based on FOCUS 

Report data,1385 the Commission estimates that as of December 31, 2018, approximately 985 

broker-dealers may be deemed small entities under the Regulatory Flexibility Act.1386  Of these, 

                                                                                                                                                             

 

to reflect the number of broker-dealers registered with the Commission as of December 
31, 2018. 

1384  As of December 31, 2018, 3,764 broker-dealers filed Form BD.  Retail sales by broker-
dealers were obtained from Form BR.  As discussed above in Section III.B.1.a, the 
number of broker-dealers that serve retail customers (i.e., 2,766) likely overstates the 
number of broker-dealers that will be subject to Regulation Best Interest, because not all 
broker-dealers that serve retail investors provide recommendations to retail investors.  
We do not have reliable data to determine the precise number of broker-dealers that 
provide recommendations, and as a result, we have assumed, for purposes of this analysis 
that 2,766 broker-dealers will be subject to Regulation Best Interest. 

1385  FOCUS Reports, or “Financial and Operational Combined Uniform Single” Reports, are 
monthly, quarterly, and annual reports that broker-dealers are generally required to file 
with the Commission and/or SROs pursuant to Exchange Act Rule 17a-5.  See 17 CFR 
240.17a-5.   

1386  See infra Section V for an explanation of which brokers-dealers, subject to Regulation 
Best Interest, are “small entities,” for purposes of the Regulatory Flexibility Act analysis.   

 The Commission’s estimate is obtained from Form BD filings.  Although Form BD 
filings are updated on a more frequent basis than annually, FOCUS data, which also 
informs this baseline with respect to broker-dealers, is only sparsely updated throughout 
the year.  Moreover, instead, broker-dealers tend to make their most complete updates in 
the fourth calendar quarter of each year.  Therefore, in order to minimize discrepancies in 
the broker-dealer data between Form BD and FOCUS data, we have normalized all of the 
data to the most recently complete FOCUS data, which is for December 2018. 



666 

 

approximately 756 have retail business.1387  Therefore, we estimate that 2,010 broker-dealers 

would qualify as large broker-dealers with retail customers for purposes of this analysis.1388 

2. Natural Persons Who Are Associated Persons of Broker-Dealers 

As with broker-dealers, Regulation Best Interest imposes a best interest obligation on 

natural persons who are associated persons of broker-dealers when making recommendations of 

any securities transaction or investment strategy involving securities to retail customers.   

The Commission believes that approximately 428,404 natural persons would qualify as 

retail-facing, registered representatives at standalone broker-dealers or dually registered 

firms,1389 and would therefore be subject to Regulation Best Interest.1390 

                                                                                                                                                             

 

1387  Id. 
1388  This calculation was made as follows:  (2,766 total retail broker-dealers) – (756 total 

small retail broker-dealers) = 2,010 large retail broker-dealers.  
1389  See supra Section III.B.1 at Table 5.  This estimate is based on the following calculation:  

(504,005 total licensed representatives (including representatives of investment advisers)) 
x (15% (the percentage of total licensed representatives who are standalone investment 
adviser representatives)) = approximately 75,601 representatives at standalone 
investment advisers. To isolate the number of representatives at standalone broker-
dealers and dually registered firms, we have subtracted 75,601 from 504,005, for a total 
of 428,404 retail-facing, licensed representatives at standalone broker-dealers or dually 
registered firms.   

1390  Unless otherwise noted, for purposes of the PRA, we use the term “registered 
representatives” to refer to associated persons of broker-dealers who are registered, have 
series 6 or 7 licenses, and are retail-facing, and we use the term “dually registered 
representatives of broker-dealers” to refer to registered representatives who are dually 
registered and are associated persons of a standalone broker-dealer (who may be 
associated with an unaffiliated investment adviser) or a dually registered broker-dealer.   



667 

 

B. Summary of Collections of Information 

Regulation Best Interest requires broker-dealers and their associated persons1391 when 

making a recommendation of any securities transaction or investment strategy involving 

securities to a retail customer to act in the best interest of the retail customer at the time the 

recommendation is made, without placing the financial or other interest of the broker-dealer 

ahead of the interest of the retail customer.  As discussed above, Regulation Best Interest 

specifically provides that this best interest obligation shall be satisfied if the broker-dealer 

complies with the specific Disclosure, Care, Conflict of Interest, and Compliance Obligations. 

Rule 17a-3 requires a broker-dealer to make and keep current certain records.  The 

Commission is amending this rule by adding new paragraph (a)(35) to impose new record-

making obligations on broker-dealers subject to Regulation Best Interest.  Rule 17a-4 requires a 

broker-dealer to preserve certain records if it makes or receives them.  The Commission is 

amending Rule 17a-4(e)(5) to impose new record retention obligations on broker-dealers subject 

to Regulation Best Interest.   

The obligations arising under Regulation Best Interest and the amendments under Rule 

17a-3(a)(35) and Rule 17a-4(e)(5) would give rise to distinct collections of information and 

                                                                                                                                                             

 

1391  However, in certain instances, as described more fully below, the Commission assumes 
that broker-dealers will undertake certain Disclosure Obligations on behalf of their 
registered representatives.  See, e.g., infra footnote 1397. 



668 

 

associated costs and burdens for broker-dealers subject to the rules.  The collections of 

information associated with Regulation Best Interest and rule amendments are described below. 

1.  Disclosure Obligation 

The Disclosure Obligation under Regulation Best Interest requires a broker, dealer, or 

natural person who is an associated person of a broker or dealer, prior to or at the time of 

recommending a securities transaction or strategy involving securities to a retail customer, to 

provide the retail customer, in writing, full and fair disclosure of:  (1) all material facts relating to 

the scope and terms of the relationship with the retail customer, including (a) that the broker, 

dealer, or such natural person is acting as a broker, dealer, or an associated person of a broker or 

dealer with respect to the recommendation, (b) the fees and costs that apply to the retail 

customer’s transactions, holdings, and accounts, and (c) the type and scope of services provided 

to the retail customer, including any material limitations on the securities or investment strategies 

involving securities that may be recommended to the retail customer; and (2) all material facts 

relating to conflicts of interest that are associated with the recommendation.  The Commission 

believes that requiring broker-dealers to disclose to a retail customer, in writing, all material facts 

relating to the scope and terms of the relationship with the retail customer would facilitate the 

retail customer’s understanding of the nature of his or her account, the broker-dealer’s fees and 

costs, as well as the nature of services that the broker-dealer provides, as well as any limitations 

to those services.  It would also provide retail customers with information to better understand 

the differences among certain financial service providers, such as broker-dealers, investment 

advisers, and dually registered firms and dually registered financial professionals.  In addition, 

the obligation to disclose all material facts relating to conflicts of interest that are associated with 

a recommendation would raise retail customers’ awareness of the potential effects of conflicts of 



669 

 

interest, and increase the likelihood that broker-dealers would make recommendations that are in 

the retail customer’s best interest.  

 We are explicitly requiring in the rule text of Regulation Best Interest, items that the 

Proposing Release had only provided as examples of “material facts relating to the scope and 

terms of the relationship with the retail customer” that must be disclosed, namely: (1) that the 

broker, dealer or such natural person is acting as a broker, dealer or an associated person of a 

broker-dealer with respect to the recommendation; (2) the material fees and costs that apply to 

the retail customer’s transactions, holdings, and accounts; and (3) the type and scope of services 

provided to the retail customer, including: any material limitations on the securities or 

investment strategies involving securities that may be recommended to the retail customer.  We 

generally believe the proposed burdens and costs identified in the Proposing Release were 

accurate but have updated estimates to reflect changes in the number of broker-dealers and costs 

of certain services since the last estimate.  The collections of information associated with the 

Disclosure Obligation, as well as the associated record-making and recordkeeping obligations are 

addressed below. 

a. Obligation to Provide to the Retail Customer Full and Fair 
Disclosure, in Writing, of all Material Facts Relating to the 
Scope and Terms of the Relationship with the Retail Customer 

 
The Commission assumes for purposes of this analysis that broker-dealers would meet 

the obligation to disclose to the retail customer, in writing, the material facts related to the scope 

and terms of the relationship with the retail customer through a combination of delivery of the 

Relationship Summary, creating account disclosures to include standardized language related to 

capacity and type and scope of services, and the development of fee schedules.   



670 

 

(1) Disclosure of Capacity 
 

As discussed above, the Commission believes that a standalone broker-dealer would be 

able to satisfy its obligation to disclose that it is acting in a broker-dealer capacity by providing 

the retail customer with the Relationship Summary in the manner prescribed by the rules and 

guidance in the Relationship Summary Adopting Release.1392   

We assume, for purposes of this PRA analysis, that a dually registered broker-dealer 

would satisfy its obligation to disclose it is acting in a broker-dealer capacity by creating an 

account disclosure with standardized language, and by providing it to the retail customer at the 

beginning of the relationship.  The account disclosure would set forth when the broker-dealer 

would be acting in a broker-dealer capacity, and the method the broker-dealer planned to use to 

clarify its capacity at the time of the recommendation.  We understand that many broker-dealers 

already include such information in account disclosures. 

(2) Disclosure of Fees and Costs and Type and Scope of 
Services, Including Any Material Limitations on the 
Securities or Investment Strategies that may be 
Recommended 

 
While many broker-dealers provide fee information to retail customers in a fee schedule, 

the Commission believes that to comply with the Disclosure Obligation broker-dealers will either 

amend their existing schedules or develop a new standardized fee schedule to disclose the fees 

and costs applicable to retail customers’ transactions, holdings, and accounts.  This fee schedule 
                                                                                                                                                             

 

1392   See Relationship Summary Adopting Release.   



671 

 

would be delivered to retail customers at the beginning of a relationship.  If, at the time the 

recommendation is made, the disclosure made to the retail customer is not current or does not 

contain all material facts regarding the fees and costs of the particular recommendation, the 

broker-dealer would need to deliver an amended fee schedule or provide an oral update, under 

the circumstances outlined in Section II.C.1.  

With respect to disclosure of the type and scope of services provided by the broker-dealer, 

including any material limitations on the securities or investment strategies that may be 

recommended to the retail customer, we assume for purposes of this PRA analysis that a broker-

dealer would satisfy the Disclosure Obligation by including this information in the account 

disclosure provided to the retail customer at the beginning of the relationship, as described above.  

The broker-dealer would need to deliver an amended account disclosure to the retail customer in 

the case of any material changes made to the type and scope of services or provide an oral update, 

under the circumstances outlined in Section II.C.1.  

b. Obligation to Provide to the Retail Customer Full and Fair 
Disclosure, in Writing, of All Material Facts Relating to 
Conflicts of Interest that are Associated with the 
Recommendation 

 
Regulation Best Interest requires a broker-dealer to provide the retail customer, in writing, 

full and fair disclosure of all material facts relating to conflicts of interest that are associated with 

a recommendation. 

As discussed above, we assume that broker-dealers will satisfy the obligation to disclose 

all material facts relating to conflicts of interest through the use of: (1) a standardized, written 

disclosure document provided to all retail customers and (2) supplemental disclosure provided to 

certain retail customers for recommendations of specific products.   



672 

 

We assume for purposes of this analysis that delivery of written disclosure will occur at 

the beginning of a relationship, such as together with the account opening agreement.  For 

existing retail customers, the disclosure will need to occur “prior to or at the time” of a 

recommendation.  Subsequent disclosures may be delivered or the broker-dealer may provide an 

oral update, under the circumstances outlined in Section II.C.1, in the event of a material change 

or if the broker-dealer determines additional disclosure is needed for certain types of products. 

The corresponding estimated total annual reporting costs and burdens are addressed 

below.1393  

c. Estimated Costs and Burdens  

(1) Disclosure of Capacity, Type and Scope of Services 
 

Standalone broker-dealers will satisfy the obligation to disclose the capacity in which 

they are acting through the delivery to retail customers of the Relationship Summary, in 

accordance with the rules and guidance set forth in the Relationship Summary Adopting Release.  

Additionally, although we understand that many dual-registrants and standalone broker-dealers, 

as a matter of best practice, already disclose the capacity in which they are acting as well as the 

and type and scope of services they offer to retail customers, for purposes of this analysis, we 

assume that dual-registrants would create new account disclosure related to capacity and all 

                                                                                                                                                             

 

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



673 

 

broker-dealers would create or update account disclosure related to type and scope of services 

specifically for purposes of compliance with Regulation Best Interest.  The Commission assumes 

that broker-dealers would provide the account disclosure to each retail customer account, 

regardless of whether the retail customer has multiple accounts with the broker-dealer.   

While the Commission recognizes that the Disclosure Obligation applies to the broker-

dealer entity and its associated persons, we do not expect associated persons to incur any initial 

or ongoing burdens with respect to the scope and terms of the relationship, as we assume for 

purposes of this analysis that this information would be addressed by the broker-dealer entity’s 

account disclosure.1394  With regard to disclosure of the capacity in which the associated person 

is acting, the Commission believes that dually registered representatives of broker-dealers will 

incur initial and ongoing burdens.1395   

Following is a discussion of the estimated initial and ongoing burdens and costs. 

i. Initial Costs and Burdens 
 

                                                                                                                                                             

 

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

1395  See supra Section IV.B.5 (discussing the costs and burdens associated with record-
making). 



674 

 

Because, as noted above, standalone broker-dealers will satisfy the obligation to disclose 

the capacity in which they are acting through the delivery to retail customers of the Relationship 

Summary, we estimate zero burden hours for standalone broker-dealers to disclose the capacity 

in which they are acting.  We estimate that a dually registered firm will incur an initial internal 

burden of 10 hours for in-house counsel and in-house compliance1396 to draft language regarding 

the capacity in which they are acting for inclusion in the standardized account disclosure that is 

delivered to the retail customer.1397   

In addition, we estimate that dual-registrants will incur an estimated external cost of 

$4,970 for the assistance of outside counsel in the preparation and review of standardized 

language regarding capacity.1398  For the estimated 563 dually registered firms with retail 

                                                                                                                                                             

 

1396  The ten hour estimate includes five hours for in-house counsel to draft and review the 
standardized language, and five hours for consultation and review of compliance 
personnel. 

1397  As discussed above, the following estimates include the costs and burdens that broker-
dealers would incur in drafting standardized account disclosure language related to the 
scope and terms of the relationship on behalf of their dually registered representatives.  
For purposes of this analysis, the Commission assumes that broker-dealers will undertake 
these tasks on behalf of their registered representatives.  See Section IV.B.5 (discussing 
the costs and burdens associated with record-making). 

1398 Data from the Securities Industry Financial Markets Association’s Management & 
Professional Earnings in the Securities Industry 2013 (“SIFMA Management and 
Professional Earnings Report”), modified by Commission staff to account for an 1,800-
hour work-year and inflation, and multiplied by 5.35 (professionals) or 2.93 (office) to 
account for bonuses, firm size, employee benefits, and overhead, suggests that costs for 
this position is $497 per hour.  The SIFMA Management and Professional Earnings 
Report was updated in 2019 to reflect inflation.  The numbers in the report are higher 

 

 



675 

 

business,1399 we project an aggregate initial burden of 5,630 hours,1400 and $2.8 million in 

aggregate initial costs relating to disclosure of the capacity in which they are acting.1401   

Similarly, to comply with Regulation Best Interest, we believe that broker-dealers1402 will 

draft standardized language for inclusion in the account disclosure to provide the retail customer 

with more specific information regarding the type and scope of services that they provide.  We 

expect that the associated costs and burdens will differ between small and large broker-dealers, 

as large broker-dealers generally offer more products and services and therefore will need to 

evaluate a larger number of products and services.   

Given these assumptions, we estimate that a small broker-dealer will incur an internal 

initial burden of 10 hours for in-house counsel and in-house compliance to draft this standardized 

                                                                                                                                                             

 

than the numbers we used in the Proposing Release.  This estimate is based on the 
following calculation: (10 hours for outside counsel review/drafting) x ($497/hour for 
outside counsel services) = $4,970 in initial outside counsel costs.   

1399  See supra Section III.B.1.a, at Table 1, Panel B.  The number of dually registered broker-
dealers includes broker-dealers that are also Commission- and state-licensed investment 
advisers. 

1400  This estimate is based on the following calculation: (563 dually registered retail firms) x 
(10 hours) = 5,630 initial aggregate burden hours. 

1401  This estimate is based on the following calculation: (563 dually registered retail firms) x 
($4,970 in external cost per firm) = $2.8 million in aggregate initial costs. 

1402  In the Proposing Release, we inadvertently referred to “standalone broker-dealers” in this 
discussion, but our subsequent references and estimates reflected our intent to capture 
initial costs and burdens relating to disclosure of type and scope of services on all broker-
dealers (distinguishing between small and large). 



676 

 

language.1403  In addition, a small broker-dealer will incur an estimated external cost of $4,970 

for the assistance of outside counsel in the preparation and review of this standardized 

language.1404  For the estimated 756 small broker-dealers,1405 we project an aggregate initial 

burden of 7,560 hours,1406 and aggregate initial costs of $3.8 million.1407   

Given the broader array of products and services offered, we estimate that a large broker-

dealer will incur an internal burden of twenty hours to draft this standardized language.1408  A 

large broker-dealer will also incur an estimated cost of $7,470 for the assistance of outside 

counsel in the preparation and review of this standardized language.1409  For the estimated 2,010 

                                                                                                                                                             

 

1403  The 10-hour estimate includes 5 hours for in-house counsel to draft and review the 
standardized language, and 5 hours for consultation and review by in-house compliance. 

1404 This estimate is based on the following calculation: (10 hours for outside counsel 
review/drafting) x ($497/hour for outside counsel services) = $4,970 in initial outside 
counsel costs.   

1405  See supra footnote 1385 and accompanying text. 
1406  This estimate is based on the following calculation: (756 small broker-dealers) x (10 

hours per small broker-dealer) = 7,560 initial aggregate burden hours. 
1407  This estimate is based on the following calculation: (756 small broker-dealers) x ($4,970 

in external cost per small broker-dealer) = $3.8 million in aggregate initial outside 
counsel costs. 

1408  The 20-hour estimate includes 10 hours for in-house counsel to draft and review the 
standardized language, and 10 hours for consultation and review by in-house compliance. 

1409 This estimate is based on the following calculation: (15 hours for outside counsel 
review/drafting) x ($497/hour for outside counsel services) = $7,455 in initial outside 
counsel costs.   



677 

 

large retail broker-dealers, we estimate an aggregate initial burden of 40,200 hours1410 and $15 

million in aggregate initial costs.1411 

We estimate that all broker-dealers will each incur approximately 0.02 burden hours1412 

for delivery of the account disclosure document.1413  Based on FOCUS data, we estimate that the 

2,766 broker-dealers that report retail activity have approximately 139 million customer accounts, 

and that approximately 73.5%, or 102 million, of those accounts belong to retail customers.1414  

We therefore estimate that broker-dealers will have an aggregate initial burden of 2,040,000 
                                                                                                                                                             

 

1410  This estimate is based on the following calculation: (2,010 large broker-dealers) x (20 
burden hours) = 40,200 aggregate initial burden hours. 

1411  This estimate is based on the following calculation: (2,010 large broker-dealers) x 
($7,455 initial outside counsel costs) = $15 million in aggregate initial costs. 

1412  This is the same estimate the Commission makes in the Relationship Summary Adopting 
Release.  It is also the same estimate the Commission made in the Amendments to Form 
ADV Adopting Release, and for which we received no comment.  See Amendments to 
Form ADV, 17 CFR Parts 275 and 279 at 49259.  We expect that delivery requirements 
will be performed by a general clerk.  The general clerk’s time is included in the initial 
burden estimate. 

1413 As noted above, for new retail customers, we expect delivery to occur at the beginning of 
the relationship; for existing customers, we expect delivery to occur prior to or at the time 
of a recommendation. 

1414  We have revised our estimates from the Proposing Release to reflect the updated FOCUS 
Report data.  Therefore, the 2,766 broker-dealers (including dual-registrants) with retail 
customers report 139 million customer accounts.  See Section III.B.1.a, at Table 1, Panel 
B.  Assuming the amount of retail customer accounts is proportionate to the percentage of 
broker-dealers that have retail customers, or 73.5% of broker-dealers, then the number of 
retail customer accounts would be 73.5% of 139 million accounts = 102 million retail 
customer accounts.  This number likely overstates the number of deliveries to be made 
due to the double-counting of deliveries to be made by dual-registrants to a certain extent, 
and the fact that one customer may own more than one account. 



678 

 

hours, or approximately 738 hours1415 per broker-dealer for the first year after Regulation Best 

Interest is in effect.1416   

We estimate a total initial aggregate burden for all broker-dealers to develop and deliver 

to retail customers account disclosures relating to capacity and type and scope of services of 

2,093,390 burden hours.1417  We estimate a total initial aggregate cost of $21.6 million.1418 

ii. Ongoing Costs and Burdens 
 

For purposes of this analysis, we assume that broker-dealers will review and amend the 

standardized language in the account disclosure, on average, once a year.1419  Further, we assume 

                                                                                                                                                             

 

1415  These estimates are based on the following calculations:  (0.02 hours per customer 
account x (102 million retail customer accounts) = 2,040,000 aggregate burden hours.  
Conversely, (2,040,000 hours) / (2,766 broker-dealers) = approximately 738 burden hours 
per broker-dealer for the first year after Regulation Best Interest is in effect.   

1416  We estimate that broker-dealers will not incur any incremental postage costs because we 
assume that they will make such deliveries with another mailing the broker-dealer was 
already delivering to retail customers. 

1417  This estimate is based on the following calculation: (5,630 aggregate initial burden hours 
for dual-registrants) + (7,560 aggregate initial burden hours for small broker-dealers) + 
(40,200 burden hours for large broker-dealers) + (2,040,000 aggregate initial burden 
hours for all broker-dealers to deliver the account disclosures) = 2,093,390 total 
aggregate initial burden hours. 

1418  This estimate is based on the following calculation: ($2.8 million in initial aggregate 
costs for dual-registrants) + ($3.8 million in initial aggregate costs for small broker-
dealers) + ($15 million in initial aggregate costs for large broker-dealers) = $21.6 million 
in total initial aggregate costs. 

1419  We believe this annual timeframe is consistent with other obligations imposed on broker-
dealers.  For example, FINRA rules set an annual supervisory review as a minimum 
threshold for broker-dealers, for example, in FINRA Rules 3110 (requiring an annual 

 

 



679 

 

that broker-dealers will not incur outside costs in connection with updating account disclosures, 

as in-house personnel will be more knowledgeable about changes in capacity, and the type and 

scope of services offered by the broker-dealer.  Additionally, with respect to standalone broker-

dealers, because they will meet their obligation to disclose capacity by delivering the 

Relationship Summary, and will be subject to requirements to amend the Relationship Summary 

consistent with Form CRS, we estimate zero burden hours annually for ongoing costs relating to 

disclosure of capacity under the Disclosure Obligation. 

We estimate that each dually registered broker-dealer will incur approximately five 

burden hours annually for in-house compliance and business-line personnel to review changes in 

the dual-registrant’s capacity,1420 and another two burden hours annually for in-house counsel to 

amend the account disclosure to disclose material changes to the dual-registrant’s capacity, for a 

                                                                                                                                                             

 

review of the businesses in which the broker-dealer engages), 3120 (requiring an annual 
report detailing a broker-dealer’s system of supervisory controls, including compliance 
efforts in the areas of antifraud and sales practices); and 3130 (requiring each broker-
dealer’s CEO or equivalent officer to certify annually to the reasonable design of the 
policies and procedures for compliance with relevant regulatory requirements). 

1420  In the Proposing Release, we referred to capacity and type and scope of services, 
however, we captured the ongoing costs and burdens relating to disclosure of type and 
scope of services in the paragraphs that followed, where we inadvertently referred to 
“small standalone broker-dealers” and “large standalone broker-dealers,” but where our 
calculations reflected the burdens on all “small broker-dealers” and all “large broker-
dealers.”  See Proposing Release, footnotes 600-601.  We believe it is appropriate to 
distinguish between standalone and dually registered broker-dealers in assessing the costs 
and burdens relating to disclosure of capacity, and to distinguish between small and large 
firms in assessing the costs and burdens relating to disclosure of type and scope of 
services, as reflected in this section. 



680 

 

total of seven burden hours.  The estimated ongoing aggregate burden to amend dual-registrants’ 

account disclosures to reflect changes in capacity is therefore 3,941 hours per year.1421 

With respect to small broker-dealers, we estimate an internal burden of two hours for in-

house compliance and business-line personnel to review and update changes in types or scope of 

services, and another two burden hours annually for in-house counsel to amend the account 

disclosure to disclose material changes to type and scope of services—for a total of four burden 

hours.  The estimated ongoing aggregate burden for small broker-dealers to amend account 

disclosures to reflect changes in type and scope of services is therefore 3,024 hours per year.1422  

We estimate that large broker-dealers would incur ten burden hours annually for in-house 

compliance and business-line personnel to review and update changes the type and scope of 

services, and another ten burden hours annually for in-house counsel to amend the account 

disclosure to disclose material changes to the type and scope of services, for a total of twenty 

burden hours.  We therefore believe the ongoing, aggregate burden is 40,200 hours per year for 

large broker-dealers.1423 

                                                                                                                                                             

 

1421  This estimate is based on the following calculation: (7 burden hours per dually registered 
firm per year) x (563 dually registered broker-dealers) = 3,941 ongoing aggregate burden 
hours per year.   

1422  This estimate is based on the following calculation: (4 burden hours per broker-dealer per 
year) x (756 small broker-dealers) = 3,024 ongoing aggregate burden hours per year.   

1423  This estimate is based on the following calculation: (20 burden hours per broker-dealer 
per year) x (2,010 large broker-dealers) = 40,200 ongoing aggregate burden hours per 
year.681 

 

With respect to delivery of the amended account agreements in the event of material 

changes to the capacity disclosure or disclosure related to type and scope of services, we estimate 

that this would take place among 20% of a broker-dealer’s retail customer accounts annually.  

We therefore estimate broker-dealers to incur a total annual aggregate burden of 408,000 hours, 

or 148 hours per year per broker-dealer.1424  

The total ongoing aggregate burden for all broker-dealers to review, amend, and deliver 

updated account disclosures to reflect changes in capacity, type and scope of services would be 

455,165 burden hours per year.1425 

The Commission acknowledges that the types of services and product offerings vary 

greatly by broker-dealer, and therefore the costs and burdens associated with updating the 

account disclosure might also vary. 

(2) Disclosure of Fees and Costs 
 

The Commission assumes for purposes of this analysis that a broker-dealer will disclose 

its fees and costs through a standardized fee schedule, delivered to the retail customer at the 

                                                                                                                                                             

 

1424  (20%) x (102 million retail customer accounts) x (.02 hours for delivery to each customer 
account) = 408,000 aggregate burden hours.  Conversely, 408,000 aggregate burden 
hours / 2,766 broker-dealers = 148 burden hours per year per broker-dealer.   

1425  This estimate is based on the following calculation: (3,941 ongoing aggregate burden 
hours for dually registered broker-dealers) + (3,024 ongoing aggregate burden hours for 
small broker-dealers) + (40,200 ongoing aggregate burden hours for large broker-dealers) 
+ (408,000 ongoing aggregate burden hours for delivery of amended account disclosures) 
= 455,165 total ongoing aggregate burden hours per year. 



682 

 

beginning of the relationship, or, for existing retail customers, prior to or at the time of a 

recommendation and, as discussed below, will amend such fee schedules in the event of material 

changes.  Although we understand that many broker-dealers already provide fee schedules to 

retail customers, we are assuming for purposes of this analysis that a fee schedule would be 

created specifically for purposes of compliance with Regulation Best Interest.1426  While the 

Commission recognizes that the fee disclosure included in Disclosure Obligation applies to the 

broker-dealer entity and its associated persons, we do not expect any burdens or costs on 

associated persons related to the fees and costs as this information would be addressed in the 

broker-dealer entity’s fee schedule. 

i. Initial Costs and Burdens 
 

We assume that, for purposes of this analysis, the associated costs and burdens will differ 

between small and large broker-dealers, as large broker-dealers generally offer more products 

and services and therefore will need to evaluate a wider range of fees in their fee schedules.  As 

stated above, while we anticipate that many broker-dealers may already create fee schedules, we 

believe that small broker-dealers will initially spend five hours for in-house compliance and 

large broker-dealers will spend ten hours for in-house compliance to internally create a new fee 

schedule in consideration of the requirements of Regulation Best Interest.  We additionally 

                                                                                                                                                             

 

1426  Our estimates may be higher than actual, since firms may be able to use or simply update 
existing disclosures depending on the facts and circumstances. 



683 

 

estimate a one-time external cost of $2,485 for small broker-dealers1427 and $4,970 for larger 

broker-dealers for outside counsel to review the fee schedule.1428  We therefore estimate the 

initial aggregate burden for small broker-dealers to be 3,780 burden hours,1429 and the initial 

aggregate cost to be $1.88 million.1430  We estimate the aggregate burden for large broker-

dealers to be 20,100 burden hours,1431 and the aggregate cost to be $9.99 million.1432 

Similar to delivery of the account disclosure regarding capacity and type and scope of 

services, we estimate the burden for broker-dealers to make the initial delivery of the fee 

schedule to new retail customers, at the beginning of the relationship, and existing retail 

customers, prior to or at the time of a recommendation, will require approximately 0.02 hours to 

                                                                                                                                                             

 

1427  This cost estimate is based on the following calculation: (5 hours of review) x ($497/hour 
for outside counsel services) = $2,485 outside counsel costs. 

1428  This cost estimate is based on the following calculation: (10 hours of review) x 
($497/hour for outside counsel services) = $4,970 outside counsel costs.   

1429  This estimate is based on the following calculation: (5 burden hours of review per small 
broker-dealer) x (756 small broker-dealers) = 3,780 aggregate initial burden hours. 

1430  This estimate is based on the following calculation: ($2,485 for outside counsel costs per 
small broker-dealer) x (756 small broker-dealers) = $1.88 million in aggregate initial 
outside costs. 

1431  This estimate is based on the following calculation: (10 burden hours of review per large 
broker-dealer) x (2,010 large broker-dealers) = 20,100 aggregate initial burden hours. 

1432  This estimate is based on the following calculation: ($4,970 for outside counsel costs per 
large broker-dealer) x (2,010 large broker-dealers) = $9.99 million in aggregate initial 
costs. 



684 

 

deliver to each retail customer.1433  As stated above, we estimate that the 2,766 broker-dealers 

that report retail activity have approximately 139 million customer accounts, and that 

approximately 73.5%, or 102 million, of those accounts belong to retail customers.1434  We 

therefore estimate that broker-dealers will have an aggregate initial burden of 2,040,000 hours, or 

approximately 738 hours per broker-dealer for the first year after Regulation Best Interest is in 

effect.1435   

The total aggregate initial burden for broker-dealers is therefore estimated at 

2,063,8801436 hours, and the total aggregate initial cost is estimated at $11.87 million.1437 

ii. Ongoing Costs and Burdens 
 

For purposes of this PRA analysis, we assume that broker-dealers will review and amend 

the fee schedule on average, once a year.  With respect to small broker-dealers, we estimate that 

                                                                                                                                                             

 

1433  See supra footnote 1412. 
1434  See supra footnote 1413. 
1435  This estimate is based on the following calculation: (102 million retail customer 

accounts) x (.02 hours for delivery to each customer account) = 2,040,000 aggregate 
burden hours.  Conversely, (2,040,000 aggregate burden hours) / (2,766 broker-dealers) = 
738 burden hours per broker-dealer for the first year after Regulation Best Interest is in 
effect. 

1436  This estimate is based on the following calculations: (3,780 aggregate burden hours for 
small broker-dealers) + (20,100 burden hours for large broker-dealers) + (2,040,000 
burden hours for delivery) = 2,063,880 total aggregate initial burden hours.   

1437  This estimate is based on the following calculation: ($1.88 million for small broker-
dealer costs) + ($9.99 million large broker-dealer costs) = $11.87 million in total initial 
aggregate costs. 



685 

 

reviewing and updating the fee schedule will require approximately two hours for in-house 

compliance per year, and for large broker-dealers, we estimate that the recurring, annual burden 

to review and update the fee schedule will be four hours for in-house compliance for each large 

broker-dealer.  Based on these estimates, we estimate the recurring, aggregate, annualized burden 

will be 1,512 hours for small broker-dealers1438 and 8,040 hours for large broker-dealers.1439  We 

do not anticipate that small or large broker-dealers will incur outside legal, compliance, or 

consulting fees in connection with updating their standardized fee schedule since in-house 

personnel would be more knowledgeable about these facts, and we therefore do not expect 

external costs associated with updating the fee schedule.   

With respect to delivery of the amended fee schedule in the event of a material change, 

we estimate that this would take place among 40% of a broker-dealer’s retail customer accounts 

annually, and that broker-dealers will require approximately 0.02 hours to deliver the amended 

fee schedule to each retail customer.1440  We therefore estimate broker-dealers would incur a 

total annual aggregate burden of 816,000 hours, or 295 hours per broker-dealer.1441  

                                                                                                                                                             

 

1438  This estimate is based on the following calculation: (2 burden hours per broker-dealer) x 
(756 small broker-dealers) = 1,512 aggregate burden hours per broker-dealer per year. 

1439  This estimate is based on the following calculation: (4 burden hours per broker-dealer) x 
(2,010 large broker-dealers) = 8,040 aggregate burden hours per broker-dealer per year. 

1440  See supra footnote 1412.   
1441  This estimate is based on the following calculation: (40% of 102 million retail customer 

accounts) x (.02 hours) = 816,000 aggregate burden hours.  Conversely, (816,000 
 

 



686 

 

The total ongoing aggregate burden for all broker-dealers to review, amend, and deliver 

updated account disclosures to reflect changes in fees and costs would be 825,552 burden hours 

per year.1442 

The Commission acknowledges that the type of fee schedule may vary greatly by broker-

dealer, and therefore that the costs or burdens associated with updating the standardized fee 

schedule might similarly vary.   

(3) Disclosure of All Material Facts Relating to Conflicts of 
Interest Associated with the Recommendation 

 
Regulation Best Interest requires broker-dealers to provide a retail customer, in writing, 

full and fair disclosure of all material facts relating to conflicts of interest that are associated with 

the recommendation.  Because the Disclosure Obligation applies to both the broker-dealer entity 

and its associated persons, the Commission expects that the broker-dealer entity and its 

associated persons will incur initial and ongoing burdens.  However, as with the disclosure of the 

capacity in which they are acting and type and scope of services, we assume for purposes of this 

                                                                                                                                                             

 

aggregate burden hours) / (2,766 broker-dealers) = 295 burden hours per broker-dealer 
per year.   

1442  This estimate is based on the following calculation: (1,512 ongoing aggregate burden 
hours for small broker-dealers) + (8,040 ongoing aggregate burden hours for large 
broker-dealers) + (816,000 ongoing aggregate burden hours for delivery of amended 
account disclosures) = 825,552 total ongoing aggregate burden hours per year. 



687 

 

analysis that the broker-dealer entities will incur the costs and burdens of disclosing material 

conflicts of interest on behalf of their associated persons.1443  

i. Initial Costs and Burdens 
 

The Disclosure Obligation provides broker-dealers with the flexibility to choose the form 

and manner of conflict disclosure.  However, we believe that many or most broker-dealers will 

develop a standardized conflict disclosure document and deliver it to their retail customers.1444  

We also assume for purposes of this PRA analysis that broker-dealers will update and deliver the 

standardized conflict disclosure document yearly on an ongoing basis, following the broker-

dealer’s annual conflicts review process.  

For purposes of this PRA analysis, we assume that a standardized conflict disclosure 

document will be developed by in-house counsel and reviewed by outside counsel.  For small 

broker-dealers, we estimate it will take in-house counsel, on average, five burden hours to create 

the standardized conflict disclosure document and outside counsel five hours to review and 

revise the document.  We estimate that the initial aggregate burden for the development of a 

standardized disclosure document, based on an estimated 756 small broker-dealers, will be 3,780 

                                                                                                                                                             

 

1443  See Section IV.B.5 (discussing the costs and burdens associated with record-making, 
including for associated persons of a broker-dealer). 

1444  As noted above, we assume that delivery for new customers will occur at the beginning 
of the relationship, and that delivery for existing customers will occur prior to or at the 
time a recommendation is made. 



688 

 

burden hours.1445  We additionally estimate an initial cost of $2,485 per small broker-dealer,1446 

and an aggregate initial cost of $1.88 million for all small broker-dealers.1447   

We expect the development and review of the standardized conflict disclosure document 

to take longer for large broker-dealers because, as discussed above, we believe large broker-

dealers generally offer more products and services and employ more individuals, and therefore 

will need to disclose a larger number of conflicts.  We estimate that for large broker-dealers, it 

will take 7.5 burden hours for in-house counsel to create the standardized conflict disclosure 

document, and outside counsel will take another 7.5 hours to review and revise the disclosure 

document.  As a result, we estimate the initial aggregate burden, based on an estimated 2,010 

large broker-dealers, to be approximately 15,075 burden hours.1448  We additionally estimate 

                                                                                                                                                             

 

1445  This estimate is based on the following calculation: (5 hours) x (756 small broker-
dealers) = 3,780 aggregate initial burden hours. 

1446  This estimate is based on the following calculation: ($497/hour) x (5 hours) = $2,485 in 
initial costs. 

1447  This estimate is based on the following calculation: ($497/hour x 5 hours) x (756 small 
broker-dealers) = $1.88 million in aggregate initial costs. 

1448  This estimate is based on the following calculation: (7.5 hours x 2,010 large broker-
dealers) = 15,075 aggregate initial burden hours. 



689 

 

initial costs of $3,728 per broker-dealer,1449 and an aggregate initial cost for large broker-dealers 

of approximately $7.49 million.1450   

We assume that broker-dealers will deliver the standardized conflict disclosure document 

to new retail customers at the inception of the relationship, and to existing retail customers prior 

to or at the time of a recommendation.  We estimate that broker-dealers will require 

approximately 0.02 hours to deliver the standardized conflict disclosure document to each retail 

customer.1451  We therefore estimate that broker-dealers will incur an aggregate initial burden of 

2,040,000 hours, or approximately 738 hours per broker-dealer for delivery of the standardized 

conflict disclosure document the first year after Regulation Best Interest is in effect.1452  

                                                                                                                                                             

 

1449  This estimate is based on the following calculation: ($497/hour) x (7.5 hours) = $3,728 in 
initial costs per broker-dealer. 

1450  This estimate is based on the following calculation: ($497/hour) x (7.5 hours) x 2,010 
large broker-dealers) = $7.49 million in aggregate costs. 

1451  See supra footnote 1412.  For purposes of this PRA analysis, we have assumed any initial 
disclosures made by the broker-dealer related to material conflicts of interest will be 
delivered together. 

1452  These estimates are based on the following calculations:  (0.02 hours per customer 
account x 102 million retail customer accounts) = 2,040,000 aggregate initial burden 
hours.  Conversely, (2,040,000 hours) / (2,766 broker-dealers) = 738 burden hours per 
broker-dealer. 



690 

 

The total aggregate initial burden for broker-dealers is therefore estimated at 

2,058,8551453 hours, and the total aggregate initial cost is estimated at $9.37 million.1454 

ii. Ongoing Costs and Burdens 

We believe that broker-dealers will incur ongoing annual burdens and costs to update the 

disclosure document to include newly identified conflicts.  We assume for purposes of this 

analysis that broker-dealers will update their conflict disclosure document annually, after 

conducting an annual conflicts review.  We estimate that the conflicts disclosures will be updated 

internally by both small and large broker-dealers.   

We estimate that in-house counsel at a small broker-dealer will require approximately 

one hour per year to update the standardized conflict disclosure document, for an ongoing 

aggregate, annual burden of approximately 756 hours.1455  For large broker-dealers, we estimate 

that the ongoing, aggregate annual burden would be two hours for each broker-dealer: one hour 

for in-house compliance and one hour for in-house counsel for legal personnel.  We therefore 

estimate the ongoing, aggregate burden for large broker-dealers to be approximately 4,020 

                                                                                                                                                             

 

1453  This estimate is based on the following calculations: (3,780 aggregate burden hours for 
small broker-dealers) + (15,075 burden hours for large broker-dealers) + (2,040,000 
burden hours for delivery) = 2,058,855 total aggregate initial burden hours. 

1454  This estimate is based on the following calculation: ($1.88 million for small broker-
dealer costs) + ($7.49 million large broker-dealer costs) = $9.37 million in total aggregate 
initial costs. 

1455  This estimate is based on the following calculation: (1 hour per broker-dealer) x (756 
small broker-dealers) = 756 aggregate burden hours per year. 



691 

 

burden hours.1456  We do not anticipate that small or large broker-dealers will incur outside legal, 

compliance, or consulting fees in connection with updating their standardized conflict disclosure 

document, since in-house personnel would presumably be more knowledgeable about conflicts 

of interest.   

With respect to ongoing delivery of the updated conflict disclosure document, we 

estimate that this will take place among 40% of a broker-dealer’s retail customer accounts 

annually, and that broker-dealers will require approximately 0.02 hours to deliver the updated 

conflict disclosure document to each retail customer.1457  We therefore estimate that broker-

dealers will incur an ongoing, aggregate annual burden of 816,000 hours, or 295 burden hours 

per broker-dealer.1458  The total aggregate ongoing burden for broker-dealers is therefore 

estimated at 820,776 hours.1459 

                                                                                                                                                             

 

1456  This estimate is based on the following calculation: (2 hours per broker-dealer) x (2,010 
large broker-dealers) = 4,020 aggregate burden hours per year. 

1457  See supra footnote 1412.  The Commission estimates that broker-dealers will update their 
disclosures of fees and costs and material facts relating to conflicts of interest that are 
associated with their recommendation more frequently than disclosure related to capacity 
or type and scope of services. 

1458  This estimate is based on the following calculation: (40% of 102 million retail customer 
accounts) x (.02 hours) = 816,000 aggregate burden hours per year.  Conversely, 
(816,000 aggregate burden hours) / (2,766 broker-dealers) = 295 hours per broker-dealer 
per year.   

1459  This estimate is based on the following calculations: (756 aggregate burden hours for 
small broker-dealers) + (4,020 aggregate burden hours for large broker-dealers) + 
(816,000 aggregate burden hours for delivery) = 820,776 total aggregate ongoing burden 
hours.   



692 

 

Based on the calculation describe above, we estimate that broker-dealers will incur an 

aggregate total initial burden of 6,216,125 hours1460 and a total initial cost of $42.84 million,1461 

as well as an aggregate total ongoing annual burden of 2,101,493 hours1462 to comply with the 

Disclosure Obligation. 

2. Care Obligation 

The Care Obligation requires 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, 

                                                                                                                                                             

 

1460  This estimate is based on the following calculation: (2,093,390 aggregate initial burden 
hours for initial compliance with disclosure of capacity and type and scope of services) + 
(2,063,880 aggregate initial burden hours for initial compliance with disclosure of fees 
and costs) + (2,058,855 aggregate initial burden hours for initial compliance with 
disclosure of all material facts regarding disclosure of conflicts of interest associated with 
the recommendation) = 6,216,125 total aggregate initial burden hours for compliance 
with the Disclosure Obligation.  

1461  This estimate is based on the following calculation: ($21.6 million aggregate initial cost 
for compliance with disclosure of capacity and type and scope of services) + ($11.87 
million aggregate initial cost for compliance with disclosure of fees and costs) + ($9.37 
aggregate initial cost for compliance with disclosure of all material facts regarding 
disclosure of conflicts of interest associated with the recommendation) = $42.84 million 
total aggregate initial cost for compliance with the Disclosure Obligation.   

1462  This estimate is based on the following calculation: (455,165 aggregate annual burden 
hours for ongoing compliance with disclosure of capacity and type and scope of services) 
+ (825,552 aggregate annual burden hours for ongoing compliance with disclosure of 
fees and costs) + (820,776 aggregate annual burden hours for ongoing compliance with 
disclosure of all material facts regarding disclosure of conflicts of interest associated with 
the recommendation) = 2,101,493 total aggregate burden hours per year for ongoing 
compliance with the Disclosure Obligation. 



693 

 

that the 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.  However, any PRA burdens 

or costs associated with the Care Obligation are duplicative of costs associated with other 

obligations in Regulation Best Interest, including the Disclosure Obligation and the Record-

Making Obligation under Rule 17a-3(a)(35) and Recordkeeping Obligation under Rule 17a-

4(e)(5). 

3. Conflict of Interest Obligation 

The Conflict of Interest Obligation creates an overarching obligation to require broker-

dealers1463 to establish written policies and procedures reasonably designed to identify and at a 

minimum disclose, pursuant to the Disclosure Obligation, or eliminate all conflicts of interest 

associated with a recommendation. More specifically, broker-dealers are specifically required 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 to a retail 

                                                                                                                                                             

 

1463  As discussed above, the Conflict of Interest Obligation and Compliance Obligation apply 
solely to the broker or dealer entity, and not to the associated persons of a broker or 
dealer. 



694 

 

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 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.1464 

Written policies and procedures developed pursuant to the Conflict of Interest Obligation 

of Regulation Best Interest would help a broker-dealer to develop a process reasonably designed 

for its business, for identifying conflicts of interest, and then determining whether to eliminate, 

or disclose and/or mitigate the conflict and the appropriate means of eliminating, disclosing 

and/or mitigating the conflict.  In addition, establishing and maintaining written policies and 

procedures would generally (1) assist a broker-dealer in supervising its associated persons and 

assessing compliance with the Conflict of Interest Obligation; and (2) assist the Commission and 

SRO staff in connection with examinations and investigations.1465   

                                                                                                                                                             

 

1464  Rule 15l-1 under the Exchange Act. 
1465  See Section II.C.3.a. 

 Any written policies and procedures developed pursuant to Regulation Best Interest 
would be required to be retained pursuant to Exchange Act Rule 17a-4(e)(7), which 
requires broker-dealers to retain compliance, supervisory, and procedures manuals (and 
any updates, modifications, and revisions thereto) describing the policies and procedures 

 

 



695 

 

In light of the modifications to several substantive requirements of the rule relative to the 

Proposing Release, including the Conflict of Interest Obligation, as discussed in more detail 

above,  we believe these changes will allow broker-dealers’ to more easily incorporate the 

requirements of Regulation Best Interest into existing supervisory and compliance systems and 

streamline compliance with Regulation Best Interest.1466  Therefore, we generally believe our 

proposed burdens and costs are accurate but have updated estimates to reflect changes in the 

number of broker-dealers and costs of certain services since the last estimate in the Proposing 

Release. 

Following is a detailed discussion of the estimated costs and burdens associated with the 

Conflict of Interest Obligation. 

a. Written Policies and Procedures 

i. Initial Costs and Burdens 

We believe that most broker-dealers have policies and procedures in place to address 

conflicts of interest, but do not necessarily have written policies and procedures regarding the 

identification and management of conflicts as required by Regulation Best Interest.  To comply 

                                                                                                                                                             

 

of the broker-dealer with respect to compliance with applicable laws and rules, and 
supervision of the activities of each associated, for a specified period of time. The record 
retention requirements of Rule 17a-4(e)(7) include any written policies and procedures 
that broker-dealers may produce pursuant to the Conflict of Interest Obligation of 
Regulation Best Interest.   

1466  See Section II.C.3. 



696 

 

with the Conflict of Interest Obligation, we believe that broker-dealers would utilize a 

combination of in-house and outside legal and compliance counsel to update existing policies 

and procedures.1467  We assume that, for purposes of this analysis, the associated costs and 

burdens would differ between small and large broker-dealers, as large broker-dealers generally 

offer more products and services and therefore would need to evaluate and address a greater 

number of potential conflicts of interest.  As discussed above, we estimate that 2,010 broker-

dealers would qualify as large broker-dealers for purposes of this analysis and 756 would qualify 

as small broker-dealers that have retail business.1468 

In the Proposing Release, we estimated that a large broker-dealer would incur a one-time 

internal burden of 60 hours for in-house legal and in-house compliance counsel to update 

existing policies and procedures to comply with Regulation Best Interest.1469  We also estimated 

a cost of $4,720 for outside counsel to review updated policies and procedures on behalf of a 

large broker-dealer, with an aggregate initial burden of 123,300 burden hours and aggregate 

initial cost of $9.70 million for large broker-dealers.1470 

In the Proposing Release, we assumed that small broker-dealers would primarily rely on 

outside counsel to update existing policies and procedures, as small broker-dealers generally 

                                                                                                                                                             

 

1467   See footnote 1382 and accompanying text. 
1468  See footnote 1388 and accompanying text.  
1469  See Proposing Release at 21666. 
1470  Id.  



697 

 

have fewer in-house legal and compliance personnel.  Given that smaller broker-dealers 

generally have fewer conflicts of interest, we estimated that 40 hours of outside legal counsel 

services would be required, for a one-time cost of $18,800 per small broker-dealer, and an 

aggregate cost of $15.1 million for all small broker-dealers, and we also expected that in-house 

compliance personnel would require 10 hours to review and approve the updated policies and 

procedures, for an aggregate burden of 8,020 hours.1471  Therefore, we estimated the total initial 

aggregate burden to be 131,320 hours and the total initial aggregate cost to be $24.8 million.1472 

We believe our estimates are generally accurate in light of the increased specificity in 

Regulation Best Interest as to how a broker-dealer must address specified conflicts of interest but 

due to changes in the number of broker-dealers and cost estimates for certain services, we are 

revising our burden and cost estimates.1473   

For purposes of Regulation Best Interest as adopted, we estimate that a large broker-

dealer would incur an initial burden of 50 hours for in-house counsel and in-house compliance to 

update existing policies and procedures to comply with Regulation Best Interest and an initial 

burden of 5 hours for general counsel and 5 hours for a Chief Compliance Officer to review and 

                                                                                                                                                             

 

1471  Id. 
1472  Id. 
1473  We have revised our cost estimates to reflect the updated SIFMA Management and 

Professional Earnings Report which was updated in 2019 to reflect inflation.  Therefore, 
the hourly rates used here for certain services, for example, outside legal counsel and 
outside compliance costs, are higher than the numbers in the Proposing Release. 



698 

 

approve the updated policies and procedures, for a total of 60 burden hours.1474  We also estimate 

ten hours of outside counsel services will be required at a cost of $4,970 to review updated 

policies and procedures on behalf of a large broker-dealer.1475  We therefore estimate the 

aggregate initial burden for large broker-dealers to be of 120,600 burden hours1476 and initial 

aggregate cost of approximately $10.0 million for large broker-dealers.1477 

For small broker-dealers, we believe that they would primarily rely on outside counsel to 

update existing policies and procedures, as small broker-dealers generally have fewer in-house 

legal and compliance personnel.  Given that smaller broker-dealers generally have fewer 

conflicts of interest, we estimate that 40 hours of outside legal counsel would be required to 

update existing policies and procedures, for a one-time cost of $19,880 per small broker-

                                                                                                                                                             

 

1474  This estimate is based on the following calculation:  (50 hours of review for in-house 
counsel and in-house compliance counsel) + (5 hours of review for general counsel) + (5 
hours of review for Chief Compliance Officer) = 60 initial burden hours per large broker-
dealer. 

1475  Data from the SIFMA Management and Professional Earnings Report suggests that the 
average hourly rate for legal services is $497/hour.  This cost estimate is therefore based 
on the following calculation:  (10 hours of review) x ($497/hour for outside counsel 
services) = $4,970 in outside counsel costs per large broker-dealer. 

1476  This estimate is based on the following calculation:  (60 burden hours of review per large 
broker-dealer) x (2,010 large broker-dealers) = 120,600 aggregate burden hours for large 
broker-dealers. 

1477 This estimate is based on the following calculation:  ($4,970 for outside counsel costs per 
large broker-dealer) x (2,010 large broker-dealers) = approximately $10.0 million in 
outside counsel costs for large broker-dealers. 



699 

 

dealer,1478 and an aggregate cost of $15.0 million for all small broker-dealers.1479  We also 

expect that in-house compliance would require 10 hours to review and approve the updated 

policies and procedures, for an aggregate burden of 7,560 hours.1480  Therefore, we estimate the 

total initial aggregate burden to be 128,160 hours1481 and the total initial aggregate cost to be 

approximately $25.0 million.1482 

ii. Ongoing Costs and Burdens 

 For purposes of this analysis, we assume that small and large broker-dealers would 

review and update policies and procedures on an annual basis to accommodate the addition of, 

for example, new products or services, new business lines, and/or new personnel.  We also 

assume that broker-dealers would review and update their policies and procedures for 

                                                                                                                                                             

 

1478  This cost estimate is based on the following calculation:  (40 hours of review) x 
($497/hour for outside counsel services) = $19,880 in outside counsel costs per small 
broker-dealer. 

1479  This cost estimate is based on the following calculation: ($19,880 for outside attorney 
costs per small broker-dealer) x (756 small broker-dealers) = approximately $15.0 million 
in outside counsel costs for small broker-dealers.   

1480  This estimate is based on the following calculation: (10 burden hours) x (756 small 
broker-dealers) = 7,560 aggregate burden hours.   

1481  This estimate is based on the following calculation: (120,600 aggregate burden hours for 
large broker-dealers) + (7,560 aggregate burden hours for small broker-dealers) = 
128,160 total aggregate burden hours.   

1482  This estimate is based on the following calculation: ($10 million in aggregate costs for 
large broker-dealers) + ($15.0 million in aggregate costs for small broker-dealers) = 
$25.0 million total aggregate costs. 



700 

 

compliance with the Conflict of Interest Obligation on an annual basis, and in-house personnel 

would perform the review and make any updates. 

 In the Proposing Release, we estimated that large broker-dealers would incur an annual 

internal burden of 12 hours to review and update existing policies and procedures to identify new 

conflicts for an ongoing, aggregate burden of 24,660 hours with no ongoing costs as they would 

rely on internal personnel.1483  We assumed small broker-dealers would rely on outside legal 

counsel and compliance consultants to review and update policies and procedures, with final 

review and approval from in-house compliance1484 with an aggregate, annual ongoing cost of 

$3.08 million per year.1485  In addition to these costs, we believed that small broker-dealers 

would incur an internal an ongoing, aggregate burden of 28,670 hours.  While the Commission 

believes our time estimates from the Proposing Release are generally accurate, we have revised 

our burdens and estimates to account for changes in both the number of broker-dealers and 

external costs of services. 

 We estimate that large broker-dealers, which generally have more numerous and complex 

products and services, as well as and higher rates of hiring and turnover would incur an annual 

internal burden of 12 hours to review and update existing policies and procedures:  four hours for 

in-house counsel, four hours for in-house compliance, and four hours for business-line personnel 
                                                                                                                                                             

 

1483  Proposing Release at 21667. 
1484  Id. 
1485  Id.701 

 

to identify new conflicts.  We therefore estimate an ongoing, aggregate burden for large broker-

dealers of approximately 24,120 hours.1486  Because we assume that large broker-dealers would 

rely on internal personnel to update policies and procedures on an ongoing basis, we do not 

believe large broker-dealers would incur ongoing external costs. 

 We assume for purposes of this analysis that small broker-dealers, generally have fewer 

and less complex products and lower rates of hiring.  We also assume they would primarily rely 

on outside legal counsel and outside compliance consultants for review and update of their 

policies and procedures, with final review and approval from an in-house compliance manager.  

We estimate that outside legal counsel would require approximately five hours per year to update 

policies and procedures, for an annual cost of $2,485 for each small broker-dealer.1487  The 

projected aggregate, annual ongoing cost for outside legal counsel to update policies and 

procedures for small broker-dealers would be $1.88 million per year.1488  In addition, we expect 

that small broker-dealers would require five hours of outside compliance services per year to 

                                                                                                                                                             

 

1486  This estimate is based on the following calculation: (12 burden hours per large broker-
dealer) x (2,010 large broker-dealers) = 24,120 aggregate ongoing burden hours.   

1487  This estimate is based on the following calculation: (5 hours per small broker-dealer) x 
($497/hour for outside counsel services) = $2,485 in outside counsel costs.   

1488  This estimate is based on the following calculation: ($2,485 in outside counsel costs per 
small broker-dealer) x (756 small broker-dealers) = $1.88 million in aggregate, ongoing 
outside legal costs per year.   



702 

 

update their policies and procedures, for an ongoing cost of $1,365 per year,1489 and an aggregate 

ongoing cost of $1.03 million.1490  The total aggregate, ongoing cost for small broker-dealers is 

therefore projected at $2.91 million per year.1491 

 In addition to the costs described above, we additionally believe small broker-dealers 

would incur an internal burden of approximately 5 hours for an in-house compliance manager to 

review and approve the updated policies and procedures per year.  The ongoing, aggregate 

burden for small broker-dealers would be 3,780 hours for in-house compliance manager 

review.1492 

                                                                                                                                                             

 

1489  We believe that performance of this function will most likely be equally allocated 
between a senior compliance examiner and a compliance manager.  Data from the 
SIFMA Management and Professional Earnings Report suggests that costs for these 
positions are $237 and $309 per hour, respectively for an average of $273 per hour. This 
cost estimate is based on the following calculation: (5 hours of review) x ($273/hour for 
outside compliance services) = $1,365 in outside compliance service costs.   

1490  This estimate is based on the following calculation: ($1,365 in outside compliance costs 
per small broker-dealer) x (756 small broker-dealers) = $1.03 million in aggregate, 
ongoing outside compliance costs per year.   

1491  This estimate is based on the following calculation: ($1.88 million for outside legal 
counsel costs) + ($1.03 million for outside compliance costs) = $2.91 million total 
aggregate ongoing costs per year.   

1492  This estimate is based on the following calculation: (5 hours compliance manager review 
per small broker-dealer) x (756 small broker-dealers) = 3,780 aggregate ongoing burden 
hours per year.   



703 

 

 We therefore estimate the total ongoing aggregate ongoing burden to be 27,900 hours per 

year1493 
and the total ongoing aggregate cost to be $2.91 million per year.1494 

 The Commission acknowledges that policies and procedures may vary greatly by broker-

dealer, given the differences in size and the complexity of broker-dealer business models. 

Accordingly, we expect that the need to update policies and procedures might also vary greatly. 

b. Identification and Management of Conflicts of Interest 

 With respect to identifying and determining whether a conflict of interest exists in 

connection with a recommendation and whether it needs to be addressed through disclosure, 

mitigation and/or elimination, a broker-dealer would first need to establish mechanisms to 

proactively and systematically identify conflicts of interest in its business on an ongoing or 

periodic basis.1495  For purposes of this analysis, we assume that most broker-dealers already 

have an existing technological infrastructure in place, and we assume it would need to be 

modified to comply with the Conflict of Interest Obligation. 

                                                                                                                                                             

 

1493  This estimate is based on the following calculation: (24,120 aggregate ongoing burden 
hours for large broker-dealers) + (3,780 aggregate ongoing burden hours for small 
broker-dealers) = 27,900 total aggregate ongoing burden hours per year.   

1494  This estimate is based on the following calculation: ($2.91 million per year in total 
aggregate ongoing costs for small broker-dealers) + ($0 projected ongoing costs for large 
broker-dealers) = $2.91 million per year in total aggregate ongoing costs. 

1495  See supra Section III.C.3. 



704 

 

i. Initial Costs and Burdens 

 As stated in the Proposing Release, we believed that costs and burdens may vary greatly 

depending on the size of the broker-dealer, but we expected that modification of a broker-

dealer’s existing technology would initially require the retention of an outside programmer as 

well as coordination between the programmer and the broker-dealer’s in-house compliance 

manager.  The costs and burdens for this process were estimated to be $15.43 million and 14,285 

burden hours.1496  In addition to these costs and burdens, we expected that a broker-dealer would 

spend time to determine whether the conflict of interest identified were material and would have 

required an additional 14,285 burden hours for all broker-dealers for an aggregate burden of 

28,570 hours for identification of conflicts of interest.1497 

 As stated above, we believe the process would be largely the same as set forth in the 

Proposing Release but have revised our estimates and costs below to account for changes in the 

number of broker-dealers and external costs as well as to account for some changes to the 

structure of the Conflict of Interest Obligation. 

 To comply with the Conflict of Interest Obligation, we expect that broker-dealers will 

modify existing technology through the work of an outside programmer which would require, on 

                                                                                                                                                             

 

1496  Proposing Release at 21667. 
1497  Id. 



705 

 

average, an estimated 20 hours, for an estimated cost per broker-dealer of $5,680.1498  We 

additionally continue to estimate (as was set forth in the Proposing Release) that coordination 

between the programmer and the broker-dealer’s compliance manager would involve five burden 

hours.1499  The aggregate initial costs and burdens for the modification of existing technology to 

identify conflicts of interest would therefore be $15.71 million,1500 and 13,830 burden hours.1501 

 As a result of the changes made to the rule text of the Conflict of Interest Obligation, we 

believe that broker-dealers would incur burdens to:  (1) identify conflicts of interest and 

determine whether the conflict involves an incentive to an associated person to place the interest 

of the broker-dealer or natural person making the recommendation ahead of the interest of the 

retail customer, a material limitation on the product menu, or a sales practice that is based on the 

sales of specific securities or specific types of securities within a limited period of time and (2) 

determine whether and how the conflict would be disclosed, disclosed and mitigated, or 

eliminated in accordance with the Conflict of Interest Obligation.  In order to complete this 

                                                                                                                                                             

 

1498  Data from the SIFMA Management and Professional Earnings Report suggests that the 
average hourly rate for technology services in the securities industry is $284.  This cost 
estimate is based on the following calculation:  (20 hours of review) x ($284/hour for 
technology services) = $5,680. 

 
1500  This cost estimate is based on the following calculation:  ($5,680 in outside programmer 

costs per broker-dealer) x (2,766 broker-dealers) = $15.71 million in aggregate outside 
programmer costs. 

1501  This burden estimate is based on the following calculation:  (5 burden hours for in-house 
compliance manager) x (2,766 broker-dealers) = 13,830 aggregate burden hours. 



706 

 

process, we believe a broker-dealer, on average, would require approximately 20 hours1502 of 

review per broker-dealer,1503 for an aggregate of 55,320 burden hours for all broker-dealers.1504  

We therefore estimate the total initial aggregate burden for identification and management of 

conflicts of interest is 69,150 hours.1505 

ii. Ongoing Costs and Burdens 

 To maintain compliance with the Conflict of Interest Obligation, we assume for purposes 

of this analysis that a broker-dealer would seek to identify additional conflicts of interest as its 

business evolves.  As noted above, the Commission recognizes that broker-dealers vary in the 

types of services and product offerings and therefore vary in the types of conflicts of interest that 

exist within and across broker-dealers.1506   

 However, for purposes of the PRA analysis in the Proposing Release, we assumed that 

broker-dealers would, at a minimum, engage in a material conflicts identification process on an 

annual basis, and we estimated that in the aggregate broker-dealers would spend approximately 

                                                                                                                                                             

 

1502  In light of the changes made to the rule text of the Conflict of Interest Obligation and the 
comments received, we have increased our estimate to 20 burden hours per broker-dealer. 

1503  This burden estimate consists of 10 hours for review by business line personnel, and 10 
hours for review by in-house compliance manager. 

1504  This burden estimate is based on the following calculation:  (20 burden hours) x (2,766 
broker-dealers) = 55,320 aggregate burden hours. 

1505  This burden estimate is based on the following calculation: (13,830 burden hours for 
modification of technology) + (55,320 burden hours for evaluation of managing conflicts) 
= 69,150 total aggregate burden hours.   

1506  See supra Section II.C.3. 



707 

 

28,570 hours each to complete this process per year.1507  Similar to the Proposing Release, we 

believe that for purposes of this analysis, broker-dealers would, through the help of the business 

line and compliance personnel, spend on average 10 hours1508 to perform an annual conflicts 

review using the modified technology infrastructure.1509  Therefore, the Commission estimates 

that the aggregate ongoing burden for an annual conflicts review, based on an estimated 2,766 

retail broker-dealers, would be approximately 27,660 burden hours per year.1510  Because we 

assume that broker-dealers would use in-house personnel to identify and evaluate new, potential 

conflicts, we continue to believe they would not incur additional ongoing external costs. 

c. Training 

 As discussed in the Proposing Release, we expect that broker-dealers would develop 

training programs to comply with Regulation Best Interest, including the Conflict of Interest 

Obligation.  However, we believe that any burdens and costs associated with a training program 

                                                                                                                                                             

 

1507  See Proposing Release at 21668. 
1508  This burden estimate consists of five hours for review by business line personnel, and 

five hours for review by an in-house compliance manager. 
1509  FINRA rules set an annual supervisory review as a minimum threshold for broker-

dealers. See, e.g., FINRA Rules 3110 (requiring an annual review of the businesses in 
which the broker-dealer engages); 3120 (requiring an annual report detailing a broker-
dealer’s system of supervisory controls, including compliance efforts in the areas of 
antifraud and sales practices); and 3130 (requiring each broker-dealer’s CEO or 
equivalent officer to certify annually to the reasonable design of the policies and 
procedures for compliance with relevant regulatory requirements).   

1510  This estimate is based on the following calculation: (10 hours per retail broker-dealer) x 
(2,766 retail broker-dealers) = 27,660 aggregate burden hours per year.   



708 

 

would fall under the new Compliance Obligation as it would be developed to comply with 

Regulation Best Interest as a whole, including each of the component obligations. 

 In total, to comply with the Conflict of Interest Obligation, the Commission estimates 

that the total initial burdens and costs to be 197,310 hours1511 and $40.71 million,1512 and the 

total ongoing burdens and costs to be 55,560 hours1513 per year and $2.91 million per year.1514 

4. Compliance Obligation 

As discussed above, in response to comments that we should require policies and 

procedures to comply with Regulation Best Interest as a whole, we are adopting the Compliance 

Obligation.1515  The Compliance Obligation requires that the broker-dealer1516 establish, 

                                                                                                                                                             

 

1511  This estimate is based on the following calculation: (128,160 initial burden hours for 
policies and procedures) + (69,150 initial burden hours for identification and 
management of conflicts of interest) = 197,310 initial burden hours to comply with the 
Conflict of Interest Obligation. 

1512  This estimate is based on the following calculation: ($25.0 million initial costs for 
policies and procedures) + ($15.71 million initial costs for identification and management 
of conflicts of interest) =$40.71 million initial total costs to comply with the Conflict of 
Interest Obligation. 

1513  This estimate is based on the following calculation: (27,900 ongoing burden hours for 
policies and procedures) + (27,660 ongoing burden hours for identification and 
management of conflicts of interest) = 55,560 aggregate ongoing burden hours per year to 
comply with Conflict of Interest Obligation. 

1514  This estimate is based on the following calculation: ($2.91 million ongoing costs for 
policies and procedures) + ($0 ongoing costs for identification and management of 
conflicts of interest) = $2.91 million aggregate ongoing total costs per year to comply 
with the Conflict of Interest Obligation. 

1515  Section II.C.4. 



709 

 

maintain and enforce written policies and procedures reasonably designed to achieve compliance 

with Regulation Best Interest.  This Compliance Obligation creates an explicit obligation under 

the Exchange Act with respect to Regulation Best Interest as a whole.  Similar to the policies and 

procedures requirement of the Conflict of Interest Obligation, broker-dealers will have flexibility 

to design policies and procedures that are reasonable for the  scope, size and risks associated 

with the operations of the firm and the types of business in which the broker-dealer engages.  

Because we did not include the Compliance Obligation in the Proposing Release, we did not 

previously include costs and burdens associated with the Compliance Obligation, but we have 

provided a detailed explanation of these costs and burdens below.1517    

a. Written Policies and Procedures 

i. Initial Costs and Burdens 

While the Compliance Obligation creates an explicit requirement under the Exchange Act, 

we believe that broker-dealers would likely establish policies and procedures to comply with 

Regulation Best Interest pursuant to Section 15(b)(4)(E) and SRO rules by adjusting their current 

systems of supervision and compliance, as opposed to creating new systems. While broker-

dealers must already have policies and procedures in place to address other Commission and 

                                                                                                                                                             

 

1516  See supra footnote 1463 and accompanying text. 
1517  We note that any burdens and costs to comply with the Conflict of Interest Obligation are 

included in the estimates in Section IV.B.3 above.   



710 

 

SRO rules, they would need to update their systems of supervision and compliance to account for 

Regulation Best Interest.   

To comply with the Compliance Obligation, we believe that broker-dealers would 

employ a combination of in-house and outside legal and compliance counsel to update existing 

policies and procedures to account for the Disclosure and Care Obligations.1518  We assume that, 

for purposes of this analysis, the associated costs and burdens would differ between small and 

large broker-dealers, as large broker-dealers generally offer more products and services and 

employ more individuals and therefore would need to evaluate and update a greater number of 

systems.  As discussed above, we estimate that 2,010 broker-dealers would qualify as large 

broker-dealers for purposes of this analysis and 756 would qualify as small broker-dealers that 

have retail business.1519 

For purposes of this analysis we estimate that a large broker-dealer would incur a one-

time average internal burden of 30 hours for in-house legal personnel and in-house compliance 

counsel to update existing policies and procedures to comply with the Compliance Obligation 

and a one-time burden of five hours for general counsel and five hours for a Chief Compliance 

Officer to review and approve the updated policies and procedures, for a total of 40 burden 

                                                                                                                                                             

 

1518   Id.   
1519  See supra footnote 1388 and accompanying text.  



711 

 

hours.1520  We also estimate six hours of outside counsel services a cost of $2,982 for outside 

counsel to review updated policies and procedures on behalf of a large broker-dealer.1521  We 

therefore estimate the aggregate burden for large broker-dealers to be of 80,400 burden hours1522 

and aggregate cost of $6.0 million for large broker-dealers.1523 

 For small broker-dealers, we believe that they would primarily rely on outside counsel to 

update existing policies and procedures, as small broker-dealers generally have fewer in-house 

legal and compliance personnel.  We estimate that only 20 hours of outside legal counsel 

services would be required, for a one-time cost of $9,940 per small broker-dealer,1524 and an 

aggregate cost of $7.5 million for all small broker-dealers.1525  We also expect that in-house 

                                                                                                                                                             

 

1520  This estimate is based on the following calculation:  (30 hours of review for in-house 
legal and in-house compliance) + (5 hours of review for general counsel) + (5 hours of 
review for Chief Compliance Officer) = 40 burden hours. 

1521  Data from the SIFMA Management and Professional Earnings Report suggests that the 
average hourly rate for legal services is $497/hour.  This cost estimate is therefore based 
on the following calculation:  (6 hours of review) x ($497/hour for outside counsel 
services) = $2,982 in outside counsel costs. 

1522  This estimate is based on the following calculation:  (40 burden hours of review per large 
broker-dealer) x (2,010 large broker-dealers) = 80,400 aggregate burden hours. 

1523 This estimate is based on the following calculation:  ($2,982 for outside counsel costs per 
large broker-dealer) x (2,010 large broker-dealers) = $6.0 million in outside counsel 
costs. 

1524  This cost estimate is based on the following calculation:  (20 hours of review) x 
($497/hour for outside counsel services) = $9,940 in outside counsel costs. 

1525  This cost estimate is based on the following calculation: ($9,940 for outside counsel costs 
per small broker-dealer) x (756 small broker-dealers) = $7.5 million in outside counsel 
costs.   



712 

 

compliance personnel would require 6 hours to review and approve the updated policies and 

procedures, for an aggregate burden of 4,536 hours.1526  Therefore, we estimate the total initial 

aggregate burden to be 84,936 hours1527 and the total initial aggregate cost to be $13.5 

million.1528 

ii. Ongoing Costs and Burdens 

For purposes of this analysis, we assume that small and large broker-dealers would 

review and update policies and procedures on a periodic basis to accommodate the addition of, 

among other things, new products or services, new business lines, and/or new personnel.  We 

also assume that broker-dealers would review and update their policies and procedures for 

compliance with Regulation Best Interest on an annual basis, and for purposes of this analysis, 

we assume they would perform the review and update using in-house personnel.  Under the 

Compliance Obligation, we do not believe that broker-dealers would incur any costs or burdens 

associated with compliance with the Conflict of Interest Obligation, as those are included in the 

discussion above, but would for ongoing compliance with the Disclosure and Care Obligations. 

                                                                                                                                                             

 

1526  This estimate is based on the following calculation: (6 burden hours) x (756 small broker-
dealers) = 4,536 initial aggregate burden hours.   

1527  This estimate is based on the following calculation: (80,400 aggregate burden hours for 
large broker-dealers) + (4,536 aggregate burden hours for small broker-dealers) = 84,936 
total initial aggregate burden hours.   

1528  This estimate is based on the following calculation: ($6 million in aggregate costs for 
large broker-dealers) + ($7.5 million in aggregate costs for small broker-dealers) = $13.5 
million total initial aggregate costs. 



713 

 

For large broker-dealers with more numerous and complex products and services, as well 

as higher rates of hiring and turnover, we estimate that each broker-dealer would annually incur 

an internal burden of 12 hours to review and update existing policies and procedures:  four hours 

for legal personnel, four hours for compliance personnel, and four hours for business-line 

personnel.  We therefore estimate an ongoing, aggregate burden for large broker-dealers of 

approximately 24,120 hours per year.1529 

We assume for purposes of this analysis that small broker-dealers, who generally have 

fewer and less complex products, and lower rates of hiring and turnover, would mostly rely on 

outside legal counsel and compliance consultants for review and update of their policies and 

procedures, with final review and approval from an in-house compliance manager.  We estimate 

that outside counsel would require approximately five hours per year to update policies and 

procedures, for an annual cost of $2,485 for each small broker-dealer.1530  The projected 

aggregate, annual ongoing cost for outside legal counsel to update policies and procedures for 

                                                                                                                                                             

 

1529  This estimate is based on the following calculation:  (12 burden hours per large broker-
dealer) x (2,010 large broker-dealers) = 24,120 aggregate ongoing burden hours per year. 

1530  Data from the SIFMA Management and Professional Earnings Report suggests that the 
average hourly rate for legal services is $497/hour.  This estimate is therefore based on 
the following calculation: (5 hours per small broker-dealer) x ($497/hour for outside 
counsel services) = $2,485 in outside counsel costs per year. 



714 

 

small broker-dealers would be $1.88 million.1531  In addition, we expect that small broker-dealers 

would require five hours of outside compliance services per year to update their policies and 

procedures, for an ongoing cost of $1,365 per year,1532 and an aggregate ongoing cost of $1.03 

million.1533  The Commission estimates the total aggregate, ongoing cost for small broker-dealers 

is therefore $2.91 million per year.1534 

b. Training 

Pursuant to the Compliance Obligation’s requirement to “maintain and enforce” written 

policies and procedures, we additionally believe broker-dealers will develop training programs 

that promote compliance with Regulation Best Interest.  We believe that a training program 

would cover compliance with Regulation Best Interest as a whole and would therefore cover the 

                                                                                                                                                             

 

1531  This estimate is based on the following calculation:  ($2,485 in outside counsel costs per 
small broker-dealer) x (756 small broker-dealers) = $1.88 million in aggregate, ongoing 
legal costs per year. 

1532  We believe that performance of this function will most likely be equally allocated 
between a senior compliance examiner and a compliance manager. Data from the SIFMA 
Management and Professional Earnings Report suggests that costs for these positions are 
$237 and $309 per hour, respectively for an average of $273 per hour. This estimate is 
therefore based on the following calculation:  (5 hours per small broker-dealer) x 
($273/hour for outside counsel services) = $1,365 in outside compliance service costs per 
year. 

1533  This estimate is based on the following calculation: ($1,365 in outside compliance costs 
per small broker-dealer) x (756 small broker-dealers) = $1.03 million in aggregate, 
ongoing outside compliance costs per year. 

1534  This estimate is based on the following calculation: ($1.88 million for outside legal 
counsel costs) + ($1.03 million for outside compliance costs) = $2.91 million total 
aggregate ongoing costs per year. 



715 

 

Disclosure, Care and Conflict of Interest Obligations.  The initial and ongoing costs and burdens 

associated with such a training program are estimated below. 

i. Initial Costs and Burdens 

We believe that broker-dealers would likely use a computerized training model to train 

their associated persons regarding the policies and procedures pertaining to Regulation Best 

Interest.  We estimate that a broker-dealer would retain an outside systems analyst, outside 

programmer, and an outside programmer analyst to create the training module, at 20 hours, 40 

hours, and 20 hours, respectively.  The total cost to develop the training module would be 

approximately $20,920,1535 for an aggregate initial cost of $62.8 million.1536 

Additionally, we expect that the training module would require the approval of the Chief 

Compliance Officer, as well as in-house counsel, each of whom would require approximately 2 

                                                                                                                                                             

 

1535  Data from the SIFMA Management and Professional Earnings Report suggests that the 
average hourly rate in the securities industry is $263 for a systems analyst, $271 for a 
programmer, and $241 for a programmer analyst..  This cost estimate is based on the 
following calculation:  ((20 hours for a systems analyst) x ($263/ hour)) + ((40 hours of 
labor for a programmer) x ($271/hour)) + ((20 hours of labor for a programmer analyst) x 
($241/hour)) = $20,920 in external technology costs per broker-dealer.     

1536   This estimate is based on the following calculation:  (2,766 broker-dealers) x ($20,920in 
external technology costs per broker-dealer) = $57.9 million in aggregate costs for 
technology services 



716 

 

hours to review and approve the training module.  The initial aggregate burden for broker-dealers 

is therefore estimated at 11,064 burden hours.1537 

In addition, broker-dealers would incur an initial cost for associated persons to undergo 

training through the training module.  We estimate the training time at one hour per associated 

person, for an aggregate burden of 428,404 burden hours, or an initial burden of 154.9 hours per 

broker-dealer.1538  We estimate the total initial aggregate burden to approve the training module 

and implement the training program would be 439,486 burden hours.1539 

ii. Ongoing Costs and Burdens 

 We believe that, as a matter of best practice, broker-dealers would likely require 

registered representatives to repeat the training module for Regulation Best Interest on an annual 

basis.  The ongoing aggregate cost for the one-hour training would be 428,404 burden hours per 

year, or 154.9 burden hours per broker-dealer per year.1540 

                                                                                                                                                             

 

1537  This estimate is based on the following calculation:  (2,766 broker-dealers) x (4 burden 
hours per broker-dealer) = 11,064 burden hours. 

1538  This estimate is based on the following calculation: (1 burden hour) x (428,404 registered 
representatives at standalone or dually registered broker-dealers) = 428,404 aggregate 
burden hours. Conversely, (428,404 aggregate burden hours) / (2,766 retail broker-
dealers) = 154.9 initial burden hours per broker-dealer per year.   

1539  This estimate is based on the following calculation: (428,404 burden hours for training of 
registered representatives) + (11,064 burden hours to approve training program) = 
439,468 total aggregate burden hours per year.   

1540  This estimate is based on the following calculation: (1 burden hour) x (428,404 registered 
representatives at standalone or dually registered broker-dealers) = 428,404 burden hours. 

 

 



717 

 

 In total, to comply with the Compliance Obligation, the Commission estimates the total 

initial burdens and costs to be 524,414 hours1541 and $71.4 million,1542 and the total ongoing 

burdens and costs to be 463,588 hours1543 and $2.91 million.1544 

5. Record-Making and Recordkeeping Obligations 

The record-making and recordkeeping obligations will impose record-making and 

recordkeeping requirements on broker-dealers with respect to certain information collected from, 

or provided to, retail customers.  Specifically, the Commission is amending Rules 17a-3 and 17a-

4 of the Exchange Act, which set forth minimum requirements with respect to the records that 

broker-dealers must make, and how long those records and other documents must be kept, 

respectively.  Records made and retained in accordance with the amendments to Rule 17a-

3(a)(35) and 17a-4(e)(5) will (1) assist a broker-dealer in supervising and assessing internal 

                                                                                                                                                             

 

Conversely, (428,404 aggregate burden hours) / (2,766 retail broker-dealers) = 154.9 
initial burden hours per broker-dealer. 

1541  This estimate is based on the following calculation: (84,946 initial burden hours for 
policies and procedures) + (439,468 initial burden hours training) = 524,414 initial 
burden hours to comply with the Compliance Obligation. 

1542  This estimate is based on the following calculation: ($13.5 million initial costs for 
policies and procedures) + ($57.9 million initial costs for training) = $71.4 million initial 
total costs to comply with the Compliance Obligation. 

1543  This estimate is based on the following calculation: (24,120 ongoing burden hours for 
policies and procedures) + (439,468 ongoing burden hours for training) = 463,588 
ongoing burden hours to comply with Compliance Obligation. 

1544  This estimate is based on the following calculation: ($2.91 million ongoing costs for 
policies and procedures) + ($0 million ongoing costs for training) = $2.91 million 
ongoing costs to comply with the Compliance Obligation. 



718 

 

compliance with Regulation Best Interest; and (2) assist the Commission and SRO staff in 

connection with examinations and investigations.   

Due to changes in the number of broker-dealers and costs estimated for certain services, 

we are revising our estimates from those in the Proposing Release.  However, while we 

understand commenters’ concerns that the estimates are lower than what would actually be 

required to comply with Regulation Best Interest, we believe the estimates are generally accurate 

in light of the increased specificity in Regulation Best Interest on how to comply with the 

component obligations, including the Disclosure Obligation.1545  The record-making and 

recordkeeping costs and burdens associated with the amendments to Rule 17a-3(a)(35) and Rule 

17a-4(e)(5) are addressed below. 

a. Record-Making Obligation 

We are amending Rule 17a-3 by adding a new paragraph (a)(35) that requires a record of 

all information collected from, and provided to, the retail customer pursuant to Regulation Best 

Interest, as well as the identity of each natural person who is an associated person of a broker or 

dealer, if any, responsible for the account.1546  This requirement applies with respect to each 

                                                                                                                                                             

 

1545  See, e.g., Raymond James Letter; CCMC Letters; SIFMA August 2018 Letter. 

1546  As indicated in the Proposing Release, we understand that broker-dealers likely make 
such records in the ordinary course of their business pursuant to Exchange Act Rules 17a-
3(a)(6) and (7).  We continue to believe, for purposes of compliance with Rule 17a-
3(a)(35), that broker-dealers would need to create a record, or modify an existing record, 

 

 



719 

 

retail customer to whom a recommendation of any securities transaction or investment strategy 

involving securities is provided.  The neglect, refusal, or inability of a retail customer to provide 

or update any such information will, however, excuse the broker-dealer from obtaining that 

information. 

We indicated in the Proposing Release, and we continue to believe that broker-dealers 

currently make records of relevant customer investment profile information, and we therefore 

assume that no additional record-making obligations would arise as a result of broker-dealers’ or 

their registered representatives’ collection of information from retail customers.1547  In addition, 

we continue to believe that broker-dealers likely make records of the “identity of each natural 

person who is an associated person, if any, responsible for the account.”  However, we are 

assuming, for purposes of compliance with Rule 17a-3(a)(35), that broker-dealers will need to 

create a record, or modify an existing record, to identify the associated person, if any, 

                                                                                                                                                             

 

to identify the associated person, if any, responsible for the account in the context of 
Regulation Best Interest.  See Proposing Release at 21673. 

1547  The PRA burdens and costs arising from the requirement that a record be made of all 
information provided to the retail customer are accounted for in Regulation Best Interest 
and the Relationship Summary Adopting Release.  With respect to the requirement that a 
record be made of all information from the retail customer, we believe that Rule 17a-
3(a)(35) will not impose any new substantive burdens on broker-dealers.  As discussed 
above, we continue to believe that the obligation to exercise reasonable diligence, care, 
and skill will not require a broker-dealer to collect additional information from the retail 
customer beyond that currently collected in the ordinary course of business even though a 
broker-dealer’s analysis of that information and any resulting recommendations will need 
to adhere to the enhanced best interest standard of Regulation Best Interest.  See supra 
Section II.C.2. 



720 

 

responsible for the account in the context of Regulation Best Interest.  In addition, in cases where 

broker-dealers choose to meet part of the Disclosure Obligation orally under the circumstances 

outlined in Section II.C.1, Oral Disclosure or Disclosure After a Recommendation, we believe 

the requirement to maintain a record of the fact that oral disclosure was provided to the retail 

customer will trigger a record-making obligation under paragraph (a)(35) of Rule 17a-3 and a 

recordkeeping obligation under paragraph (e)(5) of Rule 17a-4 that may impose additional 

compliance costs and burdens on broker-dealers.   

i. Initial Costs and Burdens 

In the Proposing Release, we assumed that broker-dealers would satisfy the record-

making requirement of the proposed amendment to Rule 17a-3(a)(25) by amending an existing 

account disclosure document to include the “identity of each natural person who is an associated 

person, if any, responsible for the account.”  We estimated that the inclusion of this information 

in an account disclosure document would require an approximate total aggregate initial burden of 

3,808,000 hours, or approximately 1,333 hours per broker-dealer for the first year after 

Regulation Best Interest is in effect.1548  

                                                                                                                                                             

 

1548  These estimates were based on the following calculations: (0.04 hours per customer 
account) x (95.2 million retail customer accounts) = 3,808,000 aggregate burden hours.  
Conversely, (3,808,000 aggregate burden hours) / (2,857 broker-dealers) = 1,333 hours 
per broker dealer for the first year after Regulation Best Interest is in effect.  See 
Proposing Release at 21673.721 

 

As discussed above, we continue to believe that broker-dealers will satisfy the record-

making requirements of the amendment to Rule 17a-3(a)(35) by amending an existing account 

disclosure document to include the “identity of each natural person who is an associated person, 

if any, responsible for the account.”  We believe that the inclusion of this information in an 

account disclosure document will require, on average, approximately 1 hour per year for outside 

legal counsel at small broker-dealers, at an updated average rate of $497/hour, for an average 

annual cost of $497 for each small broker-dealer to update an account disclosure document.  The 

projected aggregate initial cost for small broker-dealers is therefore estimated to be $375,732 per 

year.1549  For broker-dealers that are not small entities, we estimate that the initial burden will be 

2 hours for each broker-dealer: 1 hour for compliance personnel and 1 hour for legal personnel.  

We therefore estimate the aggregate initial burden for broker-dealers that are not small entities to 

be approximately 4,020 burden hours.1550  Finally, we estimate it will require an additional 0.04 

hours for the registered representative responsible for the information (or other clerical 

personnel) to fill out that information in the account disclosure document, for an approximate 

total aggregate initial burden of 4,080,000 hours, or approximately 1,475 hours per broker-dealer 

                                                                                                                                                             

 

1549  This estimate is based on the following calculation: (1 hour per small broker-dealer) x 
(756 small broker-dealers) x ($497/hour) = $375,732 in aggregate costs per year.   

1550  This estimate is based on the following calculation: (2 burden hours per broker-dealer) x 
(2,010 large broker-dealers) = 4,020 aggregate burden hours per year. 



722 

 

for the first year after Regulation Best Interest is in effect.1551  Because we have already included 

the costs and burdens associated with the creation of a record to memorialize an oral disclosure, 

and the delivery of the amended account disclosure document discussed above, they are not 

included in this section of the analysis.1552   

The total aggregate initial burden for broker-dealers is therefore estimated at 4,084,020 

hours,1553 and the total aggregate initial cost is estimated at $375,732.1554 

ii. Ongoing Costs and Burdens 

We do not believe that the identity of the registered representative responsible for the 

retail customer’s account will change.  Accordingly, we continue to believe that there are no 

ongoing costs and burdens associated with this record-making requirement of the amendment to 

Rule 17a-3(a)(35).   

                                                                                                                                                             

 

1551  These estimates are based on the following calculations:  (0.04 hours per customer 
account) x (102 million retail customer accounts) = 4,080,000 aggregate burden hours.  
Conversely, (4,080,000 burden hours) / (2,766 broker-dealers) = 1,475 hours per broker-
dealer for the first year after Regulation Best Interest is in effect.   

1552  See supra Section IV.B.1. 
1553  This estimate is based on the following calculation: (0 aggregate burden hours for small 

broker-dealers) + (4,020 burden hours for large broker-dealers) + (4,080,000 burden 
hours for personnel to fill out information in the account disclosure document) = 
4,080,000 initial burden hours. 

1554  This estimate is based on the following calculation: ($375,732 for small broker-dealer 
costs) + ($0 for large broker-dealer costs) = ($375,732 in total aggregate initial costs). 



723 

 

With respect to memorializing oral disclosures in cases where broker-dealers choose to 

meet part of the Disclosure Obligation orally under the circumstances outlined in Section II.C.1, 

Oral Disclosure or Disclosure After a Recommendation, we estimate that this would take place 

among 52% of a broker-dealer’s retail customer accounts (and thus 52% of a registered 

representative’s retail customer accounts) annually.1555  We therefore estimate broker-dealers to 

incur a total annual aggregate burden of 1.06 million hours, or 383.5 burden hours per year per 

broker-dealer.1556  

b. Recordkeeping Obligation 

We are amending Rule 17a-4(e)(5) to require that broker-dealers retain all records of the 

information collected from or provided to each retail customer pursuant to Regulation Best 

                                                                                                                                                             

 

1555  We believe (and our experience indicates) that broker-dealers will use oral disclosure 
rarely, and primarily when making disclosures regarding a change in capacity.  We do not 
have reliable data to determine the precise number of retail customers that have both a 
brokerage and an advisory account with a dually registered associated person.  As 
indicated above, approximately 52% of registered representatives were dually registered 
as investment adviser representatives at the end of 2018.  See supra footnote 945 and 
accompanying text.  As a result, we have assumed for purposes of this analysis that this 
will take place among 52% of all retail customer accounts at broker-dealers annually.  
This estimate is likely over inclusive, as it includes all retail customer accounts at all 
broker-dealers (as opposed to only retail customer accounts where the retail customer has 
both a brokerage and advisory account with a dually registered financial professional), 
and under inclusive, as it assumes that such an oral disclosure will happen annually (as 
opposed to multiple times a year).    

1556  (52%) x (102 million retail customer accounts) x (0.02 hours for recording each oral 
disclosure relating to a retail customer’s account) = 1,060,800 aggregate burden hours.  
Conversely, 1,060,800 aggregate burden hours / 2,766 broker-dealers = 383.5 burden 
hours per broker-dealer per year. 



724 

 

Interest for at least six years after the earlier of the date the account was closed or the date on 

which the information was last replaced or updated.  We assume that, for purposes of this 

analysis, the following records would likely be retained pursuant to amended Rule 17a-3(a)(35): 

(1) existing account disclosure documents; (2) comprehensive fee schedules; (3) disclosures 

identifying material conflicts; and (4) memorialized oral disclosures under the circumstances 

outlined in Section II.C.1, Oral Disclosure or Disclosure After a Recommendation.1557 

i. Initial Costs and Burdens 

We believe that, to reduce costs and for ease of compliance, broker-dealers will utilize 

their existing recordkeeping systems in order to retain the forgoing records made pursuant to 

Regulation Best Interest, and as required to be kept under the amendment to Rule 17a-4(e)(5).  

As noted above, broker-dealers currently are subject to recordkeeping obligations pursuant to 

Rule 17a-4, which require, for example, broker-dealers to “preserve for a period of not less than 

six years, the first two years in an easily accessible place, all records required to be made 
                                                                                                                                                             

 

1557  In the Proposing Release, we identified four records that would likely need to be retained 
pursuant to amended Rule 17a-3(a)(25) (now reflected as Rule 17a-3(a)(35)): (1) a 
standardized Relationship Summary document; (2) existing account disclosure 
documents; (3) a comprehensive fee schedule; and (4) disclosures identifying material 
conflicts.  However, in calculating the estimated burden for broker-dealers to add new 
documents or modify existing documents to the broker-dealer’s existing retention system, 
we erroneously assumed a broker-dealer would upload or file five account documents, as 
opposed to the four account documents identified in the Proposing Release.  See 
Proposing Release at 21673-21674.  In addition, while the burden for broker-dealers to 
retain a standardized relationship summary was included in the Regulation Best Interest 
Proposing Release, it is excluded here because its associated burden is reflected in the 
Relationship Summary Proposal and Relationship Summary Adopting Release.    



725 

 

pursuant to” Rule 17a-3(a)(1), (a)(2), (a)(3), (a)(5), (a)(21), (a)(22), and analogous records 

created pursuant to paragraph 17a-3(f).  Thus, for example, broker-dealers are already required to 

maintain documents such as account blotters and ledgers for six years.   

We continue to believe that broker-dealers will utilize their existing recordkeeping 

systems to include any additional or amended records required by Regulation Best Interest or 

pursuant to the amendment to Rule 17a-4(e)(5), and would similarly utilize their existing 

recordkeeping systems to account for any differences in the retention period.  Thus, where 

broker-dealers currently retain documents on an electronic database to satisfy existing Rule 17a-

4 or otherwise, we continue to expect broker-dealers to maintain any additional documents 

required by Regulation Best Interest or the amendment to Rule 17a-4(e)(5) by the same means.  

Likewise, where broker-dealers maintain documents required by existing Rule 17a-4 by paper, 

we would expect broker-dealers to continue to do so.   

Based on our belief that broker-dealers will rely on existing infrastructures to satisfy the 

recordkeeping obligations of Regulation Best Interest and the amendment to Rule 17-a(4)(e)(5), 

we believe the burden for broker-dealers to add new documents or modify existing documents to 

the broker-dealer’s existing retention system will be approximately 13.6 million burden hours for 

all broker-dealers, assuming a broker-dealer will need to upload or file each of the four account 



726 

 

documents discussed above for each retail customer account.1558  We do not believe there will be 

additional substantive internal or external costs relating to the uploading or filing of the 

documents.  In addition, because we have already included the costs and burdens associated with 

the delivery of the amended account opening agreement and other documents above, we do not 

include them in this section of the analysis. 

ii. Ongoing Costs and Burdens 

We estimate that the approximate ongoing burden associated with the recordkeeping 

requirement of the amendment to Rule 17a-4(e)(5) is 4.46 million burden hours per year.1559  We 

                                                                                                                                                             

 

1558   This estimate is based on the following calculation: (4 documents per customer account) 
x (102 million retail customer accounts) x (2 minutes per document) / 60 minutes = 
13,600,000 aggregate burden hours.  As indicated above, the following records would 
likely need to be retained: (1) existing account disclosure documents; (2) comprehensive 
fee schedules; (3) disclosures identifying material conflicts; and (4) memorialized oral 
disclosures under the circumstances outlined in Section II.C.1, Disclosure Obligation, 
Oral Disclosure or Disclosure After a Recommendation. 

 
1559  This estimate is based on the percentage of account records we expect would be updated 

each year as described in Section IV.B.1, supra, and the following calculation: (40% of 
fee schedules x 102 million retail customer accounts) x (2 minutes per document) + (40% 
of conflict disclosure forms x 102 million retail customer accounts) x (2 minutes per 
document) + (20% of account opening documents x 102 million retail customer accounts) 
x (2 minutes per document) = 204 million minutes / 60 minutes = 3.4 million aggregate 
ongoing burden hours.  In addition, with respect to ongoing memorialization of the 
updated oral disclosures, we estimate that this will take place among 52% of a broker-
dealer’s retail customer accounts annually.  We therefore estimate that broker-dealers will 
incur an aggregate ongoing burden of 1.06 million hours per year (calculated as follows: 
(52% of updated oral disclosures x 102 million retail customer accounts) x (1.2 minutes 
per document) = 63.6 million minutes / 60 minutes = 1.06 million aggregate ongoing 
burden hours); or 383.5 burden hours per broker-dealer (1.06 million hours / 2,766 

 

 



727 

 

do not believe that the ongoing costs associated with ensuring compliance with the retention 

schedule would change from the current costs of ensuring compliance with existing Rule 17a-4 

and as outlined above.   

V. FINAL REGULATORY FLEXIBILITY ACT ANALYSIS 

The Commission has prepared this Final Regulatory Flexibility Analysis (“FRFA”) in 

accordance with the provisions of the Regulatory Flexibility Act (“RFA”)1560 relating to 

Regulation Best Interest.  An Initial Regulatory Flexibility Analysis (“IRFA”) was prepared in 

accordance with the RFA and included in the Proposing Release.1561 

A. Need for and Objectives of the Rule 

Broker-dealers play an important role in helping Americans organize their financial lives, 

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.   

As discussed in Section I, concerns exist regarding: (1) the potential harm to retail 

customers resulting from broker-dealer recommendations provided in the presence of conflicts of 

interest and (2) the insufficiency of existing broker-dealer regulatory requirements to address 

these conflicts when broker-dealers make recommendations to retail customers.  More 
                                                                                                                                                             

 

broker-dealers = 383.5).  3.4 million burden hours per year + 1.06 million burden hours 
per year = 4,460,000 total aggregate ongoing burden hours per year. 

1560  5 U.S.C. § 603. 

1561  See Proposing Release, supra footnote 7, at Section VII. 



728 

 

specifically, there are concerns that existing requirements do not require a broker-dealer’s 

recommendations to be in the retail customer’s best interest.  

 As a result, we are adopting Regulation Best Interest, which creates an enhanced 

standard of conduct applicable to broker-dealers 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.  This General Obligation is satisfied only if 

the broker-dealer complies with four specified component obligations: (1) Disclosure Obligation, 

(2) Care Obligation, (3) Conflict of Interest Obligation, and (4) Compliance Obligation.  In 

addition, the Commission is amending Rules 17a-3 and 17a-4 of the Exchange Act, which set 

forth minimum requirements with respect to the records that broker-dealers must make, and how 

long those records and other documents must be kept, respectively.     

First, as described in Section II.C.1, under the Disclosure Obligation, before or at the 

time of making a recommendation, a broker-dealer must disclose, in writing,1562 material facts 

about the scope and terms of its relationship with the customer.  This includes a disclosure that 
                                                                                                                                                             

 

1562  As discussed above, there are circumstances where broker-dealers and their associated 
persons may make oral disclosures or written disclosures after the time of a 
recommendation under the circumstances outlined in Section II.C.1, Disclosure 
Obligation, Oral Disclosure or Disclosure After a Recommendation. 



729 

 

the broker-dealer or associated person 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, proprietary products, payments 

from third parties, and compensation arrangements.        

Second, as described in Section II.C.2, under the Care Obligation, 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 broker-dealer must then consider those risks, rewards, and costs in 

light of the retail 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.  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 retail customer’s best interest when viewed in isolation.      

Third, as described in Section II.C.3, under the Conflict of Interest Obligation, 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.  Additionally, the policies and procedures must be 

reasonably designed to mitigate conflicts of interests that create an incentive for an associated 

person of the broker-dealer to place its interests or the interest of the firm ahead of the retail 



730 

 

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 to place the associated person’s or broker-dealer’s interests ahead of the 

customer’s interest.  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, as described in Section II.C.4, under the Compliance Obligation, 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 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 conflicts of interest.  Regulation Best 

Interest will complement the related rules, interpretations, and guidance that the Commission is 



731 

 

concurrently issuing.1563  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 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. 

All of these requirements are discussed in detail in Section II above.  The costs and 

burdens of these requirements on small broker-dealers are discussed below as well as above in 

our Economic Analysis and PRA Analysis, that discuss the costs and burdens on all broker-

dealers. 

B. Significant Issues Raised by Public Comments 

The Commission is sensitive to the burdens that the new rule may have on small entities.  

In the Proposing Release, we requested comment on matters discussed in the IRFA.  In 

particular, we sought comments on the number of small entities that may be affected by proposed 

Regulation Best Interest, and whether proposed Regulation Best Interest would have an effect on 

small entities that had not been considered.  We requested that commenters describe the nature of 

any impact on small entities and provide empirical data to support the extent of such impact.  We 

                                                                                                                                                             

 

1563  See Relationship Summary Adopting Release; Fiduciary Interpretation; Solely Incidental 
Interpretation. 



732 

 

also requested comment on the proposed compliance burdens and the effects these burdens 

would have on smaller entities. 

As discussed in the Economic Analysis and PRA Analysis above, we received comments 

regarding the potential costs and burdens of the proposal on broker-dealers, including those that 

are small entities.1564  Additionally, the Commission received some comments specifically 

addressing the costs to smaller broker-dealers.   

One commenter stated that for a small firm with $500,000 in net capital, a compliance 

cost of $60,0001565 could constitute 12% of that net capital, making compliance with the rule 

burdensome for such firms and potentially forcing many small firms to hire additional 

compliance personnel.1566  Another commenter raised concerns that replacing the term “suitable” 

                                                                                                                                                             

 

1564  See supra Sections III and IV. 
1565  See NSCP Letter (“Consider the estimated $60,000 in additional compliance costs 

referenced in the Release which would represent 12% of net capital of a $500,000 firm.”)  
1566  See id (“Several small firms estimate that they incur approximately $80,000 in 

compliance costs to meet basic ongoing regulatory requirements. Notably, this amount 
does not include expenses associated with new rules, regulatory changes, regulatory 
exams or running a compliance department. In isolation, it may seem that this single 
proposal by one regulatory agency would have manageable marginal impact on costs. But 
in fact, it would be one of many changes (and importantly, a major change) that smaller 
firms must address. Many small firms do not have large Compliance Departments 
adequate to shoulder these ever increasing regulatory demands. In fact, many small firm 
Compliance Departments are comprised of just one or two persons.”).  See also, 
generally, NFIB Letter (“America's small and independent businesses in the financial 
industry cannot afford the army of lawyers and clerks needed to comply with the welter 
of complex rules issued or proposed by the U.S. Department of Labor (DOL) (Reference 
1 above), the U.S. Securities and Exchange Commission (SEC) (Reference 2 above), and 

 

 



733 

 

with “best interest” could create legal risk and cause smaller and mid-sized professional firms to 

leave the market.1567  As noted above in Section III, we acknowledge that the costs of the rule 

could be more burdensome for small firms and discuss any corresponding competitive effects in 

Section III.D.1.1568  Further, as described above, we acknowledge the requests by commenters 

for further clarity on what it means to “act in the best interest” of the retail customer, and 

particularly what it means to make a recommendation in a retail customer’s “best interest” under 

the Care Obligation.  Consequently, in Section II.A, and in the detailed discussion of each of the 

Disclosure, Care, Conflict of Interest, and Compliance Obligations in Section II.C, we have 

provided further clarity on how a broker-dealer can comply with Regulation Best Interest.  
                                                                                                                                                             

 

the several states to govern the duties of financial businesses toward their retail 
customers.”) 

1567  See Iowa Insurance Commissioner Letter (“Striking "suitability," and its history and legal 
precedence, will usher in an age of legal and marketing confusion. Additionally, smaller 
and mid-sized professional firms, to avoid the risks of this confusion and the resulting 
litigation, will leave the market, and the larger firms will remain, increasing market 
concentration. A decision to replace the term "suitable" in the text of traditional 
suitability rules with the phrase "best interest" will disrupt the market, decrease 
competition, increase the price of services out of the reach of thousands of middle class 
Americans, and significantly reduce consumer options for selecting valuable professional 
services.”)  But see NAIFA Letter (“NAIFA supports a best interest standard of conduct 
for securities-licensed firms and individuals, and we appreciate the SEC’s considerable 
efforts to establish such a standard without imposing unduly prescriptive or burdensome 
implementation or compliance requirements. The SEC’s general approach, we believe, 
will preserve choices for consumers at all income levels and account sizes – and should 
not unnecessarily increase costs for consumers or businesses.”) 

1568  See also infra Section V.E., noting that we believe that Regulation Best Interest will 
result in multiple investor protection benefits, and these benefits should apply to retail 
customers of smaller entities as well as retail customers of large broker-dealers.  



734 

 

However, with respect to the comment concerning the term “suitable,” we are adopting a “best 

interest” standard as proposed—which enhances the broker-dealer standard of conduct beyond 

existing suitability obligations—in light of our goal to enhance retail investor protection and 

decision making.      

Another commenter stated that costs for small broker-dealers could be reduced if the 

Commission approved a standard disclosure, which would add certainty and reduce costs for 

small firms and their customers.1569  We considered, as an alternative to the Disclosure 

Obligation, mandating a standardized disclosure.1570  However, as described in Section II.C.1, 

after careful consideration of the comments concerning the proposed Disclosure Obligation, we 

have decided not to require any standard written disclosures under Regulation Best Interest at 

this time.  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 

                                                                                                                                                             

 

1569  See Chepucavage Letter (“Costs for the small bd’s however can be reduced with a 
commission approved standard disclosure which would add certainty and ought to be 
considered especially for the small investor. […] A standard disclosure document would 
also be useful for the small bd that cannot afford the legal assistance needed to evaluate 
this 1,000 page proposal and draft appropriate documents. […] The Commission should 
therefore reconsider the impact of its proposal on small investors and small bd’s with the 
assumption that retirement accounts are significantly more important than regular 
brokerage accounts especially for small and elderly investors. A standard disclosure for 
small firms would reduce costs for the firms and their customers.”) 

1570  See supra Section III.E and infra Section V.E.  



735 

 

read at relevant points in time, rather than, for example, mandating a standardized all-inclusive 

(and likely lengthy) disclosure.  

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, 

but nearly all commenters suggested modifications to proposed Regulation Best Interest.  These 

suggestions touch on almost every aspect of the proposal, as summarized in Section I.C above 

and as discussed in more detail, along with explanations of modifications made in light of the 

comments, throughout the release.   

C. Small Entities Subject to the Rule 

For purposes of a Commission rulemaking in connection with the RFA, a broker-dealer 

will be deemed a small entity if it: (i) had total capital (net worth plus subordinated liabilities) of 

less than $500,000 on the date in the prior fiscal year as of which its audited financial statements 

were prepared pursuant to Rule 17a-5(d) under the Exchange Act,1571 or, if not required to file 

such statements, had total capital (net worth plus subordinated liabilities) of less than $500,000 

on the last business day of the preceding fiscal year (or in the time that it has been in business, if 

shorter); and (ii) is not affiliated with any person (other than a natural person) that is not a small 

business or small organization.1572    

                                                                                                                                                             

 

1571  17 CFR 240.17a-5(d). 

1572  See 17 CFR 240.0-10(c). 



736 

 

As discussed in Section IV above, the Commission estimates that as of December 31, 

2018, approximately 2,766 retail broker-dealers will be subject to Regulation Best Interest and 

the amendments to Rules 17a-3 and 17a-4.1573  Based on FOCUS Report data,1574 the 

Commission estimated that as of December 31, 2018, approximately 756 of those retail broker-

dealers might be deemed small entities for purposes of this analysis.1575  For purposes of this 

RFA analysis, we refer to broker-dealers that might be deemed small entities under the RFA as 

“small entities,” and we continue to use the term “broker-dealers” to refer to broker-dealers 

generally, as the term is used elsewhere in this release.1576  Of these 756 small entities, the 

Commission estimates that 623 are standalone broker-dealers and 133 are dually registered as 

investment advisers.1577 

D. Projected Reporting, Recordkeeping, and Other Compliance Requirements 

The new requirements impose certain reporting and compliance requirements on certain 

broker-dealers, including those that are small entities.  The new requirements are summarized in 

this FRFA (Section V.A. above).  All of these requirements are also discussed in detail, in 

                                                                                                                                                             

 

1573  As noted above, this estimate likely overstates the number that would be impacted by 
Regulation Best Interest.  See supra Section III.C.1.a. 

1574  See supra footnote 1385. 
1575  See supra footnote 1387. 
1576  Consistent with the PRA, unless otherwise notes, we use the terms “registered 

representative” and “dually registered representative of a broker-dealer” herein. 
1577  These estimate are based on FOCUS Report Data, see supra footnote 1385 



737 

 

Section II above, and these requirements as well as the costs and burdens on broker-dealers, 

including those that are small entities, are discussed above in Sections III and IV (the Economic 

Analysis and PRA Analysis) and below.   

1. Disclosure Obligation 

The Disclosure Obligation under Regulation Best Interest requires a broker-dealer or its 

associated persons, prior to or at the time of recommending a securities transaction or strategy 

involving securities to a retail customer, to provide the retail customer, in writing, full and fair 

disclosure of: (1) all material facts relating to the scope and terms of the relationship with the 

retail customer, including: (a) that the broker, dealer, or such natural person is acting as a broker, 

dealer, or an associated person of a broker or dealer with respect to the recommendation, (b) the 

fees and costs that apply to the retail customer’s transactions, holdings, and accounts, and (c) the 

type and scope of services provided to the retail customer, including any material limitations on 

the securities or investment strategies involving securities that may be recommended to the retail 

customer; and (2) all material facts relating to conflicts of interest that are associated with the 

recommendation.  The estimated costs and burdens incurred by small entities in relation to this 

Disclosure Obligation are discussed in detail below.1578 

a. Obligation to Provide to the Retail Customer Full and Fair Disclosure, in 
Writing, of all Material Facts Relating to the Scope and Terms of the 
Relationship with the Retail Customer 

                                                                                                                                                             

 

1578  For a discussion of additional costs and burdens as well as monetized burdens, related to 
the Disclosure Obligation, see supra Section III.C.2.b. 



738 

 

The Commission assumes for purposes of this analysis that small entities would meet the 

obligation to disclose to the retail customer, in writing, the material facts related to the scope and 

terms of the relationship with the retail customer through a combination of delivery of the 

Relationship Summary,1579 creating account disclosures to include standardized language related 

to the capacity in which they are acting and type and scope of services, and the development of 

fee schedules.   

b. Estimated Costs and Burdens  

In addition to the costs described below, additional costs associated with Regulation Best 

Interest are described above in Section III.C.1580  

(1) Disclosure of Capacity, Type and Scope of Services 
 
As explained above, standalone broker-dealers that are small entities will satisfy the 

obligation to disclose the capacity in which they acting through the delivery to the retail 

customer of the Relationship Summary, and accordingly, we estimate zero burden hours for 

standalone broker-dealers that are small entities to disclose the capacity in which they are acting.  

We estimate that a dually registered firm that is a small entity will incur an initial internal 

burden of 10 hours for in-house counsel and in-house compliance to draft language regarding the 

capacity in which it is acting for inclusion in the standardized account disclosure that is delivered 

                                                                                                                                                             

 

1579  See Exchange Act Rule 17a-14 and Relationship Summary Adopting Release, supra 
footnote 12. 

1580  See Sections III.C.2.b, III.C.3.b, III.C.4, III.C.5, and III.C.6. 



739 

 

to the retail customer.1581  In addition, we estimate that dual-registrants that are small entities 

will incur an estimated external cost of $4,970 for the assistance of outside counsel in the 

preparation and review of standardized language regarding capacity.1582  For the estimated 133 

dually registered broker-dealers that are small entities, we project an aggregate initial burden of 

1,330 hours,1583 and $661,010 in aggregate initial costs for drafting language regarding 

capacity.1584   

Similarly, to comply with Regulation Best Interest, we believe that small entities will 

draft standardized language for inclusion in the account disclosure to provide the retail customer 

with more specific information regarding the type and scope of services that they provide.  We 

estimate that a small entity will incur an internal initial burden of 10 hours for in-house counsel 

and in-house compliance to draft this standardized language.1585  In addition, a small entity will 

incur an estimated external cost of $4,970 for the assistance of outside counsel in the preparation 

                                                                                                                                                             

 

1581  See supra footnotes 1396-1397. 
1582 See supra footnote 1398.   
1583  See supra footnote 1396.  This estimate is based on the following calculation: (133 dually 

registered retail firms that are small entities) x (10 hours) = 1,330 initial aggregate burden 
hours.)  The professional skills associated with the estimated burden hours are specified 
in Section IV above.   

1584  This estimate is based on the following calculation: (133 dually registered retail firms 
that are small entities) x ($4,970 in external cost per firm) = $661,010 in aggregate initial 
costs. 

1585  See supra footnote 1403. 



740 

 

and review of this standardized language.1586  For the estimated 756 small entities,1587 we project 

an aggregate initial burden of 7,560 hours,1588 and aggregate initial costs of $3.8 million for 

drafting language regarding type and scope of services.1589   

We estimate that small entities will each incur approximately 0.02 burden hours1590 for 

delivery of the account disclosure document.1591  Based on FOCUS data, we believe that the 756 

small entities have a total of 5,281 customer accounts, and that approximately all of those 

accounts belong to retail customers.1592  We therefore estimate that small entities will have an 

aggregate initial burden of 106 hours, or approximately 0.14 hours1593 per small entity for the 

                                                                                                                                                             

 

1586 See supra footnote 1404.   
1587  See supra footnote 1386  and accompanying text. 
1588  See supra footnote 1406. 
1589  See supra footnote 1407. 
1590  See supra footnote 1412. 
1591 See supra footnote 1413. 
1592  This estimate may overstate the number of retail customer accounts at small entities 

and/or may overstate the number of deliveries to be made due to the double-counting of 
deliveries to be made by dual-registrants to a certain extent, and the fact that one 
customer may own more than one account. 

1593  These estimates are based on the following calculations: (0.02 hours per customer 
account x (5,281 retail customer accounts) = 106 aggregate burden hours.  Conversely, 
(106 hours) / (756 small entities) = approximately 0.14 burden hours per small entity for 
the first year after Regulation Best Interest is in effect.741 

 

first year after Regulation Best Interest is in effect for delivery of the account disclosure 

document.1594   

We therefore estimate a total initial aggregate burden for small entities to develop and 

deliver to retail customers account disclosures relating to the capacity in which they are acting 

and type and scope of services of 7,666 burden hours.1595   

In terms of ongoing costs, we estimate that each dually registered broker-dealer that is a 

small entity will incur approximately 5 burden hours annually for in-house compliance and 

business-line personnel to review changes in the dual-registrant’s capacity, and another 2 burden 

hours annually for in-house counsel to amend the account disclosure to disclose material changes 

to the dual-registrant’s capacity, for a total of 7 burden hours.  The estimated ongoing aggregate 

burden to amend account disclosures of dual-registrants that are small entities to reflect changes 

in capacity is therefore 931 hours per year.1596 

With respect to small entities, we estimate an internal burden of 2 hours for in-house 

compliance and business-line personnel to review and update changes in types or scope of 
                                                                                                                                                             

 

1594  See supra footnote 1416. 
1595  This estimate is based on the following calculation: (1,330 aggregate initial burden hours 

for dually registered broker-dealers that are small entities) + (6,230 aggregate initial 
burden hours for standalone broker-dealers that are small entities) + (106 aggregate initial 
burden hours for small entities to deliver the account disclosures) = 7,666 total aggregate 
initial burden hours. 

1596  This estimate is based on the following calculation: (7 burden hours per dually registered 
firm per year) x 133 dually registered broker-dealers that are small entities) = 931 
ongoing aggregate burden hours per year.   



742 

 

services,1597 and another 2 burden hours annually for in-house counsel to amend the account 

disclosure to disclose material changes to type and scope of services—for a total of 4 burden 

hours per year.  The estimated ongoing aggregate burden for standalone broker-dealers that are 

small entities to amend account disclosures to reflect changes in type and scope of services is 

therefore 2,492 hours per year.1598  

With respect to delivery of the amended account agreements in the event of material 

changes to the capacity disclosure or disclosure related to type and scope of services, we estimate 

that this would take place among 20% of a small entity’s retail customer accounts annually.  We 

therefore estimate small entities to incur a total annual aggregate burden of 21 hours, or 0.03 

hours per small entity per year.1599  

                                                                                                                                                             

 

1597  As noted above, we estimate zero burden hours annually for standalone broker-dealers 
that are small entities relating to disclosure of capacity under the Disclosure Obligation.  
See supra Section IV.B.1.a.ii.   

1598  This estimate is based on the following calculation: (4 burden hours per small entity per 
year) x (623 standalone broker-dealers that are small entities) = 2,492 ongoing aggregate 
burden hours per year.   

1599  (20%) x (5,281 retail customer accounts) x (0.02 hours for delivery to each customer 
account) = 21 aggregate burden hours per year.  Conversely, 21 aggregate burden hours / 
756 small entities = 0.03 burden hours per small entity per year.   



743 

 

The total ongoing aggregate burden for small entities to review, amend, and deliver 

updated account disclosures to reflect changes in capacity, type and scope of services would be 

3,444 burden hours per year.1600 

The Commission acknowledges that the types of services and product offerings vary 

greatly by broker-dealer, and therefore the costs or burdens associated with updating the account 

disclosure might also vary. 

(2) Disclosure of Fees and Costs 

  As stated above, while we anticipate that many small entities may already create fee 

schedules, we believe that small entities will initially spend 5 hours to internally create a new fee 

schedule in consideration of the requirements of Regulation Best Interest.  We additionally 

estimate a one-time external cost of $2,485 for small entities.1601  We therefore estimate the 

initial aggregate burden for small entities to be 3,780 burden hours,1602 and the initial aggregate 

cost to be $1.88 million.1603   

                                                                                                                                                             

 

1600  This estimate is based on the following calculation: (931 ongoing aggregate burden hours 
for dually registered broker-dealers that are small entities) + (2,492 ongoing aggregate 
burden hours for standalone broker-dealers that are small entities) + (21 ongoing 
aggregate burden hours for delivery of amended account disclosures) = 3,444 total 
ongoing aggregate burden hours per year. 

1601  See supra footnote 1427. 
1602  See supra footnote 1429. 
1603  See supra footnote 1430. 



744 

 

Similar to delivery of the account disclosure regarding capacity and type and scope of 

services, we estimate the burden for small entities to make the initial delivery of the fee schedule 

to new retail customers, at the inception of the relationship, and existing retail customers, prior to 

or at the time of a recommendation, will require approximately 0.02 hours to deliver to each 

retail customer.1604  We therefore estimate that small entities will have an aggregate initial 

burden of 106 hours, or approximately 0.14 hours per small entity for the first year after 

Regulation Best Interest is in effect.1605   

With respect to small entities, we estimate that reviewing and updating the fee schedule 

will require approximately 2 hours per year.  Based on these estimates, we estimate the recurring, 

aggregate, annualized burden will be 1,512 hours for small entities.1606  We do not anticipate that 

small entities will incur outside legal, compliance, or consulting fees in connection with updating 

their standardized fee schedule since in-house personnel would be more knowledgeable about 

these facts, and we therefore do not expect external costs associated with updating the fee 

schedule.   

                                                                                                                                                             

 

1604  See supra footnote 1412. 
1605  This estimate is based on the following calculation: (5,281 retail customer accounts) x 

(0.02 hours for delivery to each customer account) = 106 aggregate burden hours.  
Conversely, (106 aggregate burden hours) / (756 small entities) = 0.14 burden hours per 
small entity for the first year after Regulation Best Interest is in effect. 

1606  See supra footnote 1438. 



745 

 

With respect to delivery of the amended fee schedule in the event of a material change, 

we estimate that this would take place among 40% of a small entity’s retail customer accounts 

annually, and that small entities will require approximately 0.02 hours to deliver the amended fee 

schedule to each retail customer.  We therefore estimate small entities would incur a total annual 

aggregate burden of 42 hours, or 0.06 hours per small entity.1607  

The Commission acknowledges that the type of fee schedule may vary greatly by small 

entity and therefore that the costs or burdens associated with updating the standardized fee 

schedule might similarly vary. 

(3) Disclosure of All Material Facts Relating to Conflicts of 
Interest Associated with the Recommendation 

 
We believe that many or most small entities will develop a standardized conflict 

disclosure document and deliver it to their retail customers.1608  For small entities, we estimate it 

will take in-house counsel, on average, 5 burden hours to create the standardized conflict 

disclosure document and outside counsel 5 hours to review and revise the document.  We 

estimate that the initial aggregate burden for the development of a standardized disclosure 

document, based on an estimated 756 small entities, will be 3,780 burden hours.1609  We 

                                                                                                                                                             

 

1607  This estimate is based on the following calculation: (40% of 5,281 retail customer 
accounts) x (0.02 hours) = 42 aggregate burden hours.  Conversely, (42 aggregate burden 
hours) / (756 small entities) = 0.06 burden hours per small entity per year.   

1608  See supra footnote 1444. 
1609  See supra footnote 1445. 



746 

 

additionally estimate an initial cost of $2,485 per small entity,1610 and an aggregate initial cost of 

$1.88 million for all small broker-dealers.1611   

We assume that small entities will deliver the standardized conflict disclosure document 

to new retail customers at the inception of the relationship, and to existing retail customers prior 

to or at the time of a recommendation.  We estimate that small entities will require 

approximately 0.02 hours to deliver the standardized conflict disclosure document to each retail 

customer.1612  We therefore estimate that small entities will incur an aggregate initial burden of 

106 hours, or approximately 0.14 hours per small entity for delivery of the standardized conflict 

disclosure document the first year after Regulation Best Interest is in effect.1613  Accordingly, the 

                                                                                                                                                             

 

1610  See supra footnote 1446. 
1611  See supra footnote 1447. 
1612  See supra footnote 1412.  For purposes of this analysis, we have assumed any initial 

disclosures made by the small entities related to material conflicts of interest will be 
delivered together. 

1613  These estimates are based on the following calculations:  (0.02 hours per customer 
account x 5,281 retail customer accounts) = 106 aggregate burden hours.  Conversely, 
(106 hours) / (756 small entities) = 0.14 burden hours per small entity for the first year 
after Regulation Best Interest is in effect. 



747 

 

total aggregate initial burden for small entities is estimated at 3,886 hours,1614 and the total 

aggregate initial cost is estimated at $1.88 million.1615 

We believe that small entities will incur ongoing annual burdens and costs to update the 

disclosure document to include newly identified conflicts.  We estimate that in-house counsel at 

a small entity will require approximately 1 hour per year to update the standardized conflict 

disclosure document, for an ongoing aggregate burden of approximately 756 hours per year.1616  

We do not anticipate that small entities will incur outside legal, compliance, or consulting fees in 

connection with updating their standardized conflict disclosure document, since in-house 

personnel would presumably be more knowledgeable about conflicts of interest.   

With respect to ongoing delivery of the updated conflict disclosure document, we 

estimate that this will take place among 40% of a small entity’s retail customer accounts 

annually, and that small entities will require approximately 0.02 hours to deliver the updated 

conflict disclosure document to each retail customer.1617  We therefore estimate that small 

                                                                                                                                                             

 

1614  This estimate is based on the following calculation: (3,780 aggregate initial burden hours 
for the development of a standardized conflict disclosure document) + (106 burden hours 
for delivery of the standardized conflict disclosure document) = 3,886 aggregate initial 
burden hours. 

1615  See supra footnote 1430. 
1616  See supra footnote 1454. 
1617  See supra footnote 1456. 



748 

 

entities will incur an aggregate ongoing burden of 42 hours, or 0.06 burden hours per small entity 

per year.1618  

2. Care Obligation 

As discussed above in Section IV.B.2, we believe that any burdens or costs associated 

with the Care Obligation are accounted for in other obligations under Regulation Best Interest, 

including the Disclosure Obligation and the Record-making Obligation under Rule 17a-3(a)(35) 

and Recordkeeping Obligation under Rule 17a-4(e)(5).  Other costs applicable to broker-dealers, 

including small entities, associated with the Care Obligation are discussed above in Section 

III.C.3.b. 

3. Conflict of Interest Obligation 

As described more fully above in Section IV.B.3, the Conflict of Interest Obligation 

would generally include the obligation to: (1) update written policies and procedures to comply 

with Regulation Best Interest and (2) establish mechanisms to proactively and systematically 

identify and manage conflicts of interest in its business on an ongoing or periodic basis.1619   

                                                                                                                                                             

 

1618  This estimate is based on the following calculation: (40% of 5,281 retail customer 
accounts) x (0.02 hours) = 42 aggregate burden hours.  Conversely, (42 aggregate burden 
hours per year) / (756 small entities) = 0.06 hours per small entity per year.   

1619  See supra Section IV.B.3.  For a discussion of additional costs and burdens, as well as 
monetized burdens, related to the Conflict of Interest Obligation, see supra Section 
III.C.4. 



749 

 

a. Written Policies and Procedures 

i. Initial Costs and Burdens 

To initially comply with this obligation, we believe that small entities would primarily 

rely on outside counsel to update existing policies and procedures, as small broker-dealers 

generally have fewer in-house legal and compliance personnel.  We estimate that 40 hours of 

outside legal counsel services would be required, for a one-time initial cost of $19,880 per small 

entity,1620 and an aggregate initial cost of $15.0 million for all small entities.1621  We also expect 

that in-house compliance would require 10 hours to review and approve the updated policies and 

procedures, for an initial aggregate burden of 7,560 hours.1622  Therefore, we estimate the total 

initial aggregate burden for small entities to be 128,160 hours1623 and the total initial aggregate 

cost to be $25.0 million.1624 

 We believe that the related ongoing costs for small entities (relating to outside counsel 

reviewing and updating policies and procedures on a periodic basis) would be $2,485 annually 

for each small entity,1625 and the projected aggregate, annual ongoing cost for small entities 

                                                                                                                                                             

 

1620  See supra footnote 1478. 
1621  See supra footnote 1479.   
1622  See supra footnote 1480.   
1623  See supra footnote 1481.   
1624  See supra footnote 1482. 
1625  See supra footnote 1487.   



750 

 

(relating to outside legal counsel) would be $1.88 million.1626  In addition, we expect that small 

entities would require five hours of outside compliance services per year to update their policies 

and procedures, for an ongoing cost of $1,365 per year per small entity,1627 and an aggregate 

ongoing cost of $1.03 million per year.1628  The total aggregate, ongoing cost for small entities is 

therefore projected at $2.91 million per year.1629 

 In addition to the costs described above, we additionally believe small broker-dealers 

would incur an internal burden of approximately five hours for an in-house compliance manager 

to review and approve the updated policies and procedures per year.  The ongoing, aggregate 

burden for small broker-dealers would be 3,780 hours for in-house compliance manager review 

per year.1630 

b. Identification and Management of Conflicts of Interest 

 To comply with Regulation Best Interest, we expect that small entities would modify 

existing technology through an outside programmer which would require, on average, an 

estimated 20 hours, for an estimated initial cost per small entity of $5,680.1631  We additionally 

continue to project that coordination between the programmer and the small entity’s compliance 
                                                                                                                                                             

 

1626  See supra footnote 1488.   
1627  See supra footnote 1489.   
1628  See supra footnote 1490.   
1629  See supra footnote 1491.   
1630  See supra footnote 1492.   
1631  See supra footnote 1498.   



751 

 

manager would involve five initial burden hours.  The aggregate initial costs and burdens for 

small entities for the modification of existing technology to identify conflicts of interest would 

therefore be $4.29 million,1632 and 3,780 burden hours.1633 

 As a result of the changes made to the rule text of the Conflict of Interest Obligation of 

Regulation Best Interest, we believe that small entities would incur burdens to determine how to 

manage the conflict of interest.  We believe that small entities would require approximately 20 

hours per small entity,1634 for an aggregate of 15,120 initial burden hours for all small 

entities.1635  The total initial aggregate burden for small entities for identification and 

management of conflicts of interest is therefore 18,900 initial burden hours.1636 

 To maintain compliance with the Conflict of Interest Obligation, we believe that for 

purposes of this analysis, small entities would, through the help of the business line and 

                                                                                                                                                             

 

1632  This cost estimate is based on the following calculation:  ($5,680 in outside programmer 
costs per broker-dealer) x (756 small entities) = $4.29 million in aggregate initial outside 
programmer costs. 

1633  This burden estimate is based on the following calculation:  (5 burden hours) x (756 
small entities) = 3,780 aggregate initial burden hours. 

1634  See supra footnotes 1502 and 1503.   
1635  This burden estimate is based on the following calculation:  (20 burden hours) x (756 

small entities) = 15,120 aggregate initial burden hours. 
1636  This burden estimate is based on the following calculation: (3,780 burden hours for 

modification of technology) + (15,120 burden hours for evaluation of managing conflicts) 
= 18,900 total aggregate initial burden hours.   



752 

 

compliance personnel, spend on average 10 hours1637 to perform an annual conflicts review using 

the modified technology infrastructure.1638  Therefore, the aggregate ongoing burden for an 

annual conflicts review, based on an estimated 756 small entities, would be approximately 7,560 

burden hours per year.1639  Because we assume that small entities would use in-house personnel 

to identify and evaluate new, potential conflicts, we continue to believe they would not incur 

additional ongoing costs. 

c. Training 

 As discussed in the Proposing Release, we expect that small entities would develop 

training programs to comply with Regulation Best Interest, including the Conflict of Interest 

Obligation.  However, we believe that any burdens and costs associated with a training program 

would fall under the new Compliance Obligation as it would be developed to comply with the 

rule as a whole, including each of the component obligations. 

 In total, to comply with the Conflict of Interest Obligation, the Commission estimates 

that the total initial burdens and costs for small entities to be 135,720 hours1640 and $29.29 

                                                                                                                                                             

 

1637  See supra footnote 1508. 
1638  See supra footnote 1509.   
1639  This estimate is based on the following calculation: (10 hours of labor per small entity 

per year) x (756 small entities) = 7,560 aggregate burden hours per year.   
1640  This estimate is based on the following calculation: (128,160 burden hours for written 

policies and procedures) + (7,560 burden hours for identification and management of 
conflicts of interest) = 135,720 hours. 



753 

 

million1641 and the total ongoing burdens and costs for small entities to be 11,340 hours1642 and 

$2.91 million.1643 

4. Compliance Obligation 

As discussed above, in response to comments that we should require policies and 

procedures to comply with the rule as a whole, we are adopting the Compliance Obligation.1644  

Because we did not include the Compliance Obligation in the Proposing Release, we did not 

include costs and burdens associated with the Compliance Obligation, but have provided a 

detailed explanation in Section IV.B.4 above, and a summary below.    

To comply with the Compliance Obligation, we believe that small entities would 

primarily rely on outside counsel to update existing policies and procedures, and that 20 hours of 

outside legal counsel services would be required, for a one-time cost of $9,940 per small 

entity,1645 and an aggregate initial cost of $7.5 million for all small entities.1646  We also expect 

                                                                                                                                                             

 

1641  This estimate is based on the following calculation: ($25 million initial aggregate costs 
relating to written policies and procedures) + ($4.29 million initial aggregate costs for 
modification of existing technology to identify conflicts of interest) = $29.29 million 
initial aggregate costs. 

1642  This estimate is based on the following calculation: (3,780 burden hours for reviewing 
and approving the updated policies and procedures) + (7,560 burden hours for annual 
conflicts review) = 11,340 initial aggregate burden hours. 

1643  See supra footnote 1629.  
1644  Section II.C.4. 
1645  See supra footnote 1524. 
1646  See supra footnote 1525.   



754 

 

that in-house compliance personnel would require 6 hours to review and approve the updated 

policies and procedures, for an aggregate initial burden of 4,536 hours.1647   

In terms of ongoing costs, we assume for purposes of this analysis that small entities 

would mostly rely on outside legal counsel and compliance consultants for review and update of 

their policies and procedures, with final review and approval from an in-house compliance 

manager.  We estimate that outside counsel would require approximately five hours per year to 

update policies and procedures, for an annual cost of $2,485 for each small entity.1648  The 

projected aggregate, annual ongoing cost for outside legal counsel to update policies and 

procedures for small entities would be $1.88 million per year.1649  In addition, we expect that a 

small entity would require five hours of outside compliance services per year to update its 

policies and procedures, for an ongoing cost of $1,365 per year,1650 and an aggregate ongoing 

cost of $1.03 million per year.1651  The total aggregate, ongoing cost for small entities is 

therefore projected at $2.91 million per year.1652 

                                                                                                                                                             

 

1647  See supra footnote 1526.   
1648  See supra footnote 1530. 
1649  See supra footnote 1531. 
1650  See supra footnote 1532. 
1651  See supra footnote 1533. 
1652  See supra footnote 1534. 



755 

 

a. Training 

Pursuant to the obligation to “maintain and enforce” written policies and procedures, we 

additionally believe small entities will develop training programs that promote compliance with 

Regulation Best Interest.   

We estimate that a small entity would retain an outside systems analyst, outside 

programmer, and an outside programmer analyst to create a training module, at 20 hours, 40 

hours, and 20 hours, respectively.  The total cost to develop the training module would be 

approximately $20,920 per small entity,1653 for an aggregate initial cost to small entities of 

$17.18 million.1654 

Additionally, we expect that the training module would require the approval of the Chief 

Compliance Officer, as well as in-house counsel, each of whom would require approximately 2 

hours to review and approve the training module.  The initial aggregate burden for small entities 

is therefore estimated at 3,024 initial burden hours.1655 

In addition, small entities would incur an initial cost for registered representatives to 

undergo training through the training module.  We estimate the training time at one hour per 

                                                                                                                                                             

 

1653  See supra footnote 1535.     
1654  This estimate is based on the following calculation:  (756 small entities) x ($20,920 initial 

costs per broker-dealer) = $15.81 million in aggregate initial costs for technology 
services. 

1655  This estimate is based on the following calculation:  (756 small entities) x (4 initial 
burden hours per small entity) = 3,024 initial burden hours. 



756 

 

associated person, for an aggregate initial burden of 5,094 burden hours, or an initial burden of 

6.7 hours per small entity.1656  The total aggregate burden to approve the training module and 

implement the training program would be 8,118 initial burden hours.1657 

 For purposes of this analysis, we assume that  small entities would likely require 

registered representatives to repeat the training module for Regulation Best Interest on an annual 

basis.  The ongoing aggregate cost for the one-hour training would be 5,094 burden hours per 

year, or 6.7 burden hours per small entity per year.1658 

 In total, for small entities to comply with the Compliance Obligation, the Commission 

estimates the total initial burdens and costs to be 12,654 hours1659 and $23.31 million,1660 and the 

total ongoing burdens and costs to be 5,094 hours1661 and $2.91 million.1662 

                                                                                                                                                             

 

1656  This estimate is based on the following calculation: (1 burden hour) x (5094 registered 
representatives at small entities) = 5,094 aggregate initial burden hours.  Conversely, 
(5,094 aggregate burden hours) / (756 small entities) = 6.7 initial burden hours per 
broker-dealer.   

1657  This estimate is based on the following calculation: (5,094 burden hours for training of 
registered representatives) + (3,024 burden hours to approve training program) = 8,118 
total aggregate initial burden hours.   

1658  See supra footnote 1656. 
1659  This estimate is based on the following calculation: (4,536 initial burden hours for 

policies and procedures) + (8,118 initial burden hours training) = 12,654 initial burden 
hours to comply with Compliance Obligation. 

1660  This estimate is based on the following calculation: ($7.5 million initial costs for policies 
and procedures) + ($15.81 million initial costs for training) = $23.31 million initial total 
costs to comply with Compliance Obligation. 



757 

 

5. Record-Making and Recordkeeping Obligations 

The record-making and recordkeeping obligations will impose record-making and 

recordkeeping requirements on broker-dealers with respect to certain information collected from, 

or provided to, retail customers.   

a. Record-Making Obligation 

As discussed above, we continue to believe that small entities will satisfy the record-

making requirements of the amendment to Rule 17a-3(a)(35) by amending an existing account 

disclosure document to include certain information.1663  We believe that the inclusion of this 

information in an account disclosure document will require, on average, approximately 1 hour 

per year for outside counsel at small entities, at an updated average rate of $497/hour, for an 

annual cost of $497 for each small entity to update an account disclosure document.  The 

projected initial, aggregate cost for small entities is therefore estimated to be $375,732.1664  

Finally, we estimate it will require an additional 0.04 hours for the registered representative 

responsible for the information (or other clerical personnel) to fill out that information in the 

                                                                                                                                                             

 

1661  This estimate is based on the following calculation: (0 ongoing burden hours for policies 
and procedures) + (5,094 ongoing burden hours for training) = 5,094 ongoing burden 
hours to comply with Compliance Obligation. 

1662  This estimate is based on the following calculation: ($2.91 million ongoing costs for 
policies and procedures) + ($0 ongoing costs for training) = $2.91 million ongoing total 
costs to comply with Compliance Obligation. 

1663  See supra Section IV.B.5.a.i. 
1664  See supra footnote 1549.   



758 

 

account disclosure document, for an approximate total aggregate initial burden of 211 hours, or 

approximately 0.28 hours per small entity for the first year after the rule is in effect.1665   

Because we have already included the costs and burdens associated with the creation of a 

record to memorialize an oral disclosure, and the delivery of the amended account disclosure 

document in Section V.D.1., we need not include them in this section of the analysis. 

We do not believe that the identity of the registered representative responsible for the 

retail customer’s account will change.  Accordingly, we continue believe that there are no 

ongoing costs and burdens associated with this record-making requirement of the amendment to 

Rule 17a-3(a)(35).  With respect to memorializing oral disclosures, we estimate that this would 

take place among 52% of a small entity’s retail customers (and thus 52% of a registered 

representative’s retail customer accounts) annually.1666  We therefore estimate that small entities 

will incur a total annual aggregate ongoing burden of 55 hours or 0.07 hours per small entity per 

year.1667 

                                                                                                                                                             

 

1665  These estimates are based on the following calculations:  (0.04 hours per customer 
account) x (5,281 retail customer accounts at small entities) = 211 aggregate initial 
burden hours.  Conversely, (211 burden hours) / (756 small entities) = 0.28 initial burden 
hours per broker-dealer.   

1666  See supra footnote 1555. 
1667  (52%) x (5,281 retail customer accounts at small entities) x (0.02 hours for recording 

each oral disclosure relating to a retail customer’s account) = 55 aggregate burden hours 
per year.  Conversely, 55 aggregate burden hours / 756 small entities = 0.07 ongoing 
burden hours per small entity per year. 



759 

 

b. Recordkeeping Obligation 

For purposes of this analysis, we assume the following records would likely be retained 

pursuant to amended Rule 17a-3(a)(35): (1) existing account disclosure documents; (2) 

comprehensive fee schedules; (3) disclosures identifying material conflicts; and (4) 

memorialized oral disclosures under the circumstances outlined in Section II.C.1, Oral 

Disclosure or Disclosure After a Recommendation. 

Based on our belief that small entities will rely on existing infrastructures to satisfy the 

recordkeeping obligations of Regulation Best Interest and the amendment to Rule 17-a(4)(e)(5), 

we believe the burden for small entities to add new documents or modify existing documents to 

the small entity’s existing retention system will be approximately 704 burden hours for small 

entities, assuming a small entity will need to upload or file each of the four account documents 

discussed above for each retail customer account.1668  We do not believe there will be additional 

internal or external costs relating to the uploading or filing of the documents.  In addition, 

because we have already included the costs and burdens associated with the delivery of the 

amended account opening agreement and other documents in Section V.D.1 above, we do not 

include them in this section of the analysis. 

                                                                                                                                                             

 

1668   This estimate is based on the following calculation: (4 documents per customer account) 
x (5,281 retail customer accounts at small entities) x (2 minutes per document) / 60 
minutes = 704 aggregate burden hours.   



760 

 

We estimate that the approximate ongoing burden associated with the recordkeeping 

requirement of the amendment to Rule 17a-4(e)(5) is 231 burden hours per year.1669  We do not 

believe that the ongoing costs associated with ensuring compliance with the retention schedule 

would change from the current costs of ensuring compliance with existing Rule 17a-4 and as 

outlined above.   

E. Agency Action to Minimize Effect on Small Entities 

The RFA directs the Commission to consider significant alternatives that would 

accomplish the stated objective, while minimizing any significant adverse impact on small 

entities.  As described in the Proposing Release we considered the following alternatives for 

small entities in relation to the new requirements: (1) the establishment of differing compliance 

or reporting requirements or timetables that take into account the resources available to small 

                                                                                                                                                             

 

1669  This estimate is based on the percentage of account records we expect would be updated 
each year as described in Section IV.B.1, supra, and the following calculation: ((40% of 
fee schedules x 5,281 retail customer accounts at small entities) x (2 minutes per 
document) + (40% of conflict disclosure forms x 5,281 retail customer accounts at small 
entities) x (2 minutes per document) + (20% of account opening documents x 5,281  
retail customer accounts at small entities) x (2 minutes per document)) = 10,560 minutes / 
60 minutes = 176 aggregate ongoing burden hours.  In addition, with respect to ongoing 
memorialization of the updated oral disclosures, we estimate that this will take place 
among 52% of a small entity’s retail customer accounts annually.  We therefore estimate 
that small entities will incur an aggregate ongoing burden of 55 hours, or 0.07 burden 
hours per broker-dealer (calculated as follows: (52% of updated oral disclosures x 5,281 
retail customer accounts at small entities) x (1.2 minutes per document) = 3,295 minutes / 
60 minutes = 55 aggregate ongoing burden hours (or 55 aggregate burden hours / 756 
small entities = 0.07 burden hours per small entity)).  176 hours + 55 hours = 231 total 
aggregate ongoing burden hours.761 

 

entities; (2) the clarification, consolidation, or simplification of compliance and reporting 

requirements for small entities; (3) the use of performance rather than design standards; and (4) 

an exemption from coverage of the new requirements, or any part thereof, for such small entities. 

Regarding the first alternative, the Commission does not believe that we could effectively 

achieve our stated objectives by establishing different requirements applicable to broker-dealers 

of different sizes.  We considered adopting tiered compliance dates so that smaller broker-dealers 

would have had more time to comply.  However, as discussed in Section II.E above, we believe 

the operational capability needed to develop processes to comply with Regulation Best Interest is 

sufficiently established by firms of all sizes and resources.  The Commission has determined, in 

light of the importance of the protections afforded by Regulation Best Interest to retail 

customers, that a Compliance Date of one year after the Effective Date is an appropriate 

timeframe for firms to conduct the requisite operational changes to their systems to establish 

internal processes to comply with Regulation Best Interest.  Further, as discussed above in 

Section III, each of the component obligations in Regulation Best Interest shares features with 

existing market best practices, as shaped by FINRA’s guidance on relevant rules or as described 

in its Report on Conflicts of Interest.1670  To the extent that broker-dealer (and small entity) 

practices are already aligned with the requirements of Regulation Best Interest, the anticipated 

                                                                                                                                                             

 

1670  See supra Section III.C.1.b.  



762 

 

magnitude of the costs associated with a given component of the rule will be correspondingly 

reduced.1671 

As discussed above, we believe that Regulation Best Interest will result in important 

investor protection benefits, and these benefits apply to retail customers of smaller entities as 

well as retail customers of large broker-dealers.  For example, a primary objective of this 

rulemaking is to enhance the quality of recommendations provided by broker-dealers to retail 

customers, by establishing under the Exchange Act a “best interest” obligation.  We do not 

believe that the interest of investors who are retail customers would be served by establishing 

differing compliance or reporting requirements or timetables for broker-dealers that are small 

entities under Regulation Best Interest and the amendments to Rules 17a-3 and 17a-4(e)(5).   

Moreover, we continue to believe that providing an exemption or different requirements 

for small entities would be inconsistent with our goal of facilitating more consistent regulation, 

in recognition of the importance for both investors and broker-dealers of having the applicable 

standards for brokerage recommendations be clear, understandable, and as consistent as possible 

across a brokerage relationship (i.e., whether for retirement or non-retirement purposes) and 

better aligned with other advice relationships (e.g., a relationship with an investment adviser).  

Further, as discussed above, broker-dealers are subject to regulation under the Exchange Act and 

the rules of each SRO of which the broker-dealer is a member, including a number of obligations 

                                                                                                                                                             

 

1671  See supra text following footnote 1159. 



763 

 

that attach when a broker-dealer makes a recommendation to a customer, as well as general and 

specific requirements aimed at addressing certain conflicts of interest.  We note that these 

existing requirements do not generally distinguish between small entities and other broker-

dealers.  

For the same reasons as described in the Proposing Release, we still do not believe that 

additional clarification, consolidation, or simplification of compliance and reporting 

requirements would be appropriate for small entities.  We note, however, in crafting Regulation 

Best Interest, we generally aimed to provide broker-dealers flexibility in determining how to 

satisfy the component obligations.  We continue to believe that this flexibility reflects a general 

performance-based approach, rather than design-based approach. 

As discussed in the Economic Analysis in Section III.E above, the Commission also 

considered a number of alternatives as they affect all firms, including small entities.  Specifically, 

the Commission considered three different options for imposing a fiduciary standard on broker-

dealers: (1) applying the fiduciary standard under the Advisers Act to broker-dealers; 

(2) adopting a “new” uniform fiduciary standard of conduct applicable to both broker-dealers 

and investment advisers, such as that recommended by the staff in the 913 Study, and, or (3) 

adopting similar standards to what the DOL had provided under its fiduciary rule to broker-

dealers and investment advisers.  The Commission further considered requiring broker-dealers to 

use a specific form for disclosure, similar to, for example, Form ADV Part II in lieu of the 

flexible approach of the Disclosure Obligation, or in the alternative, developing a disclosure-only 

standard, which would require that broker-dealers satisfy only the Disclosure Obligation of the 

final rule. 



764 

 

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 relationships can solve 

for every issue presented.  After careful consideration of the comments and additional 

information we have received, 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. 

VI. STATUTORY AUTHORITY AND TEXT OF THE RULE 

Pursuant to Dodd-Frank Wall Street Reform and Consumer Protection Act Section 913(f), 

Pub. L. 111-203, 124 Stat. 1376, 1827 (2010), and Exchange Act sections 3, 10, 15, 15(c)(6), 

15(l), 17, 23 and 36 thereof, 15 U.S.C. 78c, 78j, 78o, 78o(c)(6), 78o(l), 78q, 78w and 78mm, the 

Commission is adopting § 240.15l-1 and adopting amendments to § 240.17a-3 by adding new 

paragraph (a)(25), and to revise § 240.17a-4(e)(5) of Title 17 of the Code of Federal Regulations 

in the manner set forth below. 

List of Subjects in 17 CFR Part 240 

Brokers, Reporting and recordkeeping requirements, Securities. 

Text of the Rule 

 In accordance with the foregoing, Title 17, Chapter II of the Code of Federal Regulations 

is amended as follows:  

PART 240 – GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE 

ACT OF 1934 



765 

 

1.  The authority citation for part 240 is amended by adding sectional authorities for section 

240.15l-1 to read as follows: 

  Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 77eee, 77ggg, 77nnn, 77sss, 

77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 

78o-4, 78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-

37, 80b-3, 80b-4, 80b-11, 7201 et seq.; and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 

U.S.C. 1350; and Pub. L. 111-203, 939A, 124 Stat. 1887 (2010); and secs. 503 and 602, Pub. L. 

112-106, 126 Stat. 326 (2012), unless otherwise noted. 

* * * * * 

 Section 240.15l-1 is also issued under Pub. L. 111-203, sec. 913, 124 Stat. 1376, 1827 

(2010). 

* * * * * 

2.   Add § 240.15l-1 to read as follows:  

§ 240.15l-1 Regulation Best Interest.  

(a)  Best interest obligation.  (1)  A broker, dealer, or a natural person who is an associated 

person of a broker or dealer, when making a recommendation of any securities transaction or 

investment strategy involving securities (including account recommendations) to a retail 

customer, 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, or natural person who 

is an associated person of a broker or dealer making the recommendation ahead of the interest of 

the retail customer.   

(2) The best interest obligation in paragraph (a)(1) of this section shall be satisfied if: 



766 

 

(i)  Disclosure obligation.  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, provides the retail customer, in 

writing, full and fair disclosure of:  

(A)  All material facts relating to the scope and terms of the relationship with the retail customer, 

including:  

(1) That the broker, dealer, or such natural person is acting as a broker, dealer, or an associated 

person of a broker or dealer with respect to the recommendation;  

(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; and 

(B)  All material facts relating to conflicts of interest that are associated with the 

recommendation.  

(ii) Care obligation. The broker, dealer, or natural person who is an associated person of a broker 

or dealer, in making the recommendation, exercises reasonable diligence, care, and skill to: 

(A) Understand the potential risks, rewards, and costs 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; 

(B) 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, rewards, and costs associated with the recommendation and does not place the financial or 



767 

 

other interest of the broker, dealer, or such natural person ahead of the interest of the retail 

customer;  

(C) 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 

and does not place the financial or other interest of the broker, dealer, or such natural person 

making the series of recommendations ahead of the interest of the retail customer.  

(iii) Conflict of interest obligation.  The broker or dealer establishes, maintains, and enforces 

written policies and procedures reasonably designed to: 

(A) Identify and at a minimum disclose, in accordance with paragraph (a)(2)(i) of this section, or 

eliminate, all conflicts of interest associated with such recommendations; 

(B) Identify and mitigate any conflicts of interest associated with such 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, dealer, or such natural person ahead of the interest of the retail 

customer; 

(C)(1) Identify and disclose any material limitations placed on the securities or investment 

strategies involving securities that may be recommended to a retail customer and any conflicts of 

interest associated with such limitations, in accordance with subparagraph (a)(2)(i), and  

(2) 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  



768 

 

(D) Identify and eliminate any sales contests, sales quotas, 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.  

(iv) Compliance obligation.  In addition to the policies and procedures required by paragraph 

(a)(2)(iii) of this section, the broker or dealer establishes, maintains, and enforces written policies 

and procedures reasonably designed to achieve compliance with Regulation Best Interest.  

(b) Definitions.  Unless otherwise provided, all terms used in this rule shall have the same 

meaning as in the Securities Exchange Act of 1934.  In addition, the following definitions shall 

apply for purposes of this section: 

(1)  Retail customer means a natural person, or the legal representative of such natural person, 

who:  

(i) 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  

(ii) Uses the recommendation primarily for personal, family, or household purposes. 

(2)  Retail customer investment profile includes, but is not 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. 

(3)  Conflict of interest means 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.   



769 

 

 

3. Amend § 240.17a-3 by adding reserved paragraphs (a)(24) through (34) and paragraph 

(a)(35) to read as follows:   

§ 240.17a-3 Records to be made by certain exchange members, brokers and dealers.   

(a)*** 

(24) – (34)  [Reserved]. 

(35)  For each retail customer to whom a recommendation of any securities transaction or 

investment strategy involving securities is or will be provided: 

(i) A record of all information collected from and provided to the retail customer pursuant to § 

240.15l-1, as well as the identity of each natural person who is an associated person, if any, 

responsible for the account. 

(ii) For purposes of this paragraph (a)(35), the neglect, refusal, or inability of the retail customer 

to provide or update any information described in paragraph (a)(35)(i) of this section shall 

excuse the broker, dealer, or associated person from obtaining that required information. 

* * * * * 

4. Amend § 240.17a-4 by revising paragraph (e)(5) to read as follows: 

§ 240.17a-4  Records to be preserved by certain exchange members, brokers and dealers. 

 * * * * * 

(e)*** 

(5)  All account record information required pursuant to § 240.17a-3(a)(17) and all 

records required pursuant to § 240.17a-3(a)(35), in each case until at least six years after 

the earlier of the date the account was closed or the date on which the information was 

collected, provided, replaced, or updated.   



770 

 

* * * * * 

By the Commission. 

 

Dated: June 5, 2019 

 

 

      Vanessa Countryman 
      Acting Secretary

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 broker-

dealer standard of conduct beyond existing suitability obligations, and aligns the standard of 

conduct with retail customers’ reasonable expectations by requiring broker-dealers, among other 

things, to: 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 



2 

 

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. 

 



3 

 

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 

 

 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 17a-

3(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-



5 

 

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 broker-

dealer standard of conduct beyond existing suitability obligations, and aligns the standard of 

conduct with retail customers’ reasonable expectations by requiring broker-dealers, among other 

things, to: (1) 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 



6 

 

both retail and institutional customers.1  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.2   

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”). 



7 

 

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.4  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).5  

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 

 

 



8 

 

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.   



9 

 

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.   



10 

 

approximately 3,000 are unique comment letters, from a variety of commenters including 

individual investors, consumer advocacy groups, financial services firms (including broker-

dealers, 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”).   



11 

 

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-form-
crs-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-committee-
2012/iac110718-investor-as-purchaser-subcommittee-recommendation.pdf (“IAC 2018 
Recommendation”).  Generally, a majority of the IAC made the following 

 

 



12 

 

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. 



13 

 

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 broker-

dealer 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”).16    

                                                                                                                                                             

 

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 

 

 



14 

 

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 broker-

dealer 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. 



15 

 

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 broker-

dealer 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. 



16 

 

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. 



17 

 

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).  



18 

 

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 broker-
dealers and investment advisers when providing personalized investment advice about 
securities to retail customers.  The staff’s recommended standard would require firms “to 
act in the best interest of the customer without regard to the financial or other interest of 
the broker, dealer or investment adviser providing the advice.”  The staff made a number 
of specific recommendations for implementing the uniform fiduciary standard of conduct, 
including that the Commission should: (1) require firms to eliminate or disclose conflicts 

 

 



19 

 

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. 



20 

 

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21 

 

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-the-
DOL-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 

 

 



22 

 

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 commission-
based 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 self-
directed 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.” 

 



23 

 

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.   



24 

 

but nearly all commenters suggested modifications to proposed Regulation Best Interest.37  

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 

 

 



25 

 

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”). 



26 

 

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  “broker-
dealer 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. 



27 

 

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”). 



28 

 

with other existing disclosure requirements.46  In particular, several commenters recommended 

that the Commission require broker-dealers provide “full and fair” disclosure.47  

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. 



29 

 

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 AFL-
CIO 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”). 



30 

 

recommendations of specific categories of securities, such as variable annuities or leveraged 

exchange-traded products.52   

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”). 



31 

 

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.56   

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”). 



32 

 

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.58 

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.61   

                                                                                                                                                             

 

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; Great-
West 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. 



33 

 

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 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. 



34 

 

agreement will result in buy, sell or hold recommendations subject to Regulation Best 

Interest, even when the recommendation to hold is implicit.63   

• 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. 



35 

 

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.   



36 

 

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 broker-

dealers 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. 



37 

 

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 broker-

dealer 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. 



38 

 

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. 



39 

 

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 broker-

dealer 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 

 

 



40 

 

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 broker-

dealer 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.41 

 

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 broker-

dealer 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. 



42 

 

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.78   

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.79   

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. 



43 

 

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 anti-
manipulation 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.  

 



44 

 

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 



45 

 

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 



46 

 

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 

 

 



47 

 

The views of commenters on the approach to an enhanced standard of conduct for broker-

dealers 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. 



48 

 

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. 



49 

 

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.   



50 

 

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 broker-

dealers 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 broker-

dealer’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). 



51 

 

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 

 

 



52 

 

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.”). 



53 

 

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 “self-

promotion.”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. 



54 

 

“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.      

1. 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. 



55 

 

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-advisory-
committee-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.   



56 

 

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 broker-

dealer 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 



57 

 

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 

 

 



58 

 

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. 



59 

 

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 broker-

dealer 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.   



60 

 

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 broker-

dealer 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.61 

 

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 broker-

dealer’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 



62 

 

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. 



63 

 

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, Dodd-

Frank Act Section 913(g) expressly provides that the receipt of commission-based 
 

 



64 

 

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 broker-
dealers.  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. 

 



65 

 

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…”). 



66 

 

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.134 

                                                                                                                                                             

 

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.”). 



67 

 

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.135  

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).   



68 

 

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 

 

 



69 

 

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 dual-
registrants 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.   



70 

 

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.   



71 

 

(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).141 

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). 



72 

 

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 broker-

dealer 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.   



73 

 

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 principles-

based 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-and-

circumstances 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 



74 

 

of Interest Obligations, if any recommendation was predominantly motivated by the broker-

dealer’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.   



75 

 

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 broker-

dealer 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. 



76 

 

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. 



77 

 

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 

1. 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. 



78 

 

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.157 

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.158  

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. 



79 

 

applied and would maintain efficiencies for broker-dealers that have already established 

infrastructures to comply with suitability obligations, which are recommendation-based.159  

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”). 



80 

 

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81 

 

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). 

 



82 

 

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 agreed-
upon 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 

 

 



83 

 

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 broker-
dealer 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.  



84 

 

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.171   

                                                                                                                                                             

 

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 

 

 



85 

 

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 

 

 



86 

 

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 

 

 



87 

 

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.177   

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 broker-
dealer 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. 



88 

 

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). 



89 

 

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.”). 



90 

 

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. 



91 

 

• 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.183  

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 broker-
dealer 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. 



92 

 

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.184  

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. 



93 

 

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”). 



94 

 

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. 



95 

 

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.   



96 

 

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.  



97 

 

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. 



98 

 

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. 



99 

 

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.   



100 

 

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101 

 

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. 



102 

 

on the facts and circumstances.206  Other commenters suggested that the Commission not impose 

a duty to monitor brokerage accounts.207  

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 broker-

dealer agrees to provide.209  We believe that any monitoring service agreed to by the broker-

dealer, 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. 



103 

 

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. 



104 

 

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.   



105 

 

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 broker-

dealer’s agreement to monitor the customer’s account.216   

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. 



106 

 

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.   



107 

 

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.  



108 

 

3. 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.224   

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. 



109 

 

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.226  

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. 



110 

 

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). 



111 

 

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.  



112 

 

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.238 

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). 



113 

 

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.240   

In addition, we view a “legal representative” of a natural person to only cover non-

professional 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-study-
part2.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.   



114 

 

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 non-

professional 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. 



115 

 

retained to represent the assets of natural persons from their own obligations to retail 

customers.244  

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. 



116 

 

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 tax-
favored 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. 



117 

 

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 

 

 



118 

 

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 after-
the-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.    
 



119 

 

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 broker-

dealer 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.   



120 

 

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.121 

 

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.259   

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).   



122 

 

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.260  

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. 



123 

 

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. 



124 

 

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.     



125 

 

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 dual-

registrant 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. 



126 

 

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 dual-

registrants.  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 dual-

registrant 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. 



127 

 

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.276   

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. 



128 

 

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 broker-

dealer 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 dual-
registrants 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). 



129 

 

Obligation), provides a recommendation of a securities transaction or investment strategy 

involving securities to the family in the course of the holistic review.282 

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. 



130 

 

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.   

1. 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 



131 

 

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. 



132 

 

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, broker-

dealers 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). 



133 

 

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. 



134 

 

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. 



135 

 

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 broker-

dealers 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. 



136 

 

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 



137 

 

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 broker-

dealers 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.   



138 

 

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.   



139 

 

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 

 

 



140 

 

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).141 

 

not only the broker-dealer entity, but also individuals who are associated persons of a broker-

dealer (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.   



142 

 

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. 



143 

 

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)). 



144 

 

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). 



145 

 

  Capacity In Which the Broker-Dealer is Acting 

 In the Proposing Release, the Commission identified that the capacity in which a broker-

dealer 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.316  

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). 



146 

 

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 15l-

1(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. 



147 

 

with the Relationship Summary.320  Form CRS requires a firm to state the name of the broker-

dealer or investment adviser and whether the firm is registered with the Commission as a broker-

dealer, 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. 



148 

 

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 broker-
dealer and investment adviser may offer services through a dual-registrant, affiliated 
firms, or unaffiliated firms, or only offer one type of service notwithstanding their dual 
licensing.  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.   



149 

 

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 

 

 



150 

 

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/public-
statement/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”). 



151 

 

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 broker-
dealers/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 … 

 

 



152 

 

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 broker-
dealers 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.  



153 

 

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).”) 

 

 



154 

 

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.  



155 

 

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.’”) 



156 

 

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 broker-

dealer 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.  



157 

 

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 broker-
dealers is more appropriate than a restriction.  



158 

 

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 dual-
registrant 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). 



159 

 

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.  



160 

 

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 broker-

dealers, 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.161 

 

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.)  



162 

 

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.  



163 

 

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. 



164 

 

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. 



165 

 

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.366   

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). 



166 

 

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 per-

transaction 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).   

 



167 

 

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.   



168 

 

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.373 

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. 



169 

 

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.375   

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. 



170 

 

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. 



171 

 

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 product-

level 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. 



172 

 

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. 



173 

 

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 



174 

 

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 broker-

dealers 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. 



175 

 

 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.386  

 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 dual-

registrants 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). 



176 

 

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).   



177 

 

 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 broker-

dealer 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). 



178 

 

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.391   

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). 



179 

 

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 broker-

dealer 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. 



180 

 

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.394   

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).181 

 

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 broker-

dealer, 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. 



182 

 

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.   



183 

 

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.402 

 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). 



184 

 

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 agreed-

upon 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 broker-

dealers 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 



185 

 

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. 



186 

 

 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. 



187 

 

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). 



188 

 

products are available with different features rather than require firms specify why the broker-

dealer recommended one product over another.413 

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).  



189 

 

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 broker-

dealer, 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 



190 

 

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.” 



191 

 

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 broker-

dealer’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 



192 

 

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. 



193 

 

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.418   

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”). 



194 

 

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 dual-

registrants 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’”).  



195 

 

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. 



196 

 

 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.   



197 

 

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. 



198 

 

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 

 

 



199 

 

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.  



200 

 

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.440 

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.201 

 

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.445 

 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. 



202 

 

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 non-
cash compensation, and the conflicts of interest those payments create.”).  



203 

 

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. 



204 

 

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. 



205 

 

  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 

 

 



206 

 

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. 



207 

 

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 broker-
dealer 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). 



208 

 

 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 broker-

dealer 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. 



209 

 

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.460   

 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, broker-
dealers 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.   



210 

 

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 broker-

dealers 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 

 

 



211 

 

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.466   

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 

 

 



212 

 

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.469 

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).  



213 

 

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.471   

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. 



214 

 

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.  



215 

 

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).  



216 

 

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-by-

case 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. 



217 

 

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 broker-

dealers 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. 



218 

 

taken this position in other contexts where full and fair disclosure is required, including under the 

fiduciary duty under the Advisers Act.480      

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. 



219 

 

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). 



220 

 

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 broker-

dealers 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”).221 

 

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.489  

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.) 



222 

 

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. 



223 

 

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.495    

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).  



224 

 

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. 



225 

 

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 broker-

dealer 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. 



226 

 

 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). 



227 

 

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 product-
level 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 

 

 



228 

 

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,506 

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. 



229 

 

under the circumstances outlined in Section II.C.1, Oral Disclosure or Disclosure After a 

Recommendation.509 

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. 



230 

 

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).    



231 

 

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 web-

based 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)). 



232 

 

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/recommendation-
promotion-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). 



233 

 

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.523   

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. 



234 

 

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). 



235 

 

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. 



236 

 

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.530 

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 broker-
dealer 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). 



237 

 

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). 



238 

 

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. 



239 

 

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 broker-
dealer 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. 



240 

 

supplemented by more detailed information provided either at the same time or subsequently.538  

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 principles-
based 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241 

 

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 broker-

dealers 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).  



242 

 

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. 



243 

 

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 broker-

dealers 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.546   

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. 



244 

 

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 

 

 



245 

 

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). 



246 

 

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 principles-

based 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”). 



247 

 

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. 



248 

 

 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 broker-

dealer 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. 



249 

 

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. 



250 

 

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.565   

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, broker-

dealers 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-circumstances-
based.  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.”). 



251 

 

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.567   

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. 



252 

 

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.569   

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….”). 



253 

 

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.571   

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 broker-

dealer’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. 



254 

 

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.573 

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 broker-
dealer’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. 



255 

 

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 

 

 



256 

 

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.578  

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. 



257 

 

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 

 

 



258 

 

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. 



259 

 

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.587 

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. 



260 

 

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.261 

 

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). 



262 

 

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). 



263 

 

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”).  

 



264 

 

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.598     

                                                                                                                                                             

 

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 Exchange-
Traded 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 

 

 



265 

 

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”).  



266 

 

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 Broker-
Dealer 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 



267 

 

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 broker-

dealer’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. 



268 

 

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 broker-

dealers 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. 



269 

 

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. 



270 

 

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. 



271 

 

 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.609       

 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. 



272 

 

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 broker-

dealer 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 



273 

 

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 risk-
based 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, 

 

 



274 

 

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.  



275 

 

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. 



276 

 

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 broker-

dealer’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. 



277 

 

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. 



278 

 

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.622  

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.624    

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. 



279 

 

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. 



280 

 

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.281 

 

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 

 

 



282 

 

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. 



283 

 

facts and circumstances of the particular recommendation and the particular retail customer at 

the time the recommendation is made.636      

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.  



284 

 

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.638    

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. 



285 

 

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. 



286 

 

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-and-
circumstances 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. 



287 

 

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 



288 

 

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.645    

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 broker-
dealer, this limitation may constitute a material limitation placed on the securities or 
investment strategies involving securities that may be recommended, which the broker-
dealer (or an associated person) would need to disclose and address as provided in the 
Disclosure and Conflict of Interest Obligations.   



289 

 

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 

 

 



290 

 

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 broker-

dealer 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. 



291 

 

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 broker-

dealer’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.647  

Application of Care Obligation to Account Type Recommendations 
 
As discussed above, Regulation Best Interest will apply to recommendations by a broker-

dealer 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.648   

                                                                                                                                                             

 

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.   

 

 



292 

 

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. 



293 

 

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. 



294 

 

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. 



295 

 

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). 



296 

 

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.   



297 

 

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. 

 

 



298 

 

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. 



299 

 

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 broker-

dealer 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. 



300 

 

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.666  

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.301 

 

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). 



302 

 

3. 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. 



303 

 

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.672    

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 broker-

dealers 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. 



304 

 

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.673 

 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.”). 



305 

 

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 

 

 



306 

 

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). 



307 

 

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.684   

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. 



308 

 

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.688   

The Commission is not providing a safe harbor to Regulation Best Interest for broker-

dealers 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. 



309 

 

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. 



310 

 

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.693   

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. 



311 

 

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. 



312 

 

investment adviser fiduciary duty which allows for conflicts to be addressed through disclosure 

sufficient for informed consent.698 

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. 



313 

 

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 broker-

dealers 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 



314 

 

“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.”) 

 

 



315 

 

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.  



316 

 

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. 



317 

 

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. 



318 

 

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.”). 



319 

 

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 broker-

dealers 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 broker-

dealer 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.  



320 

 

understand whether and how the conflict will affect the recommendations he or she receives.714  

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).321 

 

which broker-dealers may find appropriate in certain circumstances even when not required by 

Regulation Best Interest. 

e. Mitigation of Certain Incentives to Associated Persons 

We proposed to require firms to 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 with such recommendations.  In proposing 

this requirement, we recognized the importance of the brokerage model as a potentially cost-

effective option for investors, acknowledging that the compensation structures and arrangements 

within the business model create inherent conflicts715 but that such compensation may be 

appropriate in light of the time and experience necessary to understand investments.  As such, we 

aimed to promote investor choice and access to products and instead of requiring broker-dealers 

to establish policies and procedures to eliminate compensation structures and arrangements,716 

required policies and procedures to mitigate those conflicts of interest. 

                                                                                                                                                             

 

715  See Proposing Release at II.D.3.e.  See also Tully Report. 
716  While the Commission’s goal is to promote access and choice to investors, as discussed 

in more detail in Section II.C.3.g, Elimination of Certain Conflicts of Interest, the 
Commission believes it is in the public interest and will enhance investor protection to 
require broker-dealers to reasonably design policies and procedures to eliminate certain 
conflicts of interest as we believe such conflicts create too strong of an incentive for a 
broker-dealer to make a recommendation that places the broker-dealer’s interest ahead of 
the retail customer’s interest. 



322 

 

We proposed a principles-based approach to provide flexibility to firms to develop and 

tailor policies and procedures that included conflict mitigation measures based on each firm’s 

circumstances, for example, the size, retail customer base, nature and significance of the conflict, 

and complexity of the product.717  We stated that, depending on the conflict and the firm’s 

assessment, more or less demanding measures may be appropriate.718  We provided examples of 

situations in which heightened mitigation measures may be appropriate and also suggested that 

broker-dealers assess their policies and procedures as they may be reasonably designed at the 

outset but may later cease to be reasonably designed based on subsequent events or 

information.719  Finally, we provided a non-exhaustive list of potential practices that we believe 

broker-dealers should consider including in their policies and procedures, and as discussed 

above, suggested that some practices may be more appropriately avoided as they may be difficult 

to mitigate.720 

As discussed above, many commenters expressed concern with the breadth of the 

mitigation requirement and requested that mitigation be limited to certain types of 

                                                                                                                                                             

 

717  Proposing Release at II.D.3.e.   
718  Id. 
719  Id. 
720  Id. 



323 

 

compensation721 or solely to financial incentives to the individual registered representative.722  

Many commenters were also concerned about what they described as ambiguities in the 

Proposing Release, including the lack of a definition of the term “mitigate”723 and requested 

further guidance surrounding conflicts that needed to be mitigated versus those that can be 

disclosed.724  Some commenters suggested that supervision should be adequate mitigation and 

requested clarification on whether their existing supervisory practices, if compliant, were 

sufficient.725  As discussed above under Section II.C.3.b, a number of commenters expressed 

                                                                                                                                                             

 

721  See, e.g., Cetera August 2018 Letter; SIFMA August 2018 Letter.  But see CFA August 
2018 Letter (stating that the Commission has proposed an appropriately broad definition 
of material conflicts that arise out of financial incentives and that it should not be 
narrowed but a cleaner approach would be to eliminate the artificial distinction between 
those material conflicts of interest that arise from financial incentives and those that do 
not, and to apply the same obligation to disclose and mitigate all material conflicts, 
whatever the source). 

722  See, e.g., Primerica Letter; Committee of Annuity Insurers Letter; Cetera August 2018 
Letter. See also Wells Fargo Letter (stating that receipt of fees and other revenue that 
does not otherwise result in a direct financial incentive at the registered representative 
level should be disclosed); ICI Letter (recommending revisions to the proposed conflict 
of interest obligation to focus the mitigation obligation on the fees, revenue, or other 
financial incentives that may influence the recommendation of a broker-dealer 
representative  ̶  the individual making the recommendation); Invesco Letter. 

723  See, e.g., UVA Letter. 
724  See, e.g., CFA August 2018 Letter; Wells Fargo Letter; Committee of Annuity Insurers 

Letter; NASAA August 2018 Letter; Cetera August 2018 Letter; Morningstar Letter. 
725  See, e.g., BISA Letter; AALU Letter; Primerica Letter; Committee of Annuity Insurers 

Letter.   



324 

 

concern that the mitigation requirement is a higher standard of conduct than the investment 

adviser fiduciary duty and requested that it be aligned with the fiduciary duty.726 

Many commenters expressed concern over some of the examples, and in particular 

neutral compensation factors, described as a potential mitigation measure.727  Similarly, some 

commenters suggested that the Commission should take more of a principles-based approach as 

they viewed the Proposing Release as too prescriptive because it incorporated examples from the 

DOL Fiduciary Rule.728  One commenter expressed concern over the suggestion that heightened 

mitigation may be appropriate if a retail customer has a less sophisticated understanding, stating 

that it is unclear how mitigation would be measured and could create heightened costs and risks 

for firms.729  Finally, some commenters requested confirmation that certain practices are 

                                                                                                                                                             

 

726  Supra footnote 698.   
727  See, e.g., SIFMA August 2018 Letter; ICI Letter; Edward Jones Letter; Morgan Stanley 

Letter; Transamerica August 2018 Letter; Ameriprise Letter; Capital Group Letter; 
Cetera August 2018 Letter; CCMC Letters; Letter from Michelle Bryan Oroschakoff, 
Chief Legal Officer, LPL Financial (Dec. 18, 2018) (“LPL December 2018 Letter”) 
(requesting confirmation that the non-exhaustive list of potential practices was intended 
merely as a list of examples and are not required mitigation practices); Mass Mutual 
February 2019 Letter.  But see NASAA August 2018 Letter (stating that neutral 
compensation across products could constitute appropriate mitigation), State Attorneys 
General Letter (suggesting differential compensation be permitted based solely on neutral 
factors).  

728  See, e.g., LPL August 2018 Letter; Cetera August 2018 Letter; Davis Harman Letter. 
729  See Primerica Letter. 



325 

 

permissible such as use of compensation grids,730 receipt of revenue sharing,731 differential 

compensation,732 recommendations based on a limited range of products and proprietary 

products,733 and use of employment benefits.734 

In response to commenters, we have revised the Proposing Release’s requirement with 

respect to mitigation to require broker-dealers to establish policies and procedures reasonably 

designed to identify and mitigate any conflicts of interest associated with such recommendations 

that create an incentive for a natural person who is an associated person of a broker- dealer to 

place the interest of the broker-dealer, or such natural person ahead of the interest of the retail 

customer.   

We agree with commenters that it is appropriate to focus on the incentives that directly 

affect the associated person making a recommendation, because we believe those conflicts are 

most likely to undermine the associated person’s ability to make a recommendation that is in the 

best interest of the retail customer, and thus present heightened risk of recommendations that are 

                                                                                                                                                             

 

730  See, e.g., SIFMA August 2018 Letter; Committee of Annuity Insurers Letter; Primerica 
Letter. 

731  See, e.g., SIFMA August 2018 Letter; Cetera August 2018 Letter. 
732  See, e.g., Cetera August 2018 Letter; Transamerica August 2018 Letter; Ameriprise 

Letter. 
733  See, e.g., NY Life Letter; Fidelity Letter; ICI Letter; T.Rowe Letter.  These commenters 

suggested that disclosure would be an appropriate way to address conflicts of interest 
associated with limited product menus and proprietary products. 

734  See, e.g., AALU Letter. 



326 

 

not in a retail customer’s best interest and that place the associated person’s or firm’s interests 

ahead of the retail customer’s interest.  

While disclosure can be an effective tool for retail customers to increase awareness of a 

conflict of interest,735 in certain cases, we do not believe that disclosure alone sufficiently 

reduces the potential effect that these conflicts of interest may have on recommendations made to 

retail customers.736  Instead, we believe that broker-dealers are most capable of identifying and 

addressing the conflicts that may affect the obligations of their associated persons with respect to 

the recommendations they make, and therefore are in the best position, to affirmatively reduce 

the potential effect of these conflicts of interest such that they do not taint the recommendation.  

We are persuaded by commenters737 that expressed concern that requiring broker-dealers 

to establish policies and procedures reasonably designed to mitigate all financial incentives, 

including any compensation, may result in broker-dealers narrowing their product shelf and 

                                                                                                                                                             

 

735  See Section II.C.1, Disclosure Obligation; Relationship Summary Adopting Release.   
736  See, e.g., Tully Report; CFA August 2018 Letter; AARP August 2018 Letter; Warren 

Letter (“the [Commission] should not rely on disclosure alone to protect consumers.”).  
See also DOL Fiduciary Rule Release at 20950.  “Disclosure alone has proven ineffective 
to mitigate conflicts in advice.”  

737  See, e.g., Primerica Letter (“The SEC’s current formulation of the conflicts obligation 
thus inappropriately, and we believe unintentionally, preferences advisory models over 
brokerage models.”); Transamerica August 2018 Letter (expressing concern that the 
proposed interpretation of financial incentives is overbroad and may result in broker-
dealers narrowing their product shelf, which seems inconsistent with the SEC’s stated 
goal of preserving the broker-dealer model to protect an investor’s right to choose 
between brokerage and advisory accounts).   



327 

 

compensation practices which would be inconsistent with the Commission’s stated goal.738  As 

stated in the Proposing Release, while the Commission’s goal in adopting Regulation Best 

Interest is to enhance investor protection by reducing the potential harm to retail customers from 

conflicts of interest that may affect broker-dealer recommendations, we want to do so while 

preserving, to the extent possible, access and choice for investors who prefer to pay for 

investment recommendations on a transaction-by-transaction basis, which is the “pay as you go” 

model that broker-dealers generally provide, as well as preserving retail customer choice of the 

level and types of advice provided and the products available.739  As such, transaction based-

compensation need not be eliminated pursuant to Regulation Best Interest. 

                                                                                                                                                             

 

738  The Commission recognizes that a broker-dealer’s financial or other interest can and will 
inevitably exist.   

739  We are persuaded by commenters regarding the competitive issues for broker-dealers that 
could arise if we require mitigation of firm-level financial incentives, which is not 
required by an investment adviser’s fiduciary duty, and could further encourage 
migration from the broker-dealer to investment adviser model and result in a loss of 
choice for retail customers.  See Section I; CCMC Letters (“Imposing a standard on 
broker-dealers with respect to managing conflicts of interest that is greater than that 
imposed on investment advisers, on top of the additional regulatory obligations to which 
broker-dealers are subject that are not imposed on investment advisers, threatens to 
undermine the SEC’s objective of preserving retail customer choice and access to the 
brokerage advice model and may introduce a new source of confusion when it comes to 
investors’ understanding of the duties they are owed.”); AALU Letter (“Overly-rigid 
mitigation requirements could limit consumer choice of products and access to 
professional financial advice”).  See also 913 Study; Proposing Release at 21575. 

 



328 

 

Accordingly, rather than requiring mitigation of all firm-level financial incentives, we 

have determined to refine our approach by generally allowing firm-level conflicts to be generally 

addressed through disclosure.740  At the same time, we are persuaded by commenters741 that 

there are some conflicts that should be addressed through mitigation at the firm level due to the 

potential impact that we believe certain conflicts of interest (either at the associated person or 

firm level) may have on recommendations to retail customers; therefore we are requiring policies 

and procedures for mitigation or elimination of those conflicts (as identified in the rule text) and 

are not leaving it to the broker-dealer to determine whether disclosure alone is sufficient.742  We 

believe that this approach appropriately balances our goal of reducing the potential harm 

conflicts of interest may have on broker-dealers’ recommendations to retail customers and 

preserving retail access (in terms of choice and cost) to brokerage products and services. 

i. Guidance on Covered Incentives  

                                                                                                                                                             

 

740  As discussed above in the section about the Disclosure Obligation, the Commission 
believes that compliance with the Disclosure Obligation, including disclosure of the 
material facts relating to the scope and terms of the relationship with the retail customer 
and all conflicts of interest, should give sufficient information to enable a retail customer 
to make an informed decision with regard to the recommendation.  See II.D.1.  

Nevertheless, as noted, there may be situations in which disclosure alone may not be 
sufficient to provide “full and fair” disclosure in accordance with the Disclosure 
Obligation discussed above, and the broker-dealer may need to take additional steps to 
mitigate or eliminate the conflict, consistent with an investment adviser’s fiduciary duty.  
See Section II.C.3.d.  

741  See, e.g., CFA August 2018 Letter. 
742  See Section II.C.3.f and g.   



329 

 

The Commission interprets this requirement to establish, maintain, and enforce 

reasonably designed policies and procedures to identify and mitigate any conflicts of interest that 

create an incentive for the associated person to place the interest of the broker-dealer or such 

associated person ahead of the interest of the retail customer, to only apply to incentives 

provided to the associated person, whether by the firm or third-parties that are within the control 

of or associated with the broker-dealer’s business.743  It would not cover external interests of the 

associated person not within the control of or associated with the broker-dealer’s business.744  In 

the case of a dually registered individual, this requirement would generally only apply to 

incentives provided to the associated person when making a recommendation in a brokerage 

                                                                                                                                                             

 

743  The ability to control the compensation of associated person, including incentives, is an 
important mechanism by which broker-dealers exercise supervisory control over sales 
practices.      

744  For example, if an associated person of a broker-dealer participates in a securities 
transaction outside of the broker-dealer and receives compensation, although the broker-
dealer would need to approve the transactions and record it in its books and records under 
FINRA Rule 3280 (Private Securities Transaction of an Associated Person), as described 
in more detail above, this requirement to mitigate certain incentives to an associated 
person would not apply to compensation that is not an incentive provided by or in the 
control of the broker-dealer.  

 Nevertheless,  additional registration, disclosure or other obligations, and antifraud 
liabilities may apply to any other firm through which an associated person may have such 
external interests under federal or state law (for example, as a state-registered adviser).  
We also note that an associated person of a broker-dealer who receives transaction-based 
compensation and participates in a private securities transactions that is not in accordance 
with FINRA Rule 3280 should be mindful of the broker-dealer registration requirements 
under Section 15 of the Exchange Act. 



330 

 

capacity and not when making a recommendation in an investment advisory capacity as the 

investment adviser fiduciary duty would apply to the advice given in that instance.745  

The Commission generally considers the following as examples of incentives to an 

associated person that would need to be addressed under this revised provision: (i) compensation 

from the broker-dealer or from third-parties, including fees and other charges for the services 

provided and products sold; (ii) employee compensation or employment incentives (e.g., 

incentives tied to asset accumulation and not prohibited under (a)(2)(iii)(D), as discussed below, 

special awards, differential or variable compensation, incentives tied to appraisals or 

performance reviews); and (iii) commissions or sales charges, or other fees or financial 

incentives, or differential or variable compensation, whether paid by the retail customer, the 

broker-dealer or a third-party.  These examples focus on compensation that varies based on the 

advice given, such as commissions, markups/markdowns, loads, revenue sharing, and Rule 12b-1 

fees.   

ii. Guidance on Mitigation Methods 

By requiring that a broker-dealer establish policies and procedures reasonably designed 

to “mitigate” these conflicts of interest, we mean the policies and procedures must be reasonably 

designed to reduce the potential effect such conflicts may have on a recommendation given to a 

retail customer.  Thus, whether or not a broker-dealer’s policies and procedures are reasonably 

                                                                                                                                                             

 

745   See Fiduciary Interpretation; Section II.B.3. 



331 

 

designed to mitigate such conflicts will be based on whether they are reasonably designed to 

reduce the incentive for the associated person to make a recommendation that places the 

associated person’s or firm’s interests ahead of the retail customer’s interest. 

As noted in the Proposing Release, in lieu of mandating specific mitigation measures or a 

“one-size fits all” approach, we are providing broker-dealers with flexibility to develop and tailor 

reasonably designed policies and procedures that include conflict mitigation measures, based on 

each firm’s circumstances.746  Reasonably designed policies and procedures should include 

mitigation measures that depend on the nature and significance of the incentives provided to the 

associated person and a variety of factors related to a broker-dealer’s business model (such as the 

size of the broker-dealer, retail customer base (e.g., diversity of investment experience and 

financial needs), and the complexity of the security or investment strategy involving securities 

that is being recommended), some of which may be weighed more heavily than others.  For 

example, more stringent mitigation measures may be appropriate in situations where the 

characteristics of the retail customer base in general displays less understanding  of the 

                                                                                                                                                             

 

746  See Proposing Release at 21618.  See also Letter from Steven W. Stone, Morgan, Lewis 
& Bockius LLP (May 3, 2019) (“Morgan Lewis Letter”) (“The Commission should 
recognize that firms may appropriately employ only some—or various combinations—of 
these approaches depending on their businesses and business models, compensation 
structures, and related conflicts of interest, and should not prescribe a one-size-fits-all 
approach to mitigating compensation-related conflicts.”). 



332 

 

incentives associated with particular securities or investment strategies;747  where the 

compensation is less transparent (for example, an incentive from a third-party or charge built into 

the price of the product or a transaction versus a straight commission); or in a situation involving  

a complex security or investment strategy.748  A broker-dealer could reasonably determine 

through its policies and procedures that the same mitigation measures could apply to a particular 

type of retail customer, type of security or investment strategy, or type of incentive across the 

board; or in some instances a broker-dealer may reasonably determine that some conflicts create 

incentives that may be more difficult to mitigate, and are more appropriately avoided in their 

entirety or for certain categories of retail customers.749   

As noted in the Proposing Release, policies and procedures may be reasonably designed 

at the outset, but may later cease to be reasonably designed based on subsequent events or 

information obtained (for example, such as through supervision (e.g., exception testing) of 

associated person recommendations), and the actual experience of a broker-dealer should be used 

                                                                                                                                                             

 

747  FINRA’s heightened suitability requirements for options trading accounts require that a 
registered representative have “a reasonable basis for believing, at the time of making the 
recommendation, that the customer has such knowledge and experience in financial 
matters that he may reasonably be expected to be capable of evaluating the risks of the 
recommended transaction, and is financially able to bear the risks of the recommended 
position in the complex product.” FINRA Rule 2360(b)(19). 

748  See Proposing Release at 21620-21621.  
749  Id. 



333 

 

to revise the broker-dealer’s measures as appropriate.750  Further, what are considered reasonable 

mitigation measures may vary based on the size of the firm.751  While many broker-dealers have 

programs currently in place to manage conflicts of interest, each broker-dealer will need to 

carefully consider whether its existing framework complies with this provision.752 

In response to commenters’ concerns regarding the potential mitigation methods 

described in the Proposing Release, and, in particular, the references to neutral factors,753 we 

would like to emphasize that this non-exhaustive list of factors is purely illustrative and the 

factors are not required elements.754  In providing these examples, we did not intend to take a 

prescriptive approach, as suggested by some commenters, but a principles-based approach 
                                                                                                                                                             

 

750  Id.  
751  In the FINRA Conflicts Report, FINRA identified certain mitigation measures firms 

implemented that we believe highlight differences in conflict management frameworks, 
based on the size of the firm.  For example, large firms may address conflicts of interest 
through enterprise management or operational risk frameworks, and components of such 
programs, for example, risk and control self-assessments, may provide an opportunity to 
identify and evaluate possible impacts.  By contrast, small firms selling basic products 
may have a conflicts management framework that relies largely on the tone set by the 
firm owner coupled with required supervisory controls, particularly related to suitability, 
and the firm’s compensation structure. See FINRA Conflicts Report. An effective 
practice FINRA observed at a number of firms is implementation of a comprehensive 
framework to identify and manage conflicts of interest across and within firms’ business 
lines that is scaled to the size and complexity of their business. See FINRA Conflicts 
Report at 5.   

752  See Proposing Release at 21621.  
753  See, e.g., Mass Mutual February 2019 Letter; Edward Jones Letter; IRI Letter; Capital 

Group Letter; SIFMA August 2018 Letter; Committee of Annuity Insurers Letter. 
754  See Proposing Release at 21621. 



334 

 

designed to provide flexibility to broker-dealers, depending on their business model, level of 

conflicts, and the retail customers they serve.755    

Among other things, firms may adopt a range of reasonable alternatives to meet the 

mitigation requirement of the Conflict of Interest Obligation.  As noted above, we recognize that 

there are a number of different kinds of incentives and that, depending on the specific 

characteristics of an incentive, different levels and types of mitigation measures may be 

necessary.  For example, incentives tied to asset accumulation generally would present a 

different risk and require a different level or kind of mitigation, than variable compensation for 

similar securities, which in turn may present a different level or kind of risk and may require 

different mitigation methods than differential or variable compensation or financial incentives 

tied to firm revenues.  In certain instances, we believe that compliance with existing supervisory 

requirements and disclosure may be sufficient, for example, where a firm may develop a 

surveillance program to monitor sales activity near compensation thresholds.756   

As discussed above, while not required elements, the Commission believes the following 

non-exhaustive list of practices could be used as potential mitigation methods for firms to 

comply with (a)(2)(iii)(B) of Regulation Best Interest:   

                                                                                                                                                             

 

755  See Proposing Release at 21622. 
756  FINRA Conflicts Report at 30-31.   



335 

 

• avoiding compensation thresholds that disproportionately increase compensation 

through incremental increases in sales;  

• minimizing compensation incentives for employees to favor one type of account 

over another; or to favor one type of product over another, proprietary or 

preferred provider products, or comparable products sold on a principal basis, for 

example, by establishing differential compensation based on neutral factors;757  

• eliminating compensation incentives within comparable product lines by, for 

example, capping the credit that an associated person may receive across mutual 

funds or other comparable products across providers;  

• implementing supervisory procedures to monitor recommendations that are: near 

compensation thresholds; near thresholds for firm recognition; involve higher 

compensating products,758 proprietary products or transactions in a principal 

capacity; or, involve the roll over or transfer of assets from one type of account to 

                                                                                                                                                             

 

757  As noted above, we are not requiring firms to establish differential compensation based 
on neutral factors but do believe firms could choose to do so as potential practice to 
promote compliance with the requirement to establish, maintain, and enforce written 
policies and procedures reasonably designed to identify and mitigate any conflicts of 
interest that create an incentive for an associated person to place its interest ahead of the 
interest of the retail customer. 

758  See Morgan Lewis Letter (suggesting, among other things, that firms can conduct 
surveillance (whether transactions, periodic, or forensic) to identify activity that appears 
to be driven by compensation considerations—whether at the representative, team, or 
business level—rather than a customer’s interest). 



336 

 

another (such as recommendations to roll over or transfer assets in an ERISA 

account to an IRA)
 
or from one product class to another;759  

• adjusting compensation for associated persons who fail to adequately manage 

conflicts of interest; and  

• limiting the types of retail customer to whom a product, transaction or strategy 

may be recommended.760   

While the Commission is providing flexibility so that broker-dealers can determine the 

nature and extent of mitigation, whether a broker-dealer has developed policies and procedures 

reasonably designed to mitigate a conflict is not measured against industry practice (although 

such practice could be a useful point of reference).  Each firm must look at the facts and 

circumstances surrounding the mitigation methods, the particular broker-dealer’s business model, 

and whether or not the policies and procedures were reasonably designed for the particular firm 

to reduce the impact of the incentive in a manner to prevent the incentive from causing the 

associated person to place the broker-dealer’s or the associated person’s interest ahead of the 

retail customer’s interest. 

                                                                                                                                                             

 

759  See FINRA Exam Report 2017. FINRA observed a variety of effective practices in 
recommending the purchase and sale of UITs, including tailoring supervisory systems to 
products’ features and sources of risk to customers.   

760  See, e.g., supra footnote 747; FINRA Regulatory Notice 12-03, Heightened Supervision 
of Complex Products (Jan. 2012). 



337 

 

In response to a commenter’s concern that we suggested in the Proposing Release that 

some compensation conflicts may be more appropriately avoided for certain categories of retail 

customers,761 we would like to clarify that such a suggestion is an example and not a requirement. 

Nevertheless, we are adopting a requirement to establish, maintain, and enforce written policies 

and procedures reasonably designed to eliminate the incentives that we believe create the most 

problematic conflicts, namely incentives to associated persons that are tied to recommendations 

of specific securities or specific types of securities within a limited period of time as we believe 

these incentives cannot be adequately mitigated, and are likely to result in recommendations that 

place the interest of the broker-dealer or associated person ahead of the interests of the retail 

customer.  Furthermore, in accordance with the Care Obligation, a broker-dealer, when making a 

recommendation, is required to, among other things, have a reasonable basis to believe that the 

recommendation is in the best interest of the particular retail customer.762  In particular, and 

consistent with existing suitability obligations, a broker-dealer is required to exercise “reasonable 

diligence” to ascertain (and consider) the retail customer’s investment profile which, among 

                                                                                                                                                             

 

761  See Primerica Letter (“The SEC’s statements in the Proposals regarding the additional 
protections broker-dealers should afford ‘less sophisticated’ retail customers could create 
a sub-class of retail customers that broker-dealers would have to identify based on 
subjective and poorly defined criteria, and potentially further restrict access to help with 
saving and investing for customers who need it most.”). 

762  See Section II.C.2.   



338 

 

other things, includes the retail customer’s investment experience and risk tolerance.763  A 

broker-dealer that has established reasonably designed policies and procedures to mitigate the 

conflicts associated with the incentives provided to the associated person would nevertheless 

violate Regulation Best Interest if the recommendation does not comply with the Care Obligation.   

Finally, in response to commenters’ questions regarding the permissibility of specific 

practices, the Commission believes the revised, explicit requirements related to: mitigation of 

incentives to associated persons as discussed herein; mitigation of any material limitations placed 

on the securities or investment strategies that may be recommended to retail customers; and 

elimination of certain practices, as discussed below, sufficiently address these comments.  To the 

extent the Commission has not identified a practice that needs to be eliminated, it would be 

permitted, subject to compliance with the requirements of Regulation Best Interest.   

f. Mitigation of Material Limitations on Recommendations to Retail Customers 

As part of the proposed requirement to manage conflicts of interest arising from financial 

incentives through mitigation, firms would have been required to establish policies and 

procedures reasonably designed to mitigate the conflicts of interest associated with offering a 

limited range of products and proprietary products.   

We also solicited comment on information related to the magnitude of conflicts of 

interest when broker-dealers recommend, among other things, proprietary products and a limited 

                                                                                                                                                             

 

763  Id.  



339 

 

range of products.  In response, several commenters requested that the Commission confirm that 

a product menu limited to appropriate alternative investments offered by the broker-dealer would 

not violate Regulation Best Interest.764  Some commenters requested we clarify that, for certain 

customers, a firm can limit its offerings to proprietary products or products for which the firm 

receives revenue sharing payments if the limitation is properly disclosed and appropriate to meet 

the retail customer’s needs.765 

                                                                                                                                                             

 

764  See, e.g., SIFMA August 2018 Letter (requesting clarification on how a broker-dealer 
could satisfy the Conflict of Interest Obligation if the platform is limited to certain bond 
offerings); Fidelity Letter (stating that given the vast array of readily available investment 
options and the breadth of securities typically available to customers through broker-
dealers, some limitation of the universe of investment options must be undertaken in 
order for a broker-dealer to adequately understand, compare and formulate a 
recommendation); Prudential Letter (“It is unclear what ‘significantly limits’ means for 
firms that offer predominantly, but not exclusively, proprietary products.  It is also 
unclear what constitutes a ‘small choice of investments.’  Additional examples or more 
prescriptive instructions regarding when firms must disclose such limitations would be 
helpful.”).  See also Guardian August 2018 Letter; LPL August 2018 Letter; LPL 
December 2018 Letter. 

765  See, e.g., SIFMA August 2018 letter; CFA Institute Letter; Letter from Emanuel Alves, 
Senior Vice President and General Counsel, John Hancock Life Insurance Company 
(Aug. 3, 2018) (“John Hancock Letter”); Ameriprise Letter.  See also NY Life Letter 
(recommending the Commission require disclosure of the limits on the universe of 
available products, while allowing further context so that firms describe the full scope 
and impact of those limits); SPARK Letter (recognizing that the SEC did not want to 
mandate specific mitigation procedures or a “one-size-fits” all” approach but requesting 
further guidance in the case of, among other things, broker-dealers who only offer 
proprietary products or only offer limited investment menus). But see CFA August 2018 
Letter (suggesting that simply stating that a firm offers a limited selection of investments 
may not be enough for an investor to understand the limitations). 



340 

 

In consideration of these comments, and our revisions to remove firm-level conflicts 

from the proposed mitigation provision discussed above, we are adopting a new requirement to 

specifically address the conflicts of interest presented when broker-dealers place any material 

limitations on the securities or investment strategies that may be recommended to a retail 

customer (i.e., only make recommendations of proprietary or other limited ranges of products).  

While we generally believe that most firm-level conflicts of interest can be addressed through 

appropriate disclosure, this new provision focuses on the specific firm-level conflicts—namely, 

the conflicts associated with the establishment of a product menu—which we believe are most 

likely to affect recommendations made to retail customers and have the greatest potential to 

result in recommendations that place the interest of the broker-dealer or associated person ahead 

of the interest of the retail customer.766  Given the potential impact on recommendations to retail 

customer, we believe these conflicts should not be left to the broker-dealer to determine whether 

disclosure alone is sufficient, and are requiring broker-dealers to establish, maintain, and enforce 

written policies and procedures reasonably designed to (1) identify and disclose any material 

limitations broker-dealers place on their securities offerings or investment strategies involving 

                                                                                                                                                             

 

766  See CFA August 2018 Letter (“[M]any broker-dealers currently restrict choice by only 
recommending from a limited menu of proprietary funds or by only recommending 
products from companies that make revenue sharing payments. If limits on investor 
choice are of concern to the Commission, surely such limits deserve equal scrutiny. After 
all, evidence suggests that the limited menus offered by some firms consist entirely of 
low quality products that impose excessive costs, deliver inferior returns, and expose 
investors to excessive risk.”)341 

 

securities and any associated conflicts of interest and (2) prevent such limitations and associated 

conflicts of interest from causing the broker-dealer to make recommendations that place the 

broker-dealer’s interest ahead of the interest of the retail customer.   

While we believe broker-dealers should be permitted to limit their product offerings from 

which they make recommendations to retail customers, provided that they comply with 

Regulation Best Interest,767 we are also concerned that without requiring a broker-dealer to have 

a process in place to disclose and address negative effects of such limitations, retail customers 

may be unaware that a broker-dealer offers only a limited set of products and therefore would be 

unable to make an informed investment decision.768  We are also concerned that retail customers 

may be harmed by such limitations if they are more likely to result in recommendations that are 

not in the best interest of the retail customer.769 

                                                                                                                                                             

 

767  See Section II.C.2 for a related discussion of the application of the Care Obligation to 
such limitations.  See also AFL-CIO April 2019 Letter (recommending that the 
Commission make clear that it will hold firms accountable for developing a product 
menu that complies with the first prong of the proposed best interest standard and that 
under such approach, firms would periodically assess their product offerings against other 
products available in the marketplace in order to ensure that their offerings are 
competitive). 

768  See Disclosure Obligation at Section II.C.1.   
769  We believe that by including this requirement to address material limitations to product 

menus, which does not rely on disclosure alone, coupled with the requirements under the 
Care Obligation, we are addressing a commenter’s concern that product limitations can 
limit investor choice which in turn harms investors.  See CFA August 2018 Letter. 



342 

 

Broker-dealers will be required to establish, maintain and enforce written policies and 

procedures reasonably designed to: (i) identify and disclose any material limitations placed on 

the securities or investment strategies involving securities that may be recommended to a retail 

customer and any conflicts of interest associated with such limitations, in accordance with the 

Disclosure Obligation, and (ii) 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. 

As discussed in the context of the Disclosure Obligation and the Relationship Summary, 

for purposes of this requirement, a “material limitation”770 placed on the securities or investment 

strategies involving securities would include, for example, recommending only proprietary 

products (i.e., any product that is managed, issued, or sponsored by the financial institution or 

any of its affiliates), a specific asset class, or products with third-party arrangements (i.e., 

revenue sharing).771  In addition, the fact that the broker-dealer recommends only products from 

a select group of issuers could also be a material limitation.   

                                                                                                                                                             

 

770  As discussed in Section II.C.1, Disclosure Obligation, a limitation is “material” if there is 
“a substantial likelihood that a reasonable shareholder would consider it important.”  
Basic, Inc. v. Levinson, 485 U.S. 224, 224 (1988).  In the context of this Regulation Best 
Interest, this standard would apply in the context of retail customers, as defined.  

771  See II.C.1.; Relationship Summary Adopting Release.   



343 

 

We recognize, however, that, as a practical matter, almost all broker-dealers limit their 

offerings of securities and investment strategies to some degree.  We do not believe that 

disclosing the fact that a broker-dealer does not offer the entire possible range of securities and 

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.772  Rather, 

consistent with the examples of a “material limitation” provided above, whether the limitation is 

material will depend on the facts and circumstances of the extent of the limitation. 

Adopting this revised requirement is critical to ensuring that retail customers are aware of 

any material limitations associated with a broker-dealer’s recommendation and associated 

conflicts of interest and that broker-dealers, through their policies and procedures, establish 

processes to evaluate whether or not such a limited range of products is consistent with making 

recommendations that are in the retail customer’s best interest and that do not place the interests 

of the broker-dealer or associated person ahead of the retail customer’s interest, consistent with 

Care Obligation.773  Broker-dealers would be able to satisfy paragraph (a)(2)(iii)(C)(1) by 

identifying any material limitations and complying with the Disclosure Obligation which, as 

discussed above, requires disclosure of “the type and scope of services provided to the retail 

                                                                                                                                                             

 

772  See Basic, Inc. v. Levinson, 485 U.S. 224, 224 (1988).   
773  See Section II.C.2 and infra footnote 779. 



344 

 

customer, including any material limitations on the securities or investment strategies involving 

securities that may be recommended to the retail customer.”774   

Similar to the requirement to establish, maintain, and enforce written policies and 

procedures reasonably designed to mitigate certain incentives to associated persons, firms will 

have flexibility to develop and tailor reasonably designed policies and procedures to prevent 

such limitations and the associated conflicts from causing the broker-dealer or associated person 

from placing their interest ahead of the retail customer’s interest.  In developing such policies 

and procedures, the Commission believes that firms should, for example, consider establishing 

product review processes for products that may be recommended, including establishing 

procedures for identifying and mitigating the conflicts of interests associated with the product, or 

declining to recommend a product where the firm cannot effectively mitigate the conflict, and 

identifying which retail customers would qualify for recommendations from this product 

menu.775  As part of this process, firms may consider evaluating the use of “preferred lists,” 776 

                                                                                                                                                             

 

774  Section II.C.1. 
775  For example, in its Conflicts Report, FINRA identified the following as effective 

practices to identify and manage conflicts of interest for new products: (i) a product 
review process to identify and mitigate conflicts of interest that may be associated with a 
product; (ii) evaluation of whether to decline to offer products to customers when the 
conflicts associated are too significant to be mitigated effectively; (iii) differentiation of  
product eligibility between institutional and retail clients; (iv) post-launch reviews of  
products to identify potential problems; (v) evaluation of registered representatives’ 
ability to understand a product, provide training where necessary, and limit access to 
products for which they cannot demonstrate sufficient understanding to perform a 

 

 



345 

 

restricting the retail customers to whom a product may be sold, prescribing minimum knowledge 

requirements for associated persons who may recommend  certain products,777 and conducting 

periodic product reviews to identify potential conflicts of interest, whether the measures 

addressing conflicts are working as intended, and to modify the mitigation measures or product 

selection accordingly.778  The Commission’s intent is not to prevent firms from offering 

proprietary products or other limited range of products so long as firms comply with the 

Disclosure, Care,779 and Conflict of Interest Obligations.  In fact, we believe that these 

limitations can be beneficial, such as by helping ensure that a broker-dealer and its associated 
                                                                                                                                                             

 

suitability analysis and effectively explain a product and its risks to customers; and (vi) 
disclosure of product conflicts and risks.  See FINRA Conflicts Report at 3, 18-25.   

776  See FINRA Conflicts Report at 24. 
777  Cf. FINRA Conflicts Report at 19 (stating that as an effective practice in evaluating new 

products, a product review committee may engage in these activities to address conflicts 
of interest).   

778  Cf., e.g., NASD Notice to Members 03-71, Non-Conventional Investments – NASD 
Reminds Members of Obligations When Selling Non-Conventional Investments (Nov. 
2003).  Similarly, under the Compliance Obligation, we suggest that compliance policies 
and procedures’ adequacy and effectiveness should be reviewed as frequently as 
necessary in connection with changes in business activities, affiliations, or regulatory and 
legislative developments.  See Section II.D.4, Compliance Obligation. 

779  In particular, consistent with the Care Obligation and as discussed further in Section 
II.C.2, Care Obligation, 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, 
broker-dealers generally need to evaluate reasonably available alternatives offered by the 
broker-dealer.  When a broker-dealer materially limits is product offerings or offers only 
a limited menu of products, it must still comply with the Care Obligation, and could not 
use its limited menu to justify recommending a product that does not satisfy this 
obligation.  See Section II.C.2. 



346 

 

persons understand the securities they are recommending, as required by the Care Obligation.780  

This requirement is designed to allow firms to determine whether and how to restrict their menu 

of investment options based, among other things, on their retail customer base and area of 

expertise, while protecting the interests of retail customers when recommendations are made 

from such limited menus by requiring firms have a reasonably designed process to identify, 

disclose, and prevent the conflicts of interest associated with such limitations from resulting in 

recommendations that place the broker-dealer’s interests ahead of the retail customer’s interest.   

We also note that the risk that limited product menus result in recommendations that are 

not in the retail customer’s best interest is also addressed through the Care Obligation781 and 

required disclosure pursuant to the Disclosure Obligation.782  

g.  Elimination of Certain Conflicts of Interest 

Under Section 15(l)(2) of the Exchange Act, the Commission may examine and, where 

appropriate, promulgate rules prohibiting or restricting certain sales practices, conflicts of 

interest, and compensation schemes for brokers, dealers, and investment advisers that the 

                                                                                                                                                             

 

780  See also supra footnote 775. 
781  See id. 
782  Material limitations are material facts that need to be disclosed pursuant to the Disclosure 

Obligation.  The Commission is concerned about the potential effect that such limitations 
have on the securities or investment strategies involving securities recommended to a 
retail customer, and any associated conflicts of interest, could have on the ability of a 
broker-dealer to make a recommendation in the best interest of the retail customer.  See 
Disclosure Obligation at Section II.C.1. 



347 

 

Commission deems contrary to the public interest and protection of investors.  As discussed 

below, the Commission finds that it is in the public interest and consistent with the protection of 

investors to require that broker-dealers establish, maintain, and enforce 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 sales of specific securities or specific 

types of securities within a limited period of time.     

In the Proposing Release, the Conflict of Interest Obligation would have required the 

establishment of policies and procedures reasonably designed to at a minimum disclose or 

eliminate all material conflicts of interest related to the recommendation (or to disclose and 

mitigate or eliminate those material conflicts of interest arising from financial incentives).  We 

did not mandate the absolute elimination of, or policies and procedures reasonably designed to 

eliminate any particular conflicts.783  We were concerned that the absolute elimination of 

specified particular conflicts could mean a broker-dealer may not receive compensation for its 

services.784  Our intent, rather, was to identify certain practices that may be more appropriately 

                                                                                                                                                             

 

783  See Proposing Release at 21619.   
784  Id.   



348 

 

avoided for certain categories of retail customers, including, for example, sales contests, trips, 

prizes, and other similar bonuses based on sales of certain securities or accumulation of AUM.785   

We also provided examples of how a broker-dealer could eliminate conflicts of 

interest.786  We requested comment on elimination, including suggestions of whether certain 

conflicts should be required to be eliminated and how broker-dealers could eliminate conflicts of 

interest.  Specifically, we requested comment on whether the Commission should explicitly 

prohibit receipt of certain non-cash compensation (e.g. sales contests, trips, prizes, and other 

bonuses based on sales of certain securities, accumulation of AUM or any other factor).787   

In response, several commenters requested greater certainty as to whether certain 

conflicts of interest should be eliminated and if so, which ones.788  Some commenters generally 

                                                                                                                                                             

 

785  See id.  FINRA rules also establish restrictions on the use of non-cash compensation in 
connection with the sale and distribution of certain types of products.  See FINRA Rules 
2310, 2320, 3221, and 5110. 

786  Proposing Release at 21621-21622. 
787  Id. 
788  See TIAA Letter (“If the SEC were to provide more specific direction as to which 

conflicts are significant enough to warrant complete elimination, broker-dealers would be 
better able to effectively address material conflicts of interest in a manner consistent with 
the SEC’s goals and preferred approach.”); Wells Fargo Letter (“Rather than leaving 
broker-dealers vulnerable to second-guessing, the SEC should either provide more 
guidance on how such conflicts may be mitigated or simply identify a set of financial 
incentives that are prohibited.”); AXA Letter (“In the absence of clear guidance from the 
Commission as to which financial incentives must be eliminated, and not just mitigated 
and disclosed, broker-dealers may be forced to curtail otherwise legitimate practices and 
the sale of certain products and services out of an abundance of caution—thereby 

 

 



349 

 

requested that certain sales contests and financial incentives be prohibited.789  Of these 

commenters, many expressed concern that product-based incentives could lead to 

recommendations that are not in a customer’s best interest, with some commenters stating that 

firms could find ways to mitigate these conflicts790 and others advocating that they should be 

                                                                                                                                                             

 

depriving investors of choice of offerings for which they might otherwise be suited… It 
would also be helpful if the Commission could provide additional examples 
of the types of conflicts (besides “sales contests, trips, prizes . . . based on sales of certain 
securities”) that likely require elimination.”); see also Money Management Institute 
Letter; Northwestern Mutual Letter; AALU Letter.   
 

789  See, e.g., PIABA Letter (favoring a prohibition on compensation structures that would 
incentivize a broker to: recommend a proprietary product or recommend one type of 
product line over another; and/or which would reward the sale of certain products within 
a product line”), Americans for Financial Reform (recommending prohibiting brokers 
from adopting practices, such as sales quotas and contests, that clearly incentivize their 
representatives to base their recommendations on their own financial interests rather than 
the customer’s best interests); NASAA August 2018 Letter (“[W]e encourage the 
Commission to proceed further by declaring these two practices  ̶  sales contests and 
preferential treatment of allocations  ̶  per se impermissible under Regulation Best 
Interest.”); Galvin Letter (identifying the following practices as per se violations of the 
standard as they are contrary to the requirement to provide advice that is in the true best 
interest of customers:  sales contests; sales quotas (especially for in-house products); and 
incentives to sell high-cost and high-risk products); See also Warren Letter; Better 
Markets August 2018 Letter; CFA August 2018 Letter.  But see Primerica Letter (“The 
SEC should recognize that sales contests, trips, prizes, awards, and similar bonuses can 
be used to incentivize positive behavior and clarify there is no per se requirement to 
eliminate such incentives.”). 

790  See, e.g., SIFMA August 2018 Letter (“With respect to product-based sales contests, we 
agree that instances where a firm cannot adequately mitigate incentives that are 
misaligned with the customer’s best interest, the firm should eliminate such sales contests.  
A firm, however, may be able to mitigate such conflicts through several methods…under 
a principles-based regime, we ask that the SEC allow firms to decide whether to mitigate 
or eliminate such conflicts.”); Cetera August 2018 Letter (“A commonly-cited example is 

 

 



350 

 

prohibited in their entirety.791 Other commenters requested clarification that incentives not tied 

to a particular investment product would be permitted and would not need to be eliminated.792  A 

number of commenters requested clarification that incentives based on asset growth would be 

                                                                                                                                                             

 

sales contests or incentives that are focused on sales of a single product. While we agree 
that such arrangements may be per se inappropriate and Cetera does not permit them, this 
judgment is largely subjective. We suggest that reaching consensus on what other 
practices fall into this category would be well-nigh impossible. So long as a broker-dealer 
can demonstrate that it has made a good faith determination regarding identification and 
management of conflicts, it should not be subject to either regulatory action or private 
litigation based on those determinations.”); CFA Institute Letter (“Our view is that 
recommendations aimed at winning sales contests and meeting internal quotas are 
irreconcilable with the concept of a best interest standard and should not be allowed.”). 

  
791  See, e.g., PIABA Letter; CFA August 2018 Letter.  See also Fidelity Letter (“The SEC 

has properly pointed out that certain conflicts of interest can be so problematic that it 
simply may not be possible to mitigate them effectively. For example, we agree that sales 
contests improperly favoring certain investment products over others involve uniquely 
troubling conflicts and should generally be impermissible.”); NY Life Letter (In this 
context, the proposal notes that single product sales contests create conflicts that may best 
be eliminated. We agree that it is inappropriate to use a contest or other non-cash 
compensation to incentivize the sale of a specific investment or variable insurance 
product over other available alternatives, irrespective of a consumer's situation and 
needs.”)  But see AALU Letter (finding that the Commission should not prohibit 
currently-compliant compensation arrangements and business models, including non-cash 
compensation). 

 
792  See, e.g., SIFMA August 2018 Letter; Edward Jones Letter; NY Life Letter; Prudential 

Letter; LPL August 2018 Letter; Transamerica August 2018 Letter; Northwestern Mutual 
Letter; Letter from Eric R. Dinallo, Executive Vice President, General Counsel, Guardian 
Life (Feb. 6, 2019) (“Guardian February 2019 Letter”) ; Primerica Letter; Cambridge 
Letter.  Some of these commenters stated that FINRA’s rules and supervisory practices 
appropriately cover these incentives.  See Transamerica August 2018 Letter; NY Life 
Letter; Northwestern Mutual Letter; Guardian August 2018 Letter; Primerica Letter. 



351 

 

permitted as they do not raise the same types of conflicts present with product-based sales.793  A 

number of commenters expressed concern that provisions requiring elimination of certain 

conflicts could be in conflict with current treatment under the Internal Revenue Code governing 

certain employee benefits.794 

After considering comments, we are modifying the rule text of the Conflict of Interest 

Obligation to include new paragraph (a)(2)(iii)(D), which requires the broker or dealer to 

establish, maintain, and enforce 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 sales of specific securities or specific types of securities within a limited period of 

time.  In adopting this new requirement, the Commission believes it will provide certainty to 

broker-dealers regarding the types of practices where conflicts of interest are so pervasive such 

that they cannot be reasonably mitigated and must be eliminated in their entirety, as we believe 

they create too strong of an incentive for the associated persons to make a recommendation that 

                                                                                                                                                             

 

793  Generally these commenters believed that programs tied to assets under management, 
total production or revenue growth do not give associated persons an incentive to 
recommend specific securities that may be inconsistent with a customer’s best interest.  
See, e.g., SIFMA August 2018 Letter; Bank of America Letter; Edward Jones Letter; 
Transamerica August 2018 Letter; ASA Letter; UBS Letter; Fidelity Letter; NY Life 
Letter; Money Management Institute Letter; IPA Letter.   

794  See AALU Letter; NY Life Letter; Guardian February 2019 Letter; Northwestern Mutual 
Letter. 



352 

 

places their financial or other interest ahead of the interest of retail customers’ interests and 

therefore would be inconsistent with Regulation Best Interest.795  

The requirement is designed to eliminate sales contests, sales quotas, bonuses and non-

cash compensation that are based on the sales of specific securities and specific types of 

securities within a limited period of time.  We believe that these practices, particularly when 

coupled with a time limitation, create high-pressure situations for associated persons to engage in 

sales conduct contrary to the best interest of retail customers.  For purposes of this requirement, 

we interpret non-cash compensation to mean any form of compensation received in connection 

with the sale and distribution of specific securities or specific types of securities that is not cash 

compensation, including but not limited to merchandise, gifts and prizes, travel expenses, meals 

and lodging except we do not intend it to cover certain employee benefits, including healthcare 

and retirement benefits.796  We recognize that some associated persons may focus their business 

on certain general categories of securities (e.g., mutual funds, variable annuities, bonds, or 

equities) and that broker-dealers may provide compensation or other incentives related to such 

sales.  As discussed further herein, this requirement is not designed to prohibit broker-dealers 

                                                                                                                                                             

 

795  See Section I.  See also AFL-CIO April 2019 Letter (“The Commission must provide 
greater clarity regarding how the obligation to eliminate or mitigate conflicts would apply 
to different types of conflicts.  In particular, it must make clear that conflicts cannot be 
addressed through disclosure alone and that firms would be prohibited from artificially 
creating harmful incentives that undermine compliance with the best interest standard.”). 

796  Infra footnote 803 and accompanying text. 



353 

 

from providing such incentives, provided that they do not create high-pressure situations to sell a 

specifically identified type of security (e.g., stocks of a particular sector or bonds with a specific 

credit rating) within a limited period of time, such that the associated person cannot make a 

recommendation in the retail customer’s best interest.   

We believe the conflicts created by these practices are in direct opposition to our goal of 

reducing the effect of conflicts of interest on broker-dealer recommendations to retail 

customers.797  We agree with many commenters that broker-dealers cannot reasonably be 

expected to make recommendations in a particular retail customer’s best interest consistent with 

the requirements of the Care Obligation, if they are motivated to “push” certain securities or 

types of securities in order to win a contest or reach a target in order to receive a bonus or other 

non-cash compensation.  We are also persuaded that it would be difficult, if not impossible, for a 

firm to establish reasonably designed policies and procedures to sufficiently mitigate the 

incentive created to put the broker-dealer’s interest ahead of the retail customer’s interest, as 

discussed above, as the point of these practices is simply to increase the sale a particular security 

or type of security, for example, in the context where a broker-dealer is attempting to reduce its 

inventory of or exposure to that security.  Accordingly, we believe that these practices should be 

                                                                                                                                                             

 

797  See Section I. 



354 

 

eliminated in order to enhance investor protection798 and achieve the goals of Regulation Best 

Interest.  

By explicitly requiring broker-dealers to establish, maintain, and enforce written policies 

and procedures reasonably designed to eliminate certain practices, we believe we are responding 

to commenters who requested certainty as to which specific incentives are prohibited.799 Also in 

response to commenters requesting clarification as to what practices would be permitted, the 

requirement to have reasonably designed written policies and procedures to eliminate sales 

contests, sales quotas, bonuses, and non-cash compensation applies only to those that are based 

on the sales of specific securities or types of securities, and does not apply to compensation 

practices based on, for example, total products sold, or asset growth or accumulation,800 and 

customer satisfaction.  In addition, this elimination requirement would not prevent firms from 

offering only proprietary products, placing material limitations on the menu of products, or 

incentivizing the sale of such products through its compensation practices, so long as the 
                                                                                                                                                             

 

798  See Chairman Jay Clayton, Statement on Investor Roundtables Regarding Standards of 
Conduct for Investment Professionals Rulemaking (Aug. 22, 2018), available at 
https://www.sec.gov/news/public-statement/statement-clayton-082218. See also CFA 
Institute; CFA. 

799  See supra footnote 788 and accompanying text. 
800  See CCMC Letters (asserting that increasing assets under management is a natural 

outgrowth of serving clients well and is fundamentally different from sales contests based 
on a particular product); UBS Letter (stating that compensation and other rewards based 
on the growth of overall revenues or assets under management should continue to be 
permitted as they do not incent sales of one product over another but instead simply 
reward overall business growth).   



355 

 

incentive is not based on the sale of specific securities or types of securities within a limited 

period of time.801  While conflicts of interest are also associated with sales contests, sales quotas, 

bonuses and non-cash compensation that apply to, among other things, total products sold, or 

asset accumulation and growth, we agree with commenters802 these conflicts present less risk 

that the incentive would compromise compliance with the Care Obligation and Conflict of 

Interest Obligation such that a recommendation could be made that is in a retail customer’s best 

interest and that does not place the place the interest of the broker-dealer or associated person 

ahead of the interest of the retail customer.   

We also recognize that certain production requirements may exist for other reasons, 

specifically to maintain a contract of employment.803 As discussed above, we do not intend to 

                                                                                                                                                             

 

801  Although we are not defining what would constitute a “limited period of time,” as noted 
above, we are concerned about time limitations that create high-pressure situations for 
associated persons to increase the sales of specific securities or specific types of 
securities which compromise the best interests of their customers.   

802  See, e.g., Ameriprise Letter (“We believe such concerns around incentives do not exist 
with respect to programs that reward asset growth or asset flows, or recruitment bonuses 
tied to assets under management or revenue growth because these programs do not give 
associated persons an incentive to recommend specific securities that may not be 
consistent with a customer's best interest.“); Empower Letter (“We also believe asset-
gathering or account-retention incentives should not be subject to the same level of 
scrutiny as incentives aimed at increasing sales of particular securities. The potential for a 
conflict of interest to result in a bad outcome for a retail investor is much higher when a 
recommendation is related to individual securities rather than the type of account in 
which such securities should be held.”) 

 
803  See Prudential Letter; NY Life Letter; Guardian February 2019 Letter; AALU Letter.  

Under the Internal Revenue Code, statutory employees are eligible for certain employee 
 

 



356 

 

prohibit the receipt of certain employee benefits by statutory employees, and do not believe this 

provision would apply, as we do not consider these benefits to be non-cash compensation for 

purposes of Regulation Best Interest.  In addition, we do not intend to prohibit training or 

education meetings, including attendance at company-sponsored meetings such as annual 

conferences,804 provided that these meetings are not based on the sale of specific securities or 

type of securities within a limited time period.   

We emphasize that prohibiting certain incentives does not mean that all other incentives 

are presumptively compliant with Regulation Best Interest.  As discussed above, 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, and the broker-dealer and its associated persons comply with the Care 

Obligation.  Nevertheless, if the firm determines that the conflicts associated with these practice 

are too difficult to disclose and mitigate, the firm should consider carefully assessing whether it 

is able to satisfy its best interest obligation in light of the identified conflict and in certain 

circumstances, may wish to avoid such practice entirely.   

                                                                                                                                                             

 

benefits such as 401(k) and health insurance.  In order to qualify under this definition, 
full time life insurance sales agents must devote their principal business to the solicitation 
of life insurance or annuities primarily for one company.  See Department of Treasury, 
Internal Revenue Service, Employer’s Supplemental Tax Guide, Publication 15-A 
(2018), available at https://www.irs.gov/pub/irs-pdf/p15a.pdf. 

804  See Guardian August 2018 Letter; NY Life Letter. 



357 

 

4. Compliance Obligation 

As proposed, under the Conflict of Interest Obligation, a broker-dealer entity805 would be 

required 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.  As discussed above, in response to commenters, we have made modifications 

to the Conflict of Interest Obligation to more appropriately focus on the conflicts of interest that 

create an incentive for broker-dealers and their associated persons to place the interest of the 

broker-dealer or the associated person ahead of the interest of the retail customer.   

We solicited comment on the proposed requirement to establish, maintain, and enforce 

certain policies and procedures as part of the Conflict of Interest Obligation, including whether 

we should require policies and procedures specifically to assist compliance with Regulation Best 

Interest.  While commenters generally viewed the requirement to adopt policies and procedures 

as an effective means of addressing conflicts of interest,806 some commenters suggested 

broadening this requirement to a general policies and procedures obligation that would be 

                                                                                                                                                             

 

805  See supra footnote 671. 
806  See CFA August 2018 Letter; Fidelity Letter; Vanguard Letter; FPC Letter. 



358 

 

reasonably designed to ensure that recommendations are made in the customer’s best interest or 

reasonably designed to ensure compliance with Regulation Best Interest as a whole.807   

After considering the comments received, we are adopting the Compliance Obligation, 

which requires, in addition to the policies and procedures required by the Conflict of Interest 

Obligation, that broker-dealer entities808 establish, maintain and enforce written policies 

procedures reasonably designed to achieve compliance with Regulation Best Interest.  The 

Compliance Obligation creates an affirmative obligation under the Exchange Act with respect to 

the rule as a whole,809 while providing sufficient flexibility to allow broker-dealers to establish 

                                                                                                                                                             

 

807  See CFA August 2018 Letter; UBS Letter.  
808  Similar to the Conflict of Interest Obligation, the Compliance Obligation 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 Compliance Obligation, the term 
“broker-dealer” refers only to the broker-dealer entity, and not to such individuals.  See 
footnote 671 and accompanying text. 

809  As noted in the Proposing Release, broker-dealers are currently subject to supervisory 
obligations under Section 15(b)(4)(E) of the Exchange Act and SRO rules, including the 
establishment of policies and procedures reasonably designed to prevent and detect 
violations of, and to achieve compliance with, the federal securities laws and regulations, 
as well as applicable SRO rules.  See Proposing Release at 21622.  Specifically, the 
Exchange Act authorizes the Commission to sanction a broker-dealer or any associated 
person that fails to reasonably supervise another person subject to the firm’s or the 
person’s supervision that commits a violation of the federal securities laws.  Exchange 
Act Sections 15(b)(4)(E) and (b)(6)(A).  The Exchange Act provides an affirmative 
defense against a charge of failure to supervise where reasonable procedures and systems 
for applying the procedures have been established and effectively implemented without 
reason to believe those procedures and systems are not being complied with.  Id.  While 
the Compliance Obligation creates an explicit requirement, we believe that broker-dealers 
would likely establish policies and procedures to comply with Regulation Best Interest 

 

 



359 

 

compliance policies and procedures that accommodate a broad range of business models.810  The 

Commission believes that the Compliance Obligation is important to help ensure that broker-

dealers have strong systems of controls in place to prevent violations of Regulation Best Interest, 

including the component Disclosure and Care Obligations, in addition to the policies and 

procedures required pursuant to the Conflict of Interest Obligation, and to protect the interests of 

retail customers.811  

As with the policies and procedures requirement included in the Conflict of Interest 

Obligation, whether policies and procedures are reasonably designed to comply with Regulation 

                                                                                                                                                             

 

pursuant to Section 15(b)(4)(E).  In order to comply, broker-dealers could adjust their 
current systems of supervision and compliance, as opposed to creating new systems.   

810  This approach is similar to the one taken under rule 206(4)-7 under the Advisers Act 
which requires policies and procedures reasonably designed to prevent violations of the 
Advisers Act, which should be tailored to address compliance considerations relevant to 
the operations of each adviser.  See Compliance Programs of Investment Companies and 
Investment Advisers, Advisers Act Release No. 2204 (Dec. 17, 2003) (“Advisers Act 
Release 2204”).  See also Questions Advisers Should Ask While Establishing or 
Reviewing Their Compliance Programs (May 2006), available at 
https://www.sec.gov/info/cco/adviser_compliance_questions.htm (“No one standard set 
of policies and procedures will address the requirements established by the Compliance 
Rule for all advisers because each adviser is different, has different business relationships 
and affiliations, and therefore, has different conflicts of interest.”). 

811  Similar to the discussion included under Section II.C.3.a, we believe that policies and 
procedures to comply with Regulation Best Interest 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.     



360 

 

Best Interest will depend on the facts and circumstances of a given situation.812  As such, the 

Compliance Obligation does not enumerate specific requirements that broker-dealers must 

include in their policies and procedures as broker-dealers are too varied in their operations for 

rules to impose a single set of universally applicable specific required elements.  Each broker-

dealer when adopting policies and procedures should consider the nature of that firm’s 

operations and how to design such policies and procedures to prevent violations from occurring, 

detect violations that have occurred, and to correct promptly any violations that have occurred.813   

A firm’s compliance policies and procedures should be reasonably designed to address 

and be proportionate to the scope, size, and risks associated with the operations of the firm and 

the types of business in which the firm engages.814  As such, the Commission is not mandating 

specific requirements pursuant to the Compliance Obligation.  In addition to the required policies 

and procedures, depending on the size and complexity of the firm, we believe a reasonably 

designed compliance program generally would also include:815 controls; remediation of non-

compliance;816 training;817 and periodic review and testing.818    

                                                                                                                                                             

 

812  See Section II.C.3. 
813  See Advisers Act Release 2204. 
814  See Section II.C.3.a. 
815  Cf. FINRA Conflicts Report at 6 (identifying supporting structures, policies, processes, 

controls and training as critical to protect customers and the firm). 
816  Id. at 10 (“Most firms’ policies describe an escalation process for handling those conflicts 

of interest that cannot be handled through other firm policies….”).361 

 

D. Record-Making and Recordkeeping 

In connection with proposed Regulation Best Interest, we proposed new record-making 

and recordkeeping requirements for broker-dealers with respect to certain information collected 

from or provided to retail customers.  Specifically, we proposed amendments to Exchange Act 

Rules 17a-3 and 17a-4, which specify minimum requirements with respect to the records that 

broker-dealers must make, and how long those records and other documents must be kept, 

respectively.  We received several comments on the proposed new requirements and are adopting 

them substantially as proposed with additional clarifications and guidance to address 

commenters’ concerns. 

 We proposed amending Rule 17a-3819 to add a new paragraph (a)(25), which would 

require, for each retail customer to whom a recommendation of any securities transaction or 

investment strategy involving securities is or will be provided, a record of all information 

collected from and provided to the retail customer pursuant to Regulation Best Interest, as well 

as the identity of each natural person who is an associated person of a broker or dealer, if any, 

                                                                                                                                                             

 

817  “For firms, training is an important vehicle to communicate firm culture, specific 
requirements of a firm’s code of conduct and its conflicts management framework.”  Id. 
at 15. 

818  Cf. Questions Advisers Should Ask While Establishing or Reviewing Their Compliance 
Programs (May 2006), available at 
https://www.sec.gov/info/cco/adviser_compliance_questions.htm; FINRA Conflicts 
Report. 

819  See Exchange Act Rule 17a-3. 



362 

 

responsible for the account.  The new paragraph would specify that the neglect, refusal, or 

inability of a retail customer to provide or update any such information would excuse the broker-

dealer from obtaining that information.   

We are adopting the provision substantially as proposed but redesignating it as new 

paragraph (a)(35) of Rule 17a-3.820  We are also amending the text of paragraph (ii) of the 

amendment as adopted to refer to “any information described in paragraph (a)(35)(i) of this 

section” rather than the proposed “any information required under paragraph (a)(25)(i) of this 

section.”  This is a non-substantive change reflecting the fact that paragraph (i) of the new 

provision requires a record of the information collected from a retail customer by the broker-

dealer pursuant to Regulation Best Interest; it does not require the information itself directly as 

implied by the original wording of paragraph (i) of the proposed amendment.  It is therefore 

more accurate to refer in paragraph (ii) to the information “described in,” rather than “required 

under,” paragraph (i), as well as to update the reference in paragraph (ii) to “paragraph (a)(35)(i) 

of this section.” 

Several commenters expressed concern that the proposed rule amendment would 

significantly expand recordkeeping requirements.821  One commenter expressed concern that the 

record retention requirements of the proposed new paragraph to Rule 17a-3 would apply to each 

                                                                                                                                                             

 

820  The Commission is also reserving paragraphs (a)(24) through (a)(34) of Rule 17a-3 for 
use in connection with future rulemakings. 

821  See SIFMA August 2018 Letter; Edward Jones Letter; Primerica Letter. 



363 

 

recommendation made by the broker-dealer rather than to each account (as required by existing 

paragraph (a)(17) of Rule 17a-3, which operates on a per-account basis).  Another commenter 

requested clarification that “the current books and records requirement is sufficient to meet 

record-keeping requirements to satisfy Reg BI,” adding that the Commission should “affirm that 

Reg BI does not create new record-keeping requirements to prove that an advisor acted in a 

client’s best interest.”822  

The Commission notes that the proposed new requirements of Rule 17a-3 are not 

designed to create additional, standalone burdens for broker-dealers but instead to provide a 

means by which they can demonstrate, and Commission examiners can confirm, their 

compliance with the new substantive requirements of Regulation Best Interest.  In response to 

commenter concerns that the proposed requirements would significantly expand their 

recordkeeping obligations, we reiterate that, as stated in the Proposing Release, broker-dealers 

should already be attempting to collect much of the information that would be required under 

Regulation Best Interest pursuant to the FINRA suitability rule and existing Exchange Act books 

and records rules.  For example, we note that under existing Rule 17a-3(a)(17), broker-dealers 

that make recommendations for accounts with a natural person as customer or owner are already 

required to create and periodically update customer account information, although as part of 

developing a “retail customer’s investment profile,” Regulation Best Interest may require broker-

                                                                                                                                                             

 

822  See Raymond James Letter. 



364 

 

dealers to seek to obtain certain retail customer information that is currently not required by Rule 

17a-3(a)(17).823  In addition, Regulation Best Interest would require broker-dealers to disclose in 

writing the material facts relating to the scope and terms of their relationship with the retail 

customer and the material facts relating to conflicts of interest that are associated with the 

investment recommendations provided to the retail customer.  As such, it would not be accurate 

to state, as suggested by the commenter, that the Commission’s current books and records 

requirements for broker-dealers are sufficient to meet recordkeeping requirements to satisfy 

Regulation Best Interest.  The additional books and records requirements the Commission is 

adopting today are designed to allow firms to demonstrate compliance with the substantive 

requirements of Regulation Best Interest. 

We further note that the new record-making requirements would not require the 

duplication of existing records.  Rather, if a broker-dealer relied upon previously existing records 

to demonstrate its compliance with Regulation Best Interest for a given recommendation, it 

would not be required to create and preserve duplicate copies but instead could create a new 

record noting which pre-existing documents were provided to the customer, or what customer 

                                                                                                                                                             

 

823  See Exchange Act Rule 17a-3(a)(17).  As explained in the Proposing Release, Rule 17a-
3(a)(17) applies to each account with a natural person as a customer or owner, while 
proposed Regulation Best Interest would apply to each recommendation of any securities 
transaction or investment strategy involving securities to a retail customer.  Because of 
this difference, the Commission believes it would be appropriate to locate the record-
making requirements related to Regulation Best Interest in a new paragraph of Rule 17a-
3 rather than in an amendment to paragraph (a)(17). 



365 

 

information already being preserved by the broker-dealer was relied upon, to meet the 

obligations of Regulation Best Interest.  However, reliance upon previously existing records 

would only be permissible so long as such records are preserved—a record noting that a 

document was relied upon would no longer meet the recordkeeping obligations of Regulation 

Best Interest if such document was no longer preserved by the broker-dealer.  

Commenters also requested that the Commission limit new recordkeeping requirements 

to customer profile information itself, not the “related and underlying communications.”824  In 

response to these concerns, the Commission clarifies that new paragraph (a)(35) of Rule 17a-3 as 

adopted requires a record of all information collected from and provided to the retail customer 

pursuant to Regulation Best Interest.  Regulation Best Interest does not reference, and the 

Commission does not intend that it require, “related and underlying communications”—rather, it 

applies only to the information that is actually provided to or obtained from the customer 

pursuant to Regulation Best Interest.  Once again, the purpose of the new record-making 

provision is to allow broker-dealers to demonstrate their compliance with the substantive 

requirements of Regulation Best Interest.  Complying with those substantive requirements will 

require broker-dealers to obtain from and provide to customers certain information, and new 

paragraph (a)(35) of Rule 17a-3 requires a record of such information.  In response to comments 

received requesting clarification as to whether information provided to or obtained from a 

                                                                                                                                                             

 

824  See SIFMA August 2018 Letter; Morgan Stanley Letter. 



366 

 

customer orally would be covered by the new record-making requirements,825 the Commission 

clarifies that the requirements of new paragraph (a)(35) of Rule 17a-3 apply to all information 

collected from or provided to a retail customer pursuant to Regulation Best Interest, whether 

provided orally or in writing (electronically or otherwise).826 

Several commenters requested clarification that, except with respect to the specific 

recordkeeping requirements in the rule text, Regulation Best Interest does not require additional 

records (e.g., records to evidence best interest determinations on a recommendation-by-

recommendation basis).827  One commenter also stated that, as drafted, there are significant 

obstacles and costs, including increased privacy and cybersecurity risks, that would result from 

implementing the proposed new rule, in particular with respect to the “all information collected 

from….the retail customer” requirement.828   

In response, the Commission clarifies that while the substantive requirements of 

Regulation Best Interest apply on a recommendation-by-recommendation basis, consistent with 

our approach elsewhere, we are not requiring that broker-dealers create and maintain records to 

                                                                                                                                                             

 

825  See SIFMA August 2018 Letter; Primerica Letter. 
826  In the case of information provided orally under the circumstances outlined in Section 

II.C.1, Disclosure Obligation, Oral Disclosure or Disclosure After a Recommendation, 
the broker-dealer must maintain a record of the fact that oral disclosure was provided to 
the retail customer. 

827  See SIFMA August 2018 Letter; Edward Jones Letter; Morgan Stanley Letter; CCMC 
Letters. 

828  See Primerica Letter. 



367 

 

evidence best interest determinations on a recommendation-by-recommendation basis.  Nor have 

we determined to require broker-dealers to provide information to retail customers relating to the 

basis for each particular recommendation (i.e., disclose such information), and thus did not 

envision this information to come within the scope of Rule 17(a)(35).     

 Rather, in order to demonstrate compliance with Regulation Best Interest, a broker-dealer 

must be able to demonstrate that it had a reasonable basis to believe that each particular 

recommendation made to a retail customer was in the best interest of the customer at the time of 

the recommendation based on the customer’s investment profile and the potential risks, rewards, 

and costs associated with the recommendation.  As noted above, the Commission does not intend 

this to require, in practice, the creation of extensive new and potentially duplicative records for 

each and every recommendation to a retail customer.  Instead, broker-dealers should be able to 

explain in broad terms the process by which the firm determines what recommendations are in its 

customers’ best interests, and similarly to explain how that process was applied to any particular 

recommendation to a retail customer.  However, we are not mandating that broker-dealers create 

and maintain a record of each such determination.  Nonetheless, as noted above we are providing 

guidance suggesting that firms may wish to adequately document an evaluation of a 

recommendation and the basis for that recommendation in particular contexts, such as the 



368 

 

recommendation of a complex product, or where a recommendation may seem inconsistent with 

a retail customer’s investment objectives on its face.829      

In addition, in response to requests from commenters for confirmation that the proposed 

record-making requirements do not contemplate broker-dealers needing to create and maintain 

records of why certain products were recommended over others on a recommendation-by-

recommendation basis,830 we confirm that broker-dealers are not expected to maintain records 

comparing potential investments to one another so long as they are able to demonstrate that each 

individual recommendation actually made to a customer meets the requirements of Regulation 

Best Interest on its own.  Regulation Best Interest applies to recommendations made to a retail 

customer, rather than to potential recommendations considered by the broker-dealer but not 

actually made to the customer. 

In response to the commenter’s privacy and cybersecurity concerns with respect to the 

proposed requirement to make a record of all information collected from the customer pursuant 

to Regulation Best Interest, as noted in the Proposing Release831 and Section II.C above, 

although a broker-dealer’s customer obligations under Regulation Best Interest (e.g., the Care 

Obligation) go beyond those set forth in the FINRA’s suitability rule, the concept of the 

                                                                                                                                                             

 

829  See supra footnote 610 and accompanying text. 
830  See SIFMA August 2018 Letter; CCMC Letters. 
831  Proposing Release at 21611 (noting that Retail Customer Investment Profile is consistent 

with FINRA Rule 2111(a) (Suitability)). 



369 

 

“customer’s investment profile” that a broker-dealer would be required to compile—that is, the 

customer information it would be required to obtain—pursuant to Regulation Best Interest is 

consistent with that under FINRA’s suitability rule.  As such, we believe that since broker-

dealers are already required to seek to obtain identical types of retail customer information 

pursuant to the FINRA suitability rule, broker-dealers should already have in place policies and 

procedures, including training programs, to address such privacy and cybersecurity concerns. 

We also proposed an amendment to paragraph (e)(5) of Rule 17a-4, which currently 

requires broker-dealers to maintain and preserve in an easily accessible place all account 

information required by paragraph (a)(17) of Rule 17a-3 for at least six years after the earlier of 

the date the account was closed or the date on which the information was replaced or updated.832  

The proposed amendment would require broker-dealers to retain any information that the retail 

customer provides to the broker-dealer or the broker-dealer provides to the retail customer 

pursuant to the proposed amendment to Rule 17a-3 being adopted today as Rule 17a-3(a)(35), in 

addition to the existing requirement to retain information obtained pursuant to Rule 17a-3(a)(17).  

As a result, broker-dealers would be required to retain all records of the information collected 

from or provided to each retail customer pursuant to Regulation Best Interest for at least six 

years after the earlier of the date the account was closed or the date on which the information 

was replaced or updated.  The Commission is adopting this amendment to Rule 17a-4(e)(5) 

                                                                                                                                                             

 

832  See Exchange Act Rule 17a-4(e)(5). 



370 

 

substantially as proposed, with the proposed reference to paragraph (a)(25) of Rule 17a-3 

replaced with a reference to paragraph (a)(35) to reflect the redesignation of the latter new rule 

provision as discussed above. 

The Commission received several comments regarding the proposed amendment to Rule 

17a-4 requesting clarification as to what communications would be required to be retained 

pursuant to the proposed rule amendment beyond those already required to be retained by 

existing paragraph (b)(4) of Rule 17a-4.833  Rule 17a-4(b)(4) requires broker-dealers to retain 

originals of all communications received and copies of all communications sent by the broker-

dealer relating to its business as such for a period of not less than three years, the first two in an 

easily accessible place. 

In response, the Commission notes that while the records that a broker-dealer would be 

required to make in connection with Regulation Best Interest under new paragraph (a)(35) of 

Rule 17a-3 may be “business as such” records, the Commission believes it is important, 

including for examination purposes, that broker-dealers separately retain records that specifically 

demonstrate compliance with Regulation Best Interest and new paragraph (a)(35) of Rule 17a-3 

rather than simply including them in the much broader “business as such” category required to 

be retained under Rule 17a-4(b)(4).  Rule 17a-3(e)(5) currently serves the purpose of allowing 

broker-dealers to demonstrate compliance with the customer information records required to be 
                                                                                                                                                             

 

833  See Exchange Act Rule 17a-4(b)(4); SIFMA August 2018 Letter; Edward Jones Letter; 
Prudential Letter. 



371 

 

made pursuant to Rule 17a-3(a)(17), and the amendment to Rule 17a-3(e)(5) being adopted today 

will serve the same purpose with respect to records required to be retained by broker-dealers to 

demonstrate compliance with Regulation Best Interest and new paragraph (a)(35) of Rule 17a-3.  

Finally, as noted in the Proposing Release, the written policies and procedures that 

broker-dealers will be required to create pursuant to Regulation Best Interest are already 

currently required to be retained pursuant to Exchange Act Rule 17a-4(e)(7),834 which requires 

broker-dealers to retain compliance, supervisory, and procedures manuals (and any updates, 

modifications, and revisions thereto) describing the policies and practices of the broker-dealer 

with respect to compliance with applicable laws and rules, and supervision of the activities of 

each natural person associated with the broker-dealer, for a specified period of time.  As such, 

we did not propose, and are not adopting, any additional recordkeeping requirements with 

respect to the written policies and procedures that broker-dealers will be required to create 

pursuant to Regulation Best Interest. 

E. Compliance Date 

We are providing a compliance date of June 30, 2020, consistent with the transition 

provisions described in the Relationship Summary Adopting Release.835  In light of the 

importance of the protections provided by Regulation Best Interest, we believe that this 

                                                                                                                                                             

 

834  See Exchange Act Rule 17a-4(e)(7). 
835  See Relationship Summary Adopting Release.   



372 

 

compliance date will provide adequate notice and opportunity for broker-dealers to comply with 

Regulation Best Interest, including by creating or updating the necessary disclosures and to 

developing, updating or establishing their policies and procedures and systems, as appropriate, to 

achieve compliance with Regulation Best Interest.  On and after the Compliance Date, broker-

dealers that provide recommendations of securities transactions or investment strategies that 

register with the Commission would be required to comply with Regulation Best Interest as of 

the date of registration. 

While most commenters requested an implementation period of 18-24 months,836 one 

commenter requested an implementation period of 12-18 months.837  We believe the operational 

capability needed to develop processes to comply with Regulation Best Interest is sufficiently 

established by firms of all sizes and resources.  While we understand commenters’ requests for 

periods longer than 12 months after effectiveness, the Commission has determined, in light of the 

importance of the protections afforded by Regulation Best Interest to retail customers, that a 

Compliance Date of one year after effectiveness is an appropriate timeframe for firms to conduct 

                                                                                                                                                             

 

836  See Cetera August 2018 Letter; SIFMA August 2018 Letter; HD Vest Letter 
(recommending that the Commission adopt a 24-month implementation period); 
Northwestern Mutual Letter; IRI Letter (recommending that the Commission adopt an 
18-to-24-month implementation period); CCMC Letters; AXA Letter (recommending 
that the Commission adopt at least an 18-month implementation period); ACLI Letter; 
TIAA Letter (recommending that the Commission adopt an 18-month implementation 
period). 

837  See Raymond James Letter (recommending that the Commission adopt a 12-18-month 
implementation period). 



373 

 

the requisite operational changes to their systems to establish internal processes to comply with 

Regulation Best Interest.838    

The Commission also believes that it is important to coordinate the transition dates of the 

Relationship Summary requirements with those of Regulation Best Interest to ensure that all 

retail investors receive the full suite of protections and benefits afforded by the amended and 

new rules.  Finally, the Commission staff intends to 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. 

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 

Regulation Best Interest enhances the broker-dealer standard of conduct beyond existing 

suitability obligations and aligns the standard of conduct with retail customers’ reasonable 

expectations.  

Under Regulation Best Interest, broker-dealers and their associated persons will be 

required 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 an associated person 

                                                                                                                                                             

 

838  See footnote 809 and accompanying text. 



374 

 

making the recommendation ahead of the interests of the retail customer.  They also will be 

required to 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 the Commission has determined that disclosure is 

insufficient to reasonably address the conflict, to mitigate or, in certain instances, eliminate the 

conflict.  As a result, Regulation Best Interest should enhance the efficiency839 of 

recommendations that broker-dealers provide to retail customers, allow retail customers to better 

evaluate the recommendations received, improve retail customer protection when receiving 

recommendations from broker-dealers, and, ultimately, reduce agency costs840 and other costs.  

Importantly, Regulation Best Interest is designed to preserve, to the extent possible, (1) access 

and choice for investors who may prefer the transaction-based model that broker-dealers 

generally provide, or the fee-based model that investment advisers generally provide, or a 

combination of both types of arrangements, and (2) retail customer choice of the level and types 

of services provided and the securities available.  For example, retail customers who intend to 

buy and hold a long-term investment on a non-discretionary basis may find that paying a one-

time commission to a broker-dealer who recommends such an investment is more cost effective 

than paying an ongoing advisory fee to an investment adviser merely to hold the same 

                                                                                                                                                             

 

839  See infra footnote 846 and accompanying text. 
840  See infra footnote 855 and accompanying text. 



375 

 

investment.841  Retail customers who would prefer advisory accounts but have not yet 

accumulated sufficient assets to qualify for investment advisory accounts, which may require 

customers to have a minimum amount of assets, may similarly benefit from recommendations 

from broker-dealers.  Other retail customers who hold a variety of investments, or prefer 

different levels of services from financial professionals, may benefit from having access to both 

brokerage and advisory accounts. 

The Commission is mindful of the costs imposed by, and the benefits obtained from our 

rules.  Whenever the Commission engages in rulemaking under the Exchange Act and is required 

to consider or determine whether an action is necessary or appropriate in the public interest. 

Section 3(f) of the Exchange Act also requires the Commission to consider, in addition to the 

protection of investors, whether the action would promote efficiency, competition, and capital 

formation.842  Also, when making rules pursuant to the Exchange Act, S the Commission is 

required under Section 23(a)(2) to consider, among other matters, the impact any rule  would 

have on competition and is prohibited from adopting any rule that would impose a burden on 

competition not necessary or appropriate in furtherance of the purposes of the Exchange Act.843  

The following analysis considers, in detail, the economic effects that the Commission believes 

are likely to or may result from Regulation Best Interest.  The analysis includes consideration of 
                                                                                                                                                             

 

841  See infra footnote 1354 and accompanying text. 
842  See 15 U.S.C. 77b(b) and 15 U.S.C. 78c(f).   
843  See 15 U.S.C. 78w(a)(2).   



376 

 

the benefits and costs to retail investors and broker-dealers, and also takes into account the 

broader implications of Regulation Best Interest for efficiency, competition, and capital 

formation.   

Where possible, the Commission has sought to quantify the likely economic effects of 

Regulation Best Interest.  The Commission is providing both a qualitative assessment and 

quantified estimates of the potential effects of Regulation Best Interest, where feasible.  The 

Commission has incorporated data and other information provided by commenters to assist it in 

the analysis of the economic effects of Regulation Best Interest.844 However, as explained below 

in more detail, because the Commission does not have, has not received, and, in certain cases, 

does not believe it can reasonably obtain data that may inform on certain economic effects, the 

Commission is unable to quantify certain economic effects.  The Commission further notes that 

even in cases where it has some data or it has received some data regarding certain economic 

effects, the quantification of these effects is particularly challenging due to the number of 

assumptions that it would need to make to forecast how broker-dealers will respond to 

Regulation Best Interest, and how those responses will, in turn, affect the broader market for 

investment advice and the retail customers’ participation in financial markets.    

                                                                                                                                                             

 

844  See infra Section III.A.3. 



377 

 

2. Broad Economic Considerations 

Investors generally derive utility from consuming goods and services over their lifetime 

and from bequeathing wealth to others.845  The amount of goods and services that an investor can 

consume or the amount of wealth the investor can bequeath is limited by the value of the 

resources available to the investor over his or her lifetime.  These resources generally vary across 

market and economic conditions and over time.  An investor generally seeks to allocate his or 

her resources across market and economic conditions and over time to achieve the highest 

expected utility possible over his or her lifetime.  For example, an investor may decide to save, 

and therefore allocate, a proportion of his or her wages to maximize his or her expected utility 

from bequeathing wealth toward his or her children’s future education.      

 Capital markets facilitate this allocation and reallocation of resources.  An investor can 

allocate available resources across financial assets available to them in the capital markets, such 

that these resources become available to the investor at the times, and in the market and 

economic conditions, when he or she needs them.  There may be many combinations of financial 

assets or investment strategies that achieve an investor’s allocation goals, but each of these 

strategies may not necessarily provide the investor with the same benefits or cause the investor to 

bear the same costs.  The expected benefit of allocating resources to an investment strategy 

depends on the expected utility to the investor from the expected payoff of the strategy and from 
                                                                                                                                                             

 

845  See, e.g., Irving Fisher, THE THEORY OF INTEREST, AS DETERMINED BY IMPATIENCE TO 
SPEND INCOME AND OPPORTUNITY TO INVEST IT (1930).   



378 

 

whether this strategy pays off in the market and economic conditions and at the times that the 

investor cares about.  Importantly, the various costs of allocating resources to any strategy reduce 

the resources available for consumption and saving.  

A rational investor seeks out investment strategies that are efficient in the sense that they 

provide the investor with the highest possible expected net benefit, in light of the investor’s 

investment objective that maximizes expected utility.846  From the discussion above, an efficient 

investment strategy may depend on the investor’s utility from consumption, including: (1) his or 

her risk tolerance; (2) time available for the funds to be invested, and not consumed; (3) the 

resources that the investor has currently available (e.g., current wealth) or anticipates to become 

available at some point in the future (e.g., future income); and (4) the cost to the investor of 

implementing the strategy. An investor’s efficient investment strategy may change over time 

because the investor’s preferences, as well as market conditions and investment performance, 

may change over time. 

In general, a typical investor may not have the knowledge or the time to identify efficient 

strategies on his or her own.  In addition, investors may be limited in their access to information 

and their human computational capacity when evaluating choices.847 As an alternative to 

                                                                                                                                                             

 

846  See, e.g., Andreu Mas-Colell, Michael D. Whinston, & Jerry R. Green, MICROECONOMIC 
THEORY (1995), specifically Chapter 10: Competitive Markets for a discussion of 
efficient allocations of resources.   

847  See, e.g., Herbert A. Simon, A Behavioral Model of Rational Choice, 69 Q. J. ECON. 99 
(1955) for one of the first works on bounded rationality. See also Richard H. Thaler, 

 

 



379 

 

attempting to identify efficient strategies on his or her own, an investor may solicit advice from 

financial professionals.   

While there are many types of financial professionals848 that can provide advice related to 

a retail customer’s finances, we focus here (and in Regulation Best Interest) on a type of 

professional that retail customers commonly access, namely broker-dealers and their associated 

persons.  

A broker is any person engaged in the business of effecting transactions in securities for 

the account of others.849 A dealer is any person engaged in the business of buying and selling 

securities for its own account, through a broker or otherwise.850 Within the scope of these 

definitions, a “broker-dealer” (or, a firm that fits both definitions) may offer a wide variety of 

services to retail customers. These services include buying and selling securities for the retail 

customer as well as providing limited personalized investment advice in the form of 

                                                                                                                                                             

 

Behavioral Economics: Past, Present, and Future, 106 AM. ECON. REV. 1577 (2016) for 
a discussion of the evolution of bounded rationality in economics. 

848  The list of financial professionals that can provide advice related to a retail customer’s 
finances includes broker-dealers and their associated persons, investment advisers, banks, 
and insurance agents.  

849  See Section 3(a)(4)(A) of the Securities Exchange Act. 
850  See Section 3(a)(5)(A) of the Securities Exchange Act. 



380 

 

recommendations of whether or not to engage in securities transactions or investment strategies 

involving securities.851 

Federal securities laws and SRO rules govern broker-dealers’ conduct of business. 

Among other things, they require that a broker-dealer or associated person “have a reasonable 

basis to believe that a recommended transaction or investment strategy involving a security or 

securities is suitable for the customer, based on the information obtained through the reasonable 

diligence of the [firm] or associated person to ascertain the customer’s investment profile.”852 

While a suitable recommendation must take into account the elements of a retail customer’s 

investment profile that make securities transactions or an investment strategy efficient for that 

particular retail customer, this requirement for suitability may not lead to an efficient result for 

the retail customer.   

The efficiency of a recommendation to a retail customer may depend on: (1) the menu of 

securities transactions and investment strategies the broker-dealer or its associated persons 

considers and makes available to the retail customer; (2) the return distribution and the costs of 

these securities transactions and strategies; (3) the associated person’s understanding of these 

                                                                                                                                                             

 

851  We focus our discussion on recommendations that are the focus of Regulation Best 
Interest but note that broker-dealers and their representatives provide a wide variety of 
“agency services” as described in footnote 1 of the Proposing Release. See, e.g., 913 
Study.  See also infra Section III.B.1.a. 

852  See FINRA Rule 2111 (Suitability); see also infra Section III.B.2.b.381 

 

investment options and the retail customer’s objectives, such as the retail customer’s risk 

tolerance and time preference; and (4) the retail customer’s resource constraints. 

A recommendation provided by an associated person of the broker-dealer may be 

influenced by the conflicts of interest that the associated person may have or the conflicts of 

interest that the broker-dealer may have at the time of the recommendation.  These conflicts can 

arise as a result of how broker-dealers generate revenue from various securities or investment 

strategies that they make available to retail customers and how broker-dealers compensate their 

associated persons for providing recommendations to retail customers.  In the United States, 

broker-dealers may earn transaction-based compensation that is commonly paid either directly 

by the retail customer (e.g., commissions and markups or markdowns) or indirectly through the 

investment sponsor (e.g., 12b-1 fees or revenue sharing).  Broker-dealers may compensate their 

associated persons that provide recommendations to retail customers with a portion of the 

commissions and markups or markdowns these persons generate through their recommendations. 

Such financial incentives can vary depending on the investment product line, account type, or 

other factors (e.g., amount of customer assets brought into the broker-dealer or revenue 

generated from customer accounts).  



382 

 

A retail customer generally chooses to accept or reject a recommendation supplied by the 

associated person of the broker-dealer.853  Some retail customers may base their decisions on an 

assessment of whether the recommendations they receive would result in securities transactions 

or investment strategies that are efficient for them.  These customers’ assessment may depend on 

factors such as their perception of the associated person’s ability to properly understand and 

account for the customer’s objectives, any information they have about the associated person’s or 

firm’s conflicts of interest with respect to that recommendation, and the extent to which these 

conflicts are expected to result in less than efficient recommendations for the retail customer.  

However, other retail customers may rely in full or in part on factors less directly related to the 

recommendation at hand. Instead, they might rely on factors such as their level of trust with the 

associated person or firm, and in certain circumstances might be inclined to simply accept all of 

the associated person’s recommendations without evaluating for themselves whether the 

recommendations are efficient.854 

                                                                                                                                                             

 

853  Note, however, that a retail customer may receive automated advice without involvement 
of an associated person of the broker-dealer. For example, a broker-dealer may generate 
recommendations through an asset allocation model. FINRA Regulatory Notice 12-25; 
See also FINRA Report on Digital Investment Advice (Mar. 2016). 

854  See, e.g., the discussion on investor trust in the markets for financial advice in Section 
III.B.4.a, infra.  See also Gross Letter.  See also Roman Inderst & Marco Ottaviani, How 
(not) to pay for advice: A framework for consumer financial protection, 105 J. FIN. ECON 
393 (2012) for a discussion of the economic surplus extracted by broker-dealers that 
provide recommendations to retail customers, and how this surplus relates to the factors 
that determine a retail customer’s decision to accept or reject a recommendation. 



383 

 

As noted above, broker-dealers or their associated persons may have conflicts of interest 

that could influence their recommendations to retail customers at the time when they are 

provided.     

A retail customer’s choice to accept a particular recommendation often directly affects 

the compensation that an associated person or broker-dealer itself receives.  For example, an 

associated person may receive greater compensation from selling certain securities or strategies 

relative to other securities or strategies.  Differences in compensation across the securities or 

strategies offered by a broker-dealer may add complexity to an associated person’s incentives 

and may create conflict between the interests of the associated person, who desires to maximize 

his or her compensation, and the interests of the retail customer, who expects the recommended 

transaction to be efficient for him or her.   

In general, this conflict of interest may result in a broker-dealer recommending securities 

or investment strategies that are less efficient for the retail customer.  For instance, the 

recommended securities or strategies may be enhancing the associated person’s compensation at 

the expense of the retail customer.  Put another way, because of the financial incentives, broker-

dealers and their associated persons may be motivated to recommend certain types or quantities 

of securities or strategies, and those recommendations may place the interests of the broker-

dealer or its associated persons ahead of the interests of the retail customer, which may not result 

in the retail customer maximizing his or her expected net benefit.  An inefficient 

recommendation may lead to various results for the retail customer, including inferior investment 

outcomes, such as risk-adjusted expected returns that are lower relative to other similar 

investments or investment strategies.   



384 

 

A retail customer may accept a recommendation that is less efficient if he or she is unable 

to assess correctly the efficiency of the recommendation..   

The difference between the net benefit to the retail customer from accepting a less than 

efficient recommendation about a securities transaction or investment strategy, where the 

associated person or broker-dealer puts its interests ahead of the interests of the retail customer, 

and the net benefit the retail customer might expect from a similar securities transaction or 

investment strategy that is efficient for him or her, as defined above, is an agency cost.855  As 

discussed in the Proposing Release and above, this agency cost arises because of the conflicts of 

interest of the broker-dealer and its associated persons, and the differences between the 

information sets available to the broker-dealer and the retail customer at the time of the 

recommendation.   

In certain principal-agent relationships, the principal may be able to reduce the agency 

costs that he or she is facing in various ways, including by structuring the agent’s compensation 

in a way that better aligns the interest of the agent with that of the principal.856 A feature of the 

agency relationship between a retail customer (the principal) and a broker-dealer (the agent) that 

is common in many principal-agent relationships (including the investment adviser-client 

                                                                                                                                                             

 

855  See, e.g., Michael C. Jensen, and William. H. Meckling, Theory of the Firm: Managerial 
Behavior, Agency Costs and Ownership Structure, 3 J. FIN. ECON. 305 (1976) for a more 
general discussion of agency costs.  

856  See, e.g., Stephen A. Ross, The Economic Theory of Agency: The Principal’s Problem, 
63 AM. ECON. REV. (PAPERS & PROC.) 134 (1973).  



385 

 

relationship) is that the retail customer generally does not have full transparency about the 

agent’s compensation for providing advice and the sources of the agent’s compensation.  Thus, 

the retail customer, through the decision to accept or reject a recommendation received, has 

generally limited understanding of and control over the compensation that the broker-dealer and 

its associated person obtains from providing the recommendation.  These limitations restrict the 

retail customer’s ability to reduce the agency costs that he or she is facing.   

We also recognize that even if the retail customer were to have full transparency about 

the broker-dealer’s and its associated person’s compensation from providing advice, the retail 

customer’s ability to reduce the agency costs may be constrained in other ways.  For example, if 

the menu of securities from which the associated person of the broker-dealer offers 

recommendations is limited, the retail customer’s and the associated person’s ability to identify 

and select a more efficient investment may be constrained.   

Different retail customers may face different agency costs depending on whether they 

base their decision to act on a recommendation on an assessment of the efficiency of the 

recommendation.  Specifically, as noted above, a retail customer that evaluates and uses a 

recommendation received based on an assessment about the efficiency of that recommendation 

may be more successful in identifying and controlling, albeit in a limited fashion, the 

compensation that the broker-dealer and its associated person receive from the 

recommendation—such as by being more likely to reject a less than efficient recommendation—

compared to a retail customer that makes this decision without forming an assessment of the 

efficiency of the recommendation.  Thus, the agency costs may be higher for those retail 

customers that make their decision of whether to act on a recommendation received without an 

assessment of the efficiency of the recommendation. 



386 

 

While the discussion above focuses on the actions that the principal (i.e., the retail 

customer) can take to reduce the agency costs that he or she is facing, the agent can also take 

actions to reduce the agency costs to the principal. For example, in the agency paradigm, when 

the principal may forgo sharing a potentially large surplus with the agent because of the high 

agency costs, the agent may have an incentive to structure the terms of the relationship in a way 

that reduces the agency costs to the principal.857 In the agency relationship between a retail 

customer and a broker-dealer, given the features of the compensation that the broker-dealer and 

its associated persons receive for providing recommendations (e.g., this compensation does not 

depend on the value of the assets in a principal’s account), the broker-dealer and its associated 

persons may not have sufficient incentive to take actions voluntarily that would reduce agency 

costs to the retail customer, such as voluntarily increasing transparency with respect to 

compensation.858   

                                                                                                                                                             

 

857  See, e.g., Sanford J. Grossman & Oliver D. Hart, The Costs and Benefits of Ownership: A 
Theory of Vertical and Lateral Integration, 94 J. POL. ECON. 691 (1986) for a discussion 
of the actions that agents can take to reduce the agency costs to the principal in the 
context of the relationship between an owner (the principal) and a manager (the agent) 
when the agent that has a valuable investment opportunity that can only be financed by 
the principal. 

858  Limited transparency with respect to how broker-dealers and their associated persons are 
compensated from recommending a security and what constrains their  menus of 
securities may make it difficult for retail customers to grasp the size of the agency costs 
that they are facing at the time when they receive the recommendation.  As a result, this 
limited transparency may allow broker-dealers and their associated persons to extract 
informational rents (i.e., in the context of a transaction, compensation in excess of what is 
competitively feasible that stems solely from the informational advantage of one party 

 

 



387 

 

Although the dynamics of the agency relationship between a retail customer and a 

broker-dealer may not cause the broker-dealer to take steps to increase transparency, competitive 

factors in the broker-dealer industry such as steps toward transparency taken by other broker-

dealers may cause increased transparency in that relationship.  Competitive dynamics are more 

effective in areas where comparisons can be more easily made.  For example, in the market for 

mutual funds — particularly index funds —comparability and competition, among other factors, 

have driven down fees significantly.859     

                                                                                                                                                             

 

over another) from the retail customers when providing recommendations.  The adviser 
business model also has its own set of conflicted incentives to gather assets (based on 
AUM fees) or maximize the time that it takes to complete a job (if paid an hourly fee).  
Dual-registrants also have an incentive to recommend the type of account that is most 
profitable to the firm.  See AFL-CIO April 2019 Letter.  See also Morgan Lewis Letter 
(describing investment adviser compensation and conflicts disclosure in Form ADV); 
Bruce Ian Carlin & Gustavo Manso, Obfuscation, Learning, and the Evolution of Investor 
Sophistication, 24 REV. FIN. STUD. 754 (2011) for a discussion about the relationship 
between informational rents and the opacity of recommended investments (e.g., securities 
with complex payoff structures).      

859  Comparability among index funds that follow the same market index is facilitated in part 
by their passive style of investing. Actively managed funds that follow the same 
investment strategy can show different performance due to, among other things, the 
“skill” of the manager of outperforming the market (or any other benchmark). This skill 
is unobservable and generally hard to measure, which makes comparisons across actively 
managed funds difficult. In contrast, comparisons across index funds that follow the same 
market index and that have passive investment styles are based more on observable 
variables, such as fees, rather than unobservable variables, such as managerial skill. In 
this context, disclosure that is more salient with respect to these observable variables may 
facilitate comparisons across index funds.    



388 

 

While we do not have evidence to establish the degree to which broker-dealers can 

extract large informational rents from retail customers under the current legal and regulatory 

regime that governs the broker-dealers’ standard of conduct, the existing agency costs of the 

relationship between the retail customer and the broker-dealer would likely be larger, absent the 

current legal and regulatory regime.860  In general, standards and regulation are effective means 

of reducing agency costs when principals (e.g., retail customers) and agents (e.g., broker-dealers) 

cannot reduce the agency costs on their own by negotiating to address the market frictions in 

their relationship through mechanisms available to them, such as bilateral contracting861 or “side 

payments.”862  

                                                                                                                                                             

 

860  See, e.g., Matthew L. Kozora, Security Recommendations and the Liabilities of Broker-
Dealers (U.S. Sec. & Exch. Comm’n, Working Paper, May 1, 2016), available at 
https://www.sec.gov/files/Kozora_BD-Liability_05-2016.pdf, which provides evidence 
from investor awards in FINRA arbitrations that the author interprets as indicative of 
informational rents being nonzero. See also our more comprehensive discussion in 
Section III.B.3.c, infra, about potential investor harm associated with investment advice, 
including from potential informational rents.   

861  See Proposing Release at 21643. 
862  Another way principals and agents negotiate around market frictions is through “side 

payments.”  In  a transaction between two parties, a side payment is a monetary exchange 
from one party to another that is not part of the transaction.  This mechanism is discussed 
in the literature on bilateral externalities, which focuses on how the actions of one party 
can affect the well-being of the other party.  This mechanism also applies to the 
relationship between a broker-dealer and a retail customer because the action taken by a 
broker-dealer, namely providing a recommendation, may affect the well-being of the 
retail customer receiving that recommendation.  In the literature on bilateral externalities, 
if the party taking these externality actions is unconstrained, the allocation of resources 
across the two parties may be inefficient.  However, in certain circumstances, the parties 

 

 



389 

 

Regulation Best Interest enhances the current standard of conduct for broker-dealers and 

codifies it in an Exchange Act rule.  Regulation Best Interest is designed to: (1) enhance the 

current standard of conduct applicable to broker-dealers and associated persons when they make 

a recommendation to a retail customer of any securities transaction or investment strategy 

involving securities;  (2) reduce conflicts of interest that currently exist between retail customers 

and broker-dealers and their associated persons; and (3) reduce information asymmetries that 

currently limit the ability of retail customers to evaluate the efficiency of recommendations they 

receive from broker-dealers and their associated persons.  In each of these three ways, 

Regulation Best Interest is designed to reduce the agency costs in the relationship between 

broker-dealers and their retail customers, including in situations where the existing legal and 

regulatory regime that governs broker-dealers’ standard of conduct has had limited effectiveness.   

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 

The economic analysis in the Proposing Release characterized the relationship between a 

retail customer and a broker-dealer as one between a principal (the retail customer) and an agent 

(the broker-dealer).863  The analysis noted that the potential conflict between interests and the 

                                                                                                                                                             

 

can avoid this inefficient outcome through side payments that neutralize the effect of the 
externality on the allocations. See, e.g., Mas-Colell et al. (1995), supra footnote 846, 
specifically Part 3: Market Equilibrium and Market Failure for a discussion of bilateral 
externalities.      

863  See Proposing Release at 21629-21631.   



390 

 

differences between the information sets available to the agent and the principal may result in 

agency costs.  It further noted that the inability of the broker-dealers and retail customers to 

overcome the market frictions underlying these agency costs may result in inefficient allocations 

of resources.  An inability of the principal and the agent to efficiently negotiate around the 

frictions that produce agency costs and take actions that would increase the efficiency of their 

allocations is what economists refer to as a “market failure” of the principal-agent 

relationship,864 generally, and of the agency relationship between the retail customer and the 

broker-dealer, specifically.865    

The analysis in the Proposing Release recognized that while the Commission cannot provide a 

quantified estimate of the magnitude of this agency cost, the existence of these costs and their 

persistence justifies regulatory intervention.866   

A number of commenters questioned this approach.  Certain of these commenters stated 

that the Commission needs to more fully identify the market failure that needs to be addressed, 

and certain commenters stated that the Commission did not provide a quantitative assessment of 

                                                                                                                                                             

 

864  See, e.g., Mas-Colell et al. (1995), supra footnote 846. 
865  In general, because frictions such as asymmetric information are ever present, all markets 

and agency relationships have some degree of market failure.  
866  See Proposing Release at 21631.   



391 

 

the severity of the market failure that would prompt the need for regulatory intervention.867  We 

address these concerns below.    

With respect to the issue of appropriately identifying the market failure, one commenter 

questioned whether the relationship between the retail customer and the broker-dealer is a 

principal-agent relationship.868  This commenter stated that in many instances, a broker-dealer’s 

                                                                                                                                                             

 

867  See, e.g., CFA August 2018 Letter at 105, noting that “[c]orrectly diagnosing the problem 
requires identifying and analyzing the market failure that has occurred in investment 
advice securities markets, as well as assessing the significance of that problem”; See also, 
e.g., Letter from Charles Cox, Former SEC Chief Economist, et al. (Feb. 6, 2019) 
(“Former SEC Senior Economists Letter”) at 2, noting that “the Commission confronts 
important questions about advisers balancing their own compensation against the effect 
of that compensation on the customer’s expected returns. We wonder if the extreme 
asymmetry of information and financial sophistication between advisers and many of 
their clients constitutes a market failure that the April proposals are intended to 
ameliorate.” In addition, the Former SEC Senior Economists Letter raised three main 
concerns with the economic analysis in the Proposing Release: 1) the discussion of the 
potential problems in the customer-adviser relationship was incomplete and identified 
other features of the market for ongoing retail investment advice that might be 
problematic; 2) there was inadequate discussion and analysis of the existing economic 
literature on financial advice; and 3) there were questions of whether the disclosure 
requirements in the Proposing Release would provide meaningful information for 
customers. The economic analysis addresses these concerns. For instance, with respect to 
1), Section III.A.2 provides a more in depth discussion of the potential problems that may 
arise when a broker-dealer provides recommendations to a retail customer. With respect 
to 2), Section III.B.3 engages more fully with the economic literature on financial advice. 
Finally, with respect to 3), Sections III.B.4, III.C.2, and III.C.4 provide discussions on the 
effectiveness of the disclosure requirements of Regulation Best Interest.      

868  See CFA August 2018 Letter at 107, noting that “[t]he Commission’s economic analysis 
gets off to a faulty start by mischaracterizing, or at least over-simplifying, the broker-
customer ‘advice’ relationship, as a principal-agent relationship. While there are certainly 
instances where a broker and its customer can exhibit features of a bona fide principal-
agent relationship—for example when executing a customer’s order—it’s not clear that, 

 

 



392 

 

provision of recommendations to a retail customer resembles an arm’s length transaction (e.g., 

purchasing a car) that benefits the more informed broker-dealer at the expense of the less 

informed retail customer.  This commenter disagreed with the Commission’s broader view that 

the market failure stems from the agency costs of the relationship between a broker-dealer and a 

retail customer,869 and instead stated that the market failure is due to conflicts of interest caused 

by the way broker-dealers and their associated persons are generally compensated for providing 

recommendations to retail customers.870  Similarly, another commenter stated that the 

Commission failed to discuss how the current compensation practices associated with providing 

recommendations to retail customers creates incentives for the broker-dealer and its associated 

persons to favor one securities transaction or investment strategy over another when making 

recommendations to retail customers.871  This commenter further questioned whether the 

                                                                                                                                                             

 

in the context of receiving investment recommendations, those same characteristics are 
present. Certainly, the brokerage industry expressly refutes this characterization, having 
argued successfully in the Fifth Circuit that brokers engage in nothing more than an arm’s 
length commercial sales transaction, no different from a car dealer soliciting interest in 
inventory.”   

869  See CFA August 2018 Letter at 108, noting that “[t]ypically, principal-agent relationships 
don’t involve third party payments to the agent, which can adversely affect the level of 
loyalty the agent provides to the principal.” 

870  See CFA August 2018 Letter at 107, noting that the Commission “fails to acknowledge 
that conflicts of interest are a real problem that result in real harm to investors […]” and 
“[…] the Release fails to make clear whether the Commission is truly seeking to address 
the underlying problem of conflicts’ harmful impact on investors.” 

871  See Former SEC Senior Economists Letter at 3, noting that “[n]owhere does the EA 
emphasize that an adviser’s compensation provides numerous opportunities for her to 

 

 



393 

 

information asymmetry and the discrepancy in the level of financial sophistication between 

broker-dealers and their retail customers constitute a market failure.872 One commenter noted 

that the poor performance of actively managed funds that are being recommended by broker-

dealers to small retail customers reflects a principal-agent problem that causes an “enormous” 

wealth transfer from retail customers to the financial industry, including broker-dealers.873  This 

commenter stated that this problem arises because of the broker-dealer’s commission-based 

compensation for providing recommendations and because of the information asymmetries 

between the broker-dealer and the retail customer at the time of the recommendation.874  This 

                                                                                                                                                             

 

favor one investment over another on the basis of the compensation it pays to her or to 
her firm.” 

872  See Former SEC Senior Economists Letter at 2.  See also supra footnote 867 that 
describes in more detail the concerns raised by this commenter. 

873  See Letter from Monique Morrissey, Economist and Heidi Shierholz, Senior Economist 
and Director of Policy, EPI (Aug. 7, 2018) (“EPI Letter”) at 6, noting that “[i]n an 
equilibrium with knowledgeable investors, we would expect returns from active and 
passive strategies to be equal.  The fact that actively-managed funds marketed to small 
investors tend to perform poorly reflects a market distortion—naiveté—or a ‘principal-
agent problem’ in economics parlance, which results in enormous transfers from 
investors to the financial industry.” 

874  See EPI Letter at 2, noting that “[c]onflicts of interest between buyers and sellers are 
commonplace.  Many salesmen, including brokers and car dealers, are paid on 
commission.  However, it has long been recognized that markets for professional advice 
are different from markets for automobiles because information asymmetries are inherent 
in these transactions.” 



394 

 

commenter also stated that recommendations subject to conflicts of interest may have no value 

for retail customers.875  

 As an initial matter, in response to comments regarding the need to discuss fully the 

existing market failure, it is important to recognize that the Commission has been studying and 

carefully considering the issues related to the broker-dealer-client relationship and the related 

standard of conduct for broker-dealers for many years, which led to the development of the 

Proposing Release and the economic analysis therein.876  In light of the comments on the 

Proposing Release, the extensive outreach by the Commission and staff, as well as investor 

testing, the Commission has more specifically and fully described the relationship between the 

broker-dealer and the client, the related market failure, and the resulting potential economic 

effects of Regulation Best Interest in addressing the market failure.877   

The Commission continues to believe that agency costs are at the root of existing 

allocative inefficiencies in the market for broker-dealer advice.  Moreover, this economic 

analysis recognizes that a proper understanding of the economic fundamentals of an investor’s 
                                                                                                                                                             

 

875  See EPI Letter at 8, noting that “the SEC never considers that ‘advice’ offered may not 
just be of lower quality than expected, but worse than no advice at all” and that “much of 
the ‘advice’ provided by broker-dealers not only lacks value, but is actually harmful, 
steering savers to higher-cost products and costly services that will reduce their future 
standard of living compared to how they would fare in the absence of this ‘advice.’ This 
may be true whether or not, in the absence of conflicted ‘advice,’ investors would have 
availed themselves of more paid or free advice from more impartial sources.” 

876  See Proposing Release at 21579-21583. 
877  See supra Section III.A.2. 



395 

 

decision to allocate resources across market and economic conditions and over time is central to 

identifying the frictions that cause inefficiencies in the agency relationship between a broker-

dealer and a retail customer.   

In response to the commenter that stated that in a principal-agent relationship agents do 

not receive compensation from third parties (e.g., investment sponsors), the Commission notes 

that the compensation that the investment sponsor provides to the agent is ultimately funded by 

the principal (i.e., the retail customer).878  In addition, in response to the commenter’s concern 

that a broker-dealer’s provision of recommendations to retail customers resembles an arm’s 

length transaction that is “no different from a car dealer soliciting interest in inventory,”879 the 

Commission notes that under the current regulatory regime broker-dealers and their associated 

persons are subject to a suitability standard of conduct that has been interpreted to “be consistent 

with [the] customer’s best interests.”880  In contrast, in an arm’s length transaction, the parties 

involved are generally not subject to a standard of conduct that would constrain the more 

informed party from acting solely in its own interest.881  Finally, in response to the commenter’s 

                                                                                                                                                             

 

878  See supra footnote 869. 
879  See supra footnote 868. 
880  See infra footnote 979 and accompanying text. 
881  However, in certain markets, there may be market mechanisms in place that would 

prevent the more informed party to a transaction from acting solely in its own interest.     



396 

 

concern with respect to the identification of the market failure,882 the Commission notes that 

while conflicts of interest arise in many types of transactions, in certain instances the parties 

involved can negotiate an arrangement between themselves that would reduce the effect of 

conflicts of interest on the allocation of resources across the parties and improve the efficiency of 

this allocation.  The Commission further notes that agency costs may deter the parties from 

engaging in privately negotiated arrangements that would improve the efficiency of the 

allocation of resources between the parties.  From this perspective, the Commission believes that 

it is the agency costs rather than the conflicts of interest themselves that should be viewed as the 

source of the market failure.  

In response to the commenter that noted that the Commission did not discuss how the 

compensation received by the broker-dealer and its associated persons creates incentives to favor 

one security or investment strategy over another when making recommendations to retail 

customers,883 the Commission has incorporated into this economic analysis a detailed discussion 

of the incentives created by the current compensation practices associated with providing 

recommendations to retail customers.884  In addition, in response to the commenter’s concerns 

about whether the information asymmetry and the discrepancy in the level of financial 

sophistication between retail customers and a broker-dealer and its associated persons are the 
                                                                                                                                                             

 

882  See supra footnote 870. 
883  See supra footnote 871. 
884  See infra Section III.C.4. 



397 

 

source of market failure, the Commission notes that this economic analysis establishes a more 

clear link between bounded rationality, including access to information and financial literacy of 

retail customers, and agency costs, and reflects our conclusion that the agency costs are at the 

root of the market failure. 

The Commission further notes that the so-called “informational rent” that a broker-dealer 

may be incentivized to extract from a retail customer to take advantage of the information 

asymmetry or the discrepancy in the level of financial sophistication is one component of the 

agency costs associated with the relationship between a retail customer and a broker-dealer.  In 

addition, the Commission notes that the evidence on the size of the agency costs associated with 

such informational rents is limited.885  This evidence is not generally supportive of a 

commenter’s assessment that the wealth transfer from retail customers to broker-dealers is 

“enormous.”886  The Commission agrees with this commenter, who stated that the way broker-

dealers are compensated for providing recommendations and the information asymmetry 

between retail customers and broker-dealers are important determinants of the agency costs. 

However, based on the evidence discussed below, the Commission disagrees with this 

                                                                                                                                                             

 

885  See supra Section III.A.2 and infra Section III.B.3. 
886  See supra footnote 873. 



398 

 

commenter’s assessment that the advice provided by the associated persons of the broker-dealer 

has no value.887 

 With respect to the issue of measuring the severity of the market failure, some 

commenters stated that the Commission failed to take into account existing academic literature 

that provides evidence of investor harm caused by accepting advice from the associated persons 

of the broker-dealer.  A subset of these commenters believed that the evidence provided in some 

of these academic studies is compelling and that the Commission should use it to quantify the 

severity of the market failure.888  One commenter also urged the Commission to supplement the 

academic evidence on investor harm with evidence from data available to the Commission from 

regulatory oversight.889  

 In response to these comments, the Commission maintains that the existence of 

misconduct that commenters requested the Commission to document does not render the 

approach taken in Regulation Best Interest irrational, inappropriate, or unreasonable, nor does it 

suggest that an alternative approach would be more effective in fulfilling the Commission’s 

mission.  The Commission is aware and understands the concerns raised by the commenters with 
                                                                                                                                                             

 

887  See infra Section III.B.3.b. 
888  See, e.g., CFA August 2018 Letter; EPI Letter; AARP August 2018 Letter; Better 

Markets August 2018 Letter; Former SEC Senior Economists Letter.   
889  See CFA August 2018 Letter at 112.  This commenter suggested that we present 

additional information about the existence and frequency of the potential harm to 
investors “that results from conflicted brokerage ‘advice’,” which may collectively be 
seen as misconduct by financial professionals. 



399 

 

regards to the evidence on investor harm and the extent to which such evidence can inform on 

our understanding of the severity of the market failure in the market for broker-dealer advice.  As 

discussed in the Proposing Release and reiterated in this economic analysis, the Commission 

believes that retail investors can be harmed when they accept recommendations from a broker-

dealer that places the financial or other interest of the broker-dealer or its associated persons 

ahead of the interests of the retail customers.  In addition, this economic analysis engages more 

fully with the economic literature on financial advice and considers these studies in analyzing the 

costs and benefits associated with Regulation Best Interest.890   

B. Economic Baseline 

This section discusses, as it relates to this rulemaking, the current state of the broker-

dealer and investment adviser markets; the current regulatory environment and market practices 

surrounding the provision of recommendations by broker-dealers; evidence on the potential 

value and harm of investment advice; and how issues related to trust, financial literacy, and 

disclosure effectiveness affect conflicts between investors and financial professionals.  The 

economic baseline has been revised and expanded relative to the Proposing Release to address 

comments, discussed more fully below. 

                                                                                                                                                             

 

890  See infra Section III.B.3.c. 



400 

 

1. Providers of Financial Services891 

a. Broker-Dealers 

Regulation Best Interest will affect the market for broker-dealer services, including firms 

that are dually registered as broker-dealers and investment advisers892 and broker-dealers 

affiliated with an investment adviser.893  The market for broker-dealer services encompasses a 

                                                                                                                                                             

 

891  In addition to broker-dealers and Commission-registered investment advisers discussed 
below in the baseline, there are a number of other entities, such as state-registered 
investment advisers, commercial banks and bank holding companies, and insurance 
companies, which also provide financial advice services to retail customers; however, 
because of unavailability of data, the Commission is unable to estimate the number of 
some of those other entities that are likely to provide financial advice to retail customers 
as well as their size and the scope of services they provide.  A number of broker-dealers 
(see infra footnote 899) have non-securities businesses, such as insurance or tax services.  
As of December 2018, there were approximately 17,300 state-registered investment 
advisers.  The Department of Labor in its Regulatory Impact Analysis identifies 
approximately 398 life insurance companies that could provide advice to retirement 
investors.  See infra footnote 1002.  

892  Not all firms that are dually registered as an investment adviser and a broker-dealer offer 
both brokerage and advisory accounts to retail investors.  For example, some dually 
registered firms offer advisory accounts to retail investors but offer only brokerage 
services, such as underwriting services, to institutional clients.  For purposes of the 
discussion of the baseline in this economic analysis, a dually registered firm is any firm 
that is dually registered with the Commission as an investment adviser and a broker-
dealer.   

893  Some broker-dealers may be affiliated with investment advisers and not dually registered.  
From Question 10 on Form BD, 2,098 (55.7%) broker-dealers report that, directly or 
indirectly, they control, are controlled by, or are under common control with an entity 
that is engaged in the securities or investment advisory business. Comparatively, 2,421 
(18.2%) SEC-registered investment advisers report an affiliate that is a broker-dealer in 
Section 7A of Schedule D of Form ADV, including 1,878 SEC-registered investment401 

 

small set of large and medium sized broker-dealers and thousands of smaller broker-dealers 

competing for niche or regional segments of the market.894 The market for broker-dealer services 

includes many different markets for a variety of services, including (1) managing orders for 

customers and routing them to various trading venues; (2) providing advice to customers that is 

in connection with and reasonably related to their primary business of effecting securities 

transactions;895 (3) holding retail customers’ funds and securities; (4) handling clearance and 

settlement of trades; (5) intermediating between retail customers and carrying/clearing brokers; 

(6) dealing in corporate debt and equities, government bonds, and municipal bonds, among other 

securities; (7) privately placing securities; and (8) effecting transactions in mutual funds that 

involve transferring funds directly to the issuer.  Some broker-dealers may specialize in just one 

narrowly defined service, while others may provide a wide variety of services.  

As of December 2018, there were approximately 3,764 registered broker-dealers with 

over 140 million customer accounts.  In total, these broker-dealers have over $4.3 trillion in total 

                                                                                                                                                             

 

advisers that report an affiliate that is a registered broker-dealer.  Approximately 77% of 
total regulatory AUM are managed by the 2,421 SEC-registered investment advisers. 

894  See Risk Management Controls for Brokers or Dealers with Market Access, Securities 
Exchange Act Release No. 63241 (Nov. 3, 2010) [75 FR 69791, 69822 (Nov. 15, 2010)]. 
For simplification, we present our analysis as if the market for broker-dealer services 
encompasses one broad market with multiple segments, even though, in terms of 
competition, it could also be discussed in terms of numerous interrelated markets. 

895  See Solely Incidental Interpretation. 



402 

 

assets, which are total broker-dealer assets as reported on Form X-17a-5.896  More than two-

thirds of all brokerage assets and close to one-third of all customer accounts are held by the 17 

largest broker-dealers, as shown in Table 1, Panel A.897  Of the broker-dealers registered with the 

Commission as of December 2018, 563 broker-dealers were dually registered as investment 

advisers.898  These firms hold over 90 million (63%) customer accounts.  Approximately 539 

broker-dealers (14%) report at least one type of non-securities business, including insurance, 

retirement planning, mergers and acquisitions, and real estate, among others.899  Approximately 

73.5% of registered broker-dealers report retail customer activity.900  

                                                                                                                                                             

 

896  Assets are estimated by Total Assets (allowable and non-allowable) from Part II of the 
FOCUS filings (Form X-17A-5 Part II, available at https://www.sec.gov/files/formx-17a-
5_2.pdf) and correspond to balance sheet total assets for the broker-dealer.  The 
Commission does not have an estimate of the total amount of customer assets for broker-
dealers.  We estimate broker-dealer size from the total balance sheet assets as described 
above. 

897  Approximately $4.24 trillion of total assets of broker-dealers (98%) are at broker-dealers 
with total assets in excess of $1 billion.  Of the 33 dual-registrants in the group of broker-
dealers with total assets in excess of $1 billion, total assets for these dual-registrants are 
$2.32 trillion (54%) of aggregate broker-dealer assets.  Of the remaining 99 broker-
dealers with total assets in excess of $1 billion that are not dual-registrants, 91 have 
affiliated investment advisers. 

898  This number includes the number of broker-dealers who are also registered as state 
investment advisers.  For purposes of the discussion of the baseline in this economic 
analysis, a dual-registrant is any firm that is dually registered with either the Commission 
or a state as an investment adviser and a broker-dealer. Excluding state registered 
advisers, there are 359 entities that are dually registered with the Commission as an 
investment adviser and a broker-dealer.    

899  We examined Form BD filings to identify broker-dealers reporting non-securities 
business.  For the 393 broker-dealers reporting such business, staff analyzed the narrative 

 

 



403 

 

Panel B of Table 1 is limited to the broker-dealers that report some retail investor activity.  

As of December 2018, there were approximately 2,766 broker-dealers that served retail investors, 

with over $3.8 trillion in total assets (89% of total broker-dealer assets) and almost 139 million 

(97%) customer accounts.901  Of those broker-dealers serving retail investors, 452 were dually 

registered as investment advisers.902  The number of broker-dealers that serve retail customers 

                                                                                                                                                             

 

descriptions of these businesses on Form BD, and identified the most common types of 
businesses: insurance (202), management/financial/other consulting (99), 
advisory/retirement planning (71), mergers and acquisitions (70), foreign 
exchange/swaps/other derivatives (28), real estate/property management (30), tax 
services (15), and other (146).  Note that a broker-dealer may have more than one line of 
non-securities business. 

900  The value of customer accounts is not available from FOCUS data for broker-dealers.  
Therefore, to obtain estimates of firm size for broker-dealers, we rely on the value of 
broker-dealers’ total assets as obtained from FOCUS reports.  Retail sales activity is 
identified from Form BR, which categorizes retail activity broadly (by marking the 
“sales” box) or narrowly (by marking the “retail” or “institutional” boxes as types of sales 
activity).  We use the broad definition of sales as we preliminarily believe that many 
firms will just mark “sales” if they have both retail and institutional activity.  However, 
we note that this may capture some broker-dealers that do not have retail activity, 
although we are unable to estimate that frequency.   

901  Total assets and customer accounts for broker-dealers that serve retail customers also 
include institutional accounts.  Data available from Form BD and FOCUS data is not 
sufficiently granular to identify the percentage of retail and institutional accounts at 
firms. 

902  Excluding state registered advisers, there are 359 entities that are dually registered with 
the Commission as an investment adviser and a broker-dealer. Of the 31 dual-registrants 
in the group of retail broker-dealers with total assets in excess of $500 million, total 
assets for these dual-registrants are nearly $2.01 trillion (53%) of aggregate retail broker-
dealer assets (Table 1, Panel B).  Of the remaining 81 retail broker-dealers with total 
assets in excess of $500 million that are not dual-registrants, 76 have affiliated 
investment advisers. 



404 

 

(i.e., 2,766) likely overstates the number of broker-dealers that will be subject to Regulation Best 

Interest, because not all broker-dealers that serve retail investors provide recommendations to 

retail investors.  We do not have reliable data to determine the precise number of broker-dealers 

that provide recommendations (and the extent to which broker-dealers that provide 

recommendations do so, as opposed to executing unsolicited trades), and as a result, we have 

assumed, for purposes of this Section III and Sections IV (Paperwork Reduction Act Analysis) 

and V (Final Regulatory Flexibility Act Analysis) that 2,766 broker-dealers will be subject to 

Regulation Best Interest. 



405 

 

Table 1, Panel A: Registered Broker-Dealers as of December 2018903 

Cumulative Broker-Dealer Total Assets and Customer Accounts904 

Size of Broker-Dealer  
(Total Assets) 

Total Num. of 
BDs 

Num. of Dually 
Registered BDs 

Cumulative 
Total Assets  

Cumulative 
Number of 
Customer 

Accounts905 

> $50 billion  17 10 $2,879 bil. 40,550,200 

$1 billion to $50 billion  114 23 $1,363 bil. 96,037,591 

$500 million to $1 billion  35 7 $23 bil. 397,814 

$100 million to $500 million 105 20 $23 bil. 1,603,818 

$10 million to $100 million  490 115 $17 bil. 4,277,432 

$1 million to $10 million  1,021 182 $3.6 bil. 460,748 

< $1 million 1,982 206 $0.5 bil. 5,675 

Total 3,764 563 $4,309 bil. 143,333,278 

                                                                                                                                                             

 

903  The data is obtained from FOCUS filings as of December 2018. Note that there may be a 
double-counting of customer accounts among, in particular, the larger broker-dealers as 
they may report introducing broker-dealer accounts as well in their role as clearing 
broker-dealers.  

904  In addition to the approximately 143 million individual accounts at broker-dealers, there 
are approximately 302,000 omnibus accounts (0.2% of total accounts at broker-dealers), 
with total assets of $32.1 billion, across all 3,764 broker-dealers, of which approximately 
99% are held at broker-dealers with greater than $1 billion in total assets. See also supra 
footnote 897. Omnibus accounts reported in FOCUS data are the accounts of non-
carrying broker-dealers with carrying broker-dealers.  These accounts may have 
securities of multiple customers (of the non-carrying firm), or securities that are 
proprietary assets of the non-carrying broker-dealer.  We are unable to determine from 
the data available how many customer accounts non-carrying broker-dealers may have.  
The data does not allow the Commission to parse the total assets in those accounts to 
determine to whom such assets belong.  Therefore, our estimate may be under inclusive 
of all customer accounts held at broker-dealers. 

905  Customer Accounts includes both broker-dealer and investment adviser accounts for 
dual-registrants. 



406 

 

Table 1, Panel B: Registered Retail Broker-Dealers as of December 2018 

Cumulative Broker-Dealer Total Assets and Customer Accounts 

Size of Broker-Dealer (Total 
Assets) 

Total Num. of 
BDs 

Num. of Dually 
Registered BDs 

Cumulative 
Total Assets  

Cumulative 
Number of 
Customer 
Accounts 

> $50 billion  16 8 $2,806 bil. 40,545,792 

$1 billion to $50 billion  75 18 $990 bil. 91,991,118 

$500 million to $1 billion  21 5 $13 bil. 365,632 

$100 million to $500 million 84 17 $18 bil. 1,603,818 

$10 million to $100 million  378 96 $14 bil. 3,762,620 

$1 million to $10 million  783 153 $2.8 bil. 450,132 

< $1 million 1,409 155 $0.4 bil. 5,672 

Total BDs906 2,766 452 $3,844 bil. 138,724,784 

 

Table 2 reports information on brokerage commissions,907 fees, and selling concessions 

from the fourth quarter of 2018 for all broker-dealers, including dual-registrants.908  We observe 

significant variation in the sources of revenues for broker-dealers, with large broker-dealers, on 

average, generating substantially higher levels of aggregate commission and fee revenues (on a 

nominal basis) than smaller broker-dealers.  On average, broker-dealers, including those that are 

                                                                                                                                                             

 

906  Total BDs includes all retail-facing broker-dealers, including those dual-registrants that 
have retail-facing broker-dealers. 

907  Mark-ups or mark-downs are not included as part of the brokerage commission revenue 
in FOCUS data; instead, they are included in Net Gains or Losses on Principal Trades, 
but are not uniquely identified as a separate revenue category.   

908  Source: FOCUS data.  



407 

 

dually registered as investment advisers, earn about $5.1 million per quarter in revenue from 

commissions and nearly four times that amount in fees,909 although the Commission notes that 

fees encompass various types of fees, not just fees for advisory services.910 The level of revenues 

earned by broker-dealers (including dually registered firms) for commissions and fees increases 

with broker-dealer size, but also tends to be more heavily weighted toward commissions for 

broker-dealers with less than $10 million in assets and is weighted more heavily toward fees for 

broker-dealers with assets in excess of $10 million.  For example, for the 114 broker-dealers with 

                                                                                                                                                             

 

909  Fees, as detailed in the FOCUS data, include fees for account supervision, investment 
advisory services, and administrative services.  Beyond the broad classifications of fee 
types included in fee revenue, we are unable to determine whether fees such as Rule 12b-
1 fees, sub-accounting, or other such service fees (e.g., payments by an investment 
company for personal service and/or maintenance of shareholder accounts) are included.  
The data covers both broker-dealers and dually registered firms.  FINRA’s Supplemental 
Statement of Income, Line 13975 (Account Supervision and Investment Advisory 
Services) denotes that fees earned for account supervision are those fees charged by the 
firm for providing investment advisory services where there is no fee charged for trade 
execution.  Investment Advisory Services generally encompass investment advisory work 
and execution of client transactions, such as wrap arrangements.  These fees also include 
fees charged by broker-dealers that are also registered with the Commodity Futures 
Trading Commission (“CFTC”), but do not include fees earned from affiliated entities 
(Item A of question 9 under Revenue in the Supplemental Statement of Income). 

910  With respect to the FOCUS data, additional granularity of what services comprise 
“advisory services” is not available.  See also Solely Incidental Interpretation. 



408 

 

assets between $1 billion and $50 billion, average revenues from commissions are approximately 

$45 million, while average revenues from fees are approximately $225 million.911  

In addition to revenue generated from commissions and fees, broker-dealers may also 

receive revenues from other sources, including margin interest, underwriting, research services, 

and third-party selling concessions, such as from sales of investment company (“IC”) shares.  As 

shown in Table 2, Panel A, these selling concessions are generally a smaller fraction of broker-

dealer revenues than either commissions or fees, except for broker-dealers with total assets 

between $10 million and $100 million.  For these broker-dealers, revenue from third-party 

selling concessions is the largest category of revenues and constitutes approximately 42% of 

total revenues earned by these firms. 

Table 2, Panel B below provides aggregate revenues by revenue type (commissions, fees, 

or selling concessions from sales of IC shares) for broker-dealers delineated by whether the 

broker-dealer is also a dual-registrant.  Broker-dealers dually registered as investment advisers 

have a significantly larger fraction of their revenues from fees compared to commissions or 

selling concessions, whereas broker-dealers that are not dually registered generate approximately 

42% of their advice-related revenues as commissions and only 33% of their advice-related 

revenues from fees, although we lack granularity to determine whether advisory services, in 

                                                                                                                                                             

 

911  An estimate of total fees in this size category would be 114 broker-dealers with assets 
between $1 billion and $50 billion multiplied by the average fee revenue of $225 million, 
or $25.65 billion in total fees.   



409 

 

addition to supervision and administrative services, contribute to fees at standalone broker-

dealers.   

Table 2, Panel A: Average Broker-Dealer Revenues from Revenue Generating Activities912 

Size of Broker-Dealer  
in Total Assets 

N Commissions Fees913 Sales of IC 
Shares 

> $50 billion  17 $170,336,258  $414,300,268  $23,386,192  

$1 billion - $50 billion  114 $45,203,225  $225,063,257  $53,671,602  

$500 million - $1 billion  35 $8,768,547  $30,141,270  $5,481,248  

$100 million - $500 million  105 $12,801,889  $33,726,336  $16,610,013  

$10 million - $100 million 490 $3,428,843  $8,950,892  $9,092,971  

$1 million - $10 million 1,021 $996,130  $1,037,825  $652,905  

< $1 million 1,982 $197,907  $269,459  $85,219  

Average of All Broker-Dealers 3,764 $5,092,808  $21,948,551  $4,368,823  

 

                                                                                                                                                             

 

912       The data is obtained from December 2018 FOCUS reports and averaged across size 
groups. 

913  Fees, as detailed in the FOCUS data, include fees for account supervision, investment 
advisory services, and administrative services. The data covers both broker-dealers and 
dually registered firms.  



410 

 

Table 2, Panel B: Aggregate Total Revenues from Revenue Generating Activities for 

Broker-Dealers based on Dual-Registrant Status 

Broker-Dealer Type N Commissions Fees914 Sales of IC 
Shares 

Dually Registered as IAs 563 $4.62 bil. $17.56 bil. $2.65 bil. 

Standalone Registered BDs 3,201 $4.07 bil. $3.22 bil. $2.55 bil. 

All 3,764 $8.69 bil. $20.78 bil. $5.20 bil. 

 

As shown in Table 3, based on responses to Form BD, broker-dealers’ most commonly 

provided business lines include private placements of securities (62.7% of broker-dealers); retail 

sales of mutual funds (55.4%); acting as a broker or dealer retailing corporate equity securities 

over the counter (52.0%); acting as a broker or dealer retailing corporate debt securities (47.2%); 

acting as a broker or dealer selling variable contracts, such as life insurance or annuities (41.0%); 

acting as a broker of municipal debt/bonds or U.S. government securities (39.8% and 37.4%, 

respectively); acting as an underwriter or selling group participant of corporate securities 

(31.2%); and investment advisory services (26.4%), among others.915  

                                                                                                                                                             

 

914  See id.  
915  Form BD requires applicants to identify the types of business engaged in (or to be 

engaged in) that accounts for 1% or more of the applicant’s annual revenue from the 
securities or investment advisory business. Table 3 provides an overview of the types of 
businesses listed on Form BD, as well as the frequency of participation in those 
businesses by registered broker-dealers as of December 2018.   

 



411 

 

Table 3: Lines of Business at Retail Broker-Dealers as of December 2018 

 Total 

Line of Business 
Number of 

Broker-
Dealers 

Percent of 
Broker-
Dealers 

Private Placements of Securities 1,735 62.70% 

Mutual Fund Retailer 1,533 55.40% 

Broker or Dealer Retailing:   

    Corporate Equity Securities OTC 1,438 51.97% 

    Corporate Debt Securities 1,306 47.20% 

    Variable Contracts 1,132 40.91% 

Municipal Debt/Bonds Broker 1,101 39.79% 

U.S. Government Securities Broker 1,035 37.41% 

Put and Call Broker or Dealer or Options Writer 993 35.89% 

Underwriter or Selling Group Participant - Corporate Securities 862 31.15% 

Non-Exchange Member Arranging For Transactions in Listed Securities by 
Exchange Member 

785 28.37% 

Investment Advisory Services 730 26.38% 

Broker or Dealer Selling Tax Shelters or Limited Partnerships – Primary 
Market 

619 22.37% 

Trading Securities for Own Account 614 22.19% 

Municipal Debt/Bonds Dealer 475 17.17% 

U.S. Government Securities Dealer 339 12.25% 

Solicitor of Time Deposits in a Financial Institution 308 11.13% 

Underwriter - Mutual Funds 237 8.57% 

Broker or Dealer Selling Interests in Mortgages or Other Receivables 216 7.81% 

Broker or Dealer Selling Oil and Gas Interests 207 7.48% 

Broker or Dealer Making Inter-Dealer Markets in Corporate Securities OTC 207 7.48% 

Broker or Dealer Involved in Networking, Kiosk, or Similar Arrangements 
(Banks, Savings Banks, Credit Unions) 

197 7.12% 

Internet and Online Trading Accounts 192 6.94% 

Exchange Member Engaged in Exchange Commission Business Other than 
Floor Activities 

171 6.18% 

Broker or Dealer Selling Tax Shelters or Limited Partnerships – Secondary 
Market 

164 5.93% 

Commodities 162 5.85% 

Executing Broker 107 3.87% 



412 

 

Day Trading Accounts 89 3.22% 

Broker or Dealer Involved in Networking, Kiosk, or Similar Arrangements 
(Insurance Company or Agency) 

88 3.18% 

Real Estate Syndicator 94 3.40% 

Broker or Dealer Selling Securities of Non-Profit Organizations 71 2.57% 

Exchange Member Engaged in Floor Activities 61 2.20% 

Broker or Dealer Selling Securities of Only One Issuer or Associate Issuers 43 1.55% 

Prime Broker 21 0.76% 

Crowdfunding FINRA Rule 4518(a) 21 0.76% 

Clearing Broker in a Prime Broker 14 0.51% 

Funding Portal 8 0.29% 

Crowdfunding FINRA Rule 4518(b) 5 0.18% 

Number of Retail-Facing Broker-Dealers 2,766 
  

b. Investment Advisers 

Other parties that could be affected by Regulation Best Interest are SEC- or state-

registered investment advisers, because Regulation Best Interest could affect the competitive 

landscape in the market for the provision of financial advice.916  This section first discusses SEC-

registered investment advisers, followed by a discussion of state-registered investment advisers. 

                                                                                                                                                             

 

916  In addition to SEC-registered investment advisers, which are the focus of this section, 
Regulation Best Interest could also affect banks, trust companies, insurance companies, 
and other providers of financial advice. 



413 

 

As of December 2018, there were approximately 13,300 investment advisers registered 

with the Commission.  The majority of SEC-registered investment advisers report that they 

provide portfolio management services for individuals and small businesses.917   

Of all SEC-registered investment advisers, 359 identify themselves as dually registered 

broker-dealers.918  Further, 2,421 investment advisers (18%) report an affiliate that is a broker-

dealer, including 1,878 investment advisers (14%) that report an SEC-registered broker-dealer 

affiliate.919  As shown in Panel A of Table 4 below, in aggregate, investment advisers have over 

$84 trillion in AUM.  A substantial percentage of AUM at investment advisers is held by 

institutional clients, such as investment companies, pooled investment vehicles, and pension or 

profit sharing plans; therefore, the total number of accounts for investment advisers is only 29% 

of the number of customer accounts for broker-dealers.  

Based on staff analysis of Form ADV data, approximately 62% of registered investment 

advisers (8,235) have some portion of their business dedicated to retail investors, including both 

                                                                                                                                                             

 

917  Of the approximately 13,300 SEC-registered investment advisers, 8,410 (63.24%) report 
in Item 5.G.(2) of Form ADV that they provide portfolio management services for 
individuals and/or small businesses. In addition, there are approximately 17,300 state-
registered investment advisers, of which 125 are also registered with the 
Commission.  Approximately 13,900 state-registered investment advisers are retail facing 
(see Item 5.D of Form ADV). 

918  See supra footnote 892. 
919  Item 7.A.1 of Form ADV. 



414 

 

high net worth and non-high net worth individual clients,920 as shown in Panel B of Table 4.921  

In total, these firms have approximately $41.4 trillion of AUM.922  Approximately 8,200 

registered investment advisers (61%) serve almost 32 million non-high net worth individual 

clients and have approximately $4.8 trillion in AUM, while approximately 8,000 registered 

investment advisers (60%) serve approximately 4.8 million high net worth individual clients with 

$6.15 trillion in AUM.923  

Table 4, Panel A: Registered Investment Advisers (RIAs) as of December 2018 

Cumulative RIA AUM and Accounts  

Size of Investment Adviser 
(AUM) 

Number 
of RIAs 

Number of Dually 
Registered RIAs Cumulative AUM 

Cumulative 
Number of 
Accounts 

> $50 billion  270 15 $59,264 bil. 20,655,756 

$1 billion to $50 billion  3,453 121 $22,749 bil. 13,304,154 

$500 million to $1 billion  1,635 47 $1,151 bil. 1,413,099 

                                                                                                                                                             

 

920  We note that the data on individual clients obtained from Form ADV may not be exactly 
the same as who would be a “retail customer” as defined in Regulation Best Interest 
because the data obtained from Form ADV regarding clients who are individuals does not 
involve any test of use for personal, family, or household purposes. 

921  We use the responses to Items 5.D.(a)(1), 5.D.(a)(3), 5.D.(b)(1), and 5.D.(b)(3) of Part 
1A of Form ADV. If at least one of these responses was filled out as greater than 0, the 
firm is considered as providing business to retail investors. Part 1A of Form ADV.   

922  The aggregate AUM reported for these investment advisers that have retail investors 
includes both retail AUM as well as any institutional AUM also held at these advisers. 

923  Estimates are based on IARD system data as of December 31, 2018.  The AUM reported 
here is specifically that of those non-high net worth clients.  Of the 8,235 investment 
advisers serving retail investors, 318 are also dually registered as broker-dealers.  



415 

 

$100 million to $500 million 5,927 119 $1,397 bil. 5,135,070 

$10 million to $100 million  1,070 24 $59 bil. 310,031 

$1 million to $10 million  162 3 $0.8 bil. 69,664 

< $1 million 782 30 $0.02 bil. 13,976 

Total 13,299 359 $84,621 bil. 41,081,750 

 

Table 4, Panel B: Retail Registered Investment Advisers (RIAs) as of December 2018 

Cumulative RIA AUM and Accounts  

Size of Investment Adviser 
(AUM) Num. of RIAs Num. of Dually 

registered RIAs Cumulative AUM 
Cumulative 
Number of 
Accounts 

> $50 billion  119  14 $30,291 bil. 20,592,326 

$1 billion to $50 billion  1,614  111 $9,570 bil. 13,224,188 

$500 million to $1 billion  1,007 44 $700 bil. 1,392,842 

$100 million to $500 million 4,548  113 $1,026 bil. 5,287,584 

$10 million to $100 million  706  23 $40 bil. 308,285 

$1 million to $10 million  102  3 $0.5 bil. 69,534 

< $1 million 169 10 $0.02 bil. 13,946 

Total IAs924  8,235 318 $41,434 bil. 40,887,325 

 

In addition to SEC-registered investment advisers, other investment advisers are 

registered with state regulators.925  As of December 2018, there are 17,268 state-registered 

                                                                                                                                                             

 

924  Total IAs includes all retail-facing investment advisers, including those dual-registrants 
that have retail-facing SEC-registered broker-dealers and SEC-registered investment 
advisers. 

925  Item 2.A. of Part 1A of Form ADV and Advisers Act rules 203A-1 and 203A-2 require 
an investment adviser to register with the SEC if it (1) is a large adviser that has $100 

 

 



416 

 

investment advisers,926 of which 125 are also registered with the Commission.  Of the state-

registered investment advisers, 204 are dually registered as broker-dealers, while approximately 

4.6% (786) report a broker-dealer affiliate.  In aggregate, state-registered investment advisers 

have approximately $334 billion in AUM.  Eighty-two percent of state-registered investment 

advisers report that they provide portfolio management services for individuals and small 

businesses, compared to 63% for Commission-registered investment advisers. 

Approximately 81% of state-registered investment advisers (13,927) have some portion 

of their business dedicated to retail investors,927 and in aggregate, these firms have 

                                                                                                                                                             

 

million or more of regulatory AUM (or $90 million or more if an adviser is filing its most 
recent annual updating amendment and is already registered with the SEC); (2) is a mid-
sized adviser that does not meet the criteria for state registration or is not subject to 
examination; (3) meets the requirements for one or more of the revised exemptive rules 
under section 203A; (4) is an adviser (or subadviser) to a registered investment company; 
(5) is an adviser to a business development company and has at least $25 million of 
regulatory AUM; or (6) receives an order permitting the adviser to register with the 
Commission. Although the statutory threshold is $100 million, the SEC raised the 
threshold to $110 million to provide a buffer for mid-sized advisers with AUM close to 
$100 million to determine whether and when to switch between state and Commission 
registration. Advisers Act rule 203A-1(a). 

926  There are 70 investment advisers with latest reported regulatory AUM in excess of $110 
million but that are not listed as registered with the SEC. None of these 70 investment 
advisers has exempted status with the Commission.  For the purposes of this rulemaking, 
these are considered potentially erroneous submissions. 

927  We use the responses to Items 5.D.(a)(1), 5.D.(a)(3), 5.D.(b)(1), and 5.D.(b)(3) of Part 
1A. If at least one of these responses was filled out as greater than 0, the firm is 
considered as providing business to retail investors. Form ADV Part 1A.   



417 

 

approximately $324 billion in AUM.928  Approximately 13,910 (81%) state-registered advisers 

serve 14 million non-high net worth retail clients and have approximately $137 billion in AUM, 

while over 11,497 (67%) state-registered advisers serve approximately 170,000 high net worth 

retail clients with $169 billion in AUM.929 

c. Trends in the Relative Numbers of Providers of Financial Services 

Over time, the relative number of broker-dealers and investment advisers has changed. 

Figure 1 presented below shows the time series trend of growth in broker-dealers and SEC-

registered investment advisers between 2005 and 2018.  Over the last 14 years, the number of 

broker-dealers has declined from over 6,000 in 2005 to less than 4,000 in 2018, while the 

number of investment advisers has increased from approximately 9,000 in 2005 to over 13,000 in 

2018.  This change in the relative numbers of broker-dealers and investment advisers over time 

likely is a reflection of the market for investment advice, and potentially of the choices available 

to retail investors regarding how to receive or pay for such advice, the nature of the advice, and 

the attendant conflicts of interest.   

                                                                                                                                                             

 

928  The aggregate AUM reported for these investment advisers that have retail investors 
includes both retail AUM as well as any institutional AUM also held at these advisers. 

929  Estimates are based on IARD system data as of February 10, 2018.  The AUM reported 
here is specifically that of those non-high net worth investors.  Of the 13,927 state-
registered investment advisers serving retail investors, 134 may also be dually registered 
as broker-dealers.  



418 

 

Figure 1: Time Series of the Number of SEC-Registered Investment Advisers  

and Broker-Dealers (2005 – 2018) 

 

Increases in the number of investment advisers and decreases in the number of broker-

dealers could have occurred for a number of reasons, including changes in regulation and the 

enforcement of regulation, anticipation of possible regulatory changes, technological innovation 

(e.g., the increase in automated advisers, which are often colloquially referred to as “robo-

advisors” and online trading platforms), product proliferation (e.g., index mutual funds and 

exchange-traded products), and industry consolidation driven by economic and market 

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Investment Advisers Broker-Dealers



419 

 

conditions, particularly among broker-dealers.930  Commission staff has observed the transition 

by broker-dealers from traditional brokerage services to also providing investment advisory 

services (often under an investment adviser registration, whether federal or state), and many 

firms have been more focused on offering fee-based accounts because they provide a more 

steady source of revenue than accounts that charge commissions and are dependent on 

transactions.931  Broker-dealers have indicated that the following factors have contributed to this 

                                                                                                                                                             

 

930  See Hester Peirce, Dwindling Numbers in the Financial Industry, Brookings Center on 
Markets and Regulation Report (May 15, 2017), available at 
https://www.brookings.edu/research/dwindling-numbers-in-the-financial-industry/ 
(“Brookings Report”), which notes that “SEC restrictions have increased by almost thirty 
percent [since 2000],” and that regulations post-2010 were driven in large part by the 
Dodd-Frank Act.  Further, the Brookings Report observation of increased regulatory 
restrictions on broker-dealers only reflects CFTC or SEC regulatory actions, but does not 
include regulation by FINRA, other SROs, National Futures Association (“NFA”), or the 
Municipal Securities Rulemaking Board (“MSRB”). 

931  Beyond Commission observations, the Brookings Report, supra footnote 930, also 
discusses the shift from broker-dealer to investment advisory business models for retail 
investors, in part due to the DOL Fiduciary Rule.  Declining transaction-based revenue 
due to declining commission rates and competition from discount brokerage firms has 
made fee-based securities and services more attractive to providers of such securities and 
services.  Although discount brokerage firms generally provide execution-only services 
and do not compete directly in the advice market with full service broker-dealers and 
investment advisers, entry by discount brokers has contributed to lower commission rates 
throughout the broker-dealer industry. Further, fee-based activity generates a steady 
stream of revenue regardless of the customer trading activity, unlike commission-based 
accounts. See also Angela A. Hung, et al., Investor and Industry Perspectives on 
Investment Advisers and Broker-Dealers, RAND Institute for Civil Justice Technical 
Report (2008), available at 
https://www.rand.org/content/dam/rand/pubs/technical_reports/2008/RAND_TR556.pdf 
(“2008 RAND Study”), which discusses a shift from transaction-based to fee-based 
brokerage accounts prior to recent regulatory changes.   



420 

 

migration: provision of revenue stability or increase in profitability,932 perceived lower 

regulatory burden, and provisions of more services to retail customers.933  Some firms have 

reported record profits as a result of moving clients into fee-based accounts, and cite that it 

provides “stability and high returns.”934 

                                                                                                                                                             

 

932  Commission staff examined a sample of recent Form 10-K or Form 10-Q filings of large 
broker-dealers, many of which are dually registered as investment advisers, that have a 
large fraction of retail customer accounts to identify relevant broker-dealers.  See, e.g., 
Edward Jones 3/14/2019 Form 10-K available at 
https://www.sec.gov/Archives/edgar/data/815917/000156459019007788/ck0000815917-
10k_20181231.htm; Raymond James 11/21/2018 Form 10-K available at 
https://www.sec.gov/Archives/edgar/data/720005/000072000518000083/rjf-
20180930x10k.htm;  Stifel 2/20/2019 Form 10-K available at 
https://www.sec.gov/Archives/edgar/data/720672/000156459019003474/sf-
10k_20181231.htm; Wells Fargo 2/27/2019 10-K available at 
https://www.sec.gov/Archives/edgar/data/72971/000007297119000227/wfc-
12312018x10k.htm; and Ameriprise 2/23/2018 Form 10-K available at 
https://www.sec.gov/Archives/edgar/data/820027/000082002718000008/amp12312017.h
tm.  We note that discussions in Form 10-K and 10-Q filings of this sample of broker-
dealers here may not be representative of other large broker-dealers or of small to mid-
size broker-dealers. 

933  See infra Section III.B.2.e.ii, which discusses industry trends, particularly in response to 
the DOL Fiduciary Rule. 

934  See Hugh Son, Morgan Stanley Wealth-Management Fees Climb to All-Time High, 
BLOOMBERG, Jan. 18, 2018, https://www.bloomberg.com/news/articles/2018-01-
18/morgan-stanley-wealth-management-fees-hit-record-on-stock-rally.  Morgan Stanley 
increased the percentage of client assets in fee-based accounts from 37% in 2013 to 44% 
in 2017, while decreasing the dependence on transaction-based revenues from 30% to 
19% over the same time period. See Morgan Stanley Strategic Update (Jan. 18, 2018), 
available at https://www.morganstanley.com/about-us-ir/shareholder/4q2017-strategic-
update.pdf.  See also Lisa Beilfuss & Brian Hershberg, WSJ Wealth Adviser Briefing: The 
Reinvention of Morgan and Merrill, Adviser Profile, WALL ST. J., Jan. 25, 2018,421 

 

Further, there has been a substantial increase in the number of retail clients at investment 

advisers, both high net worth clients and non-high net worth clients as shown in Figure 2.  

Although the number of non-high net worth retail customers of investment advisers dipped 

between 2010 and 2012, it increased by more than 12 million new non-high net worth retail 

clients between 2012 and 2017, and has declined since 2017.  With respect to AUM, we observe 

a similar, albeit more pronounced pattern for non-high net worth retail clients as shown in Figure 

3.  For high net worth retail clients, there has been a pronounced increase in AUM since 2012, 

although AUM has leveled off since 2015 and there also has been leveling and subsequent 

reduction in AUM for non-high net worth retail clients over a similar time period. 

                                                                                                                                                             

 

https://blogs.wsj.com/moneybeat/2018/01/25/wsj-wealth-adviser-briefing-the-
reinvention-of-morgan-and-merrill-adviser-profile/.    



422 

 

Figure 2: Time Series of the Number of Retail Clients of  

Investment Advisers (2010 – 2018) 

 

Figure 3: Time Series of the Retail Clients of  

Investment Advisers AUM (2010 – 2018) 

 



423 

 

d. Registered Representatives of Broker-Dealers, Investment Advisers, and 
Dually Registered Firms 

We estimate the number of associated natural persons of broker-dealers through data 

obtained from Form U4, which generally is filed for individuals who are engaged in the 

securities or investment banking business of a broker-dealer that is a member of an SRO 

(“registered representatives”).935  Similarly, we approximate the number of supervised persons of 

registered investment advisers through the number of registered investment adviser 

representatives (or “registered IARs”), who are supervised persons of investment advisers who 

meet the definition of investment adviser representatives in Advisers Act rule 203A-3 and are 

registered with one or more state securities authorities to solicit or communicate with clients.936 

                                                                                                                                                             

 

935  The number of associated natural persons of broker-dealers may be different from the 
number of registered representatives of broker-dealers because clerical/ministerial 
employees of broker-dealers are associated persons but are not required to register with 
FINRA.  Therefore, the registered representative number does not include such persons.  
However, we do not have data on the number of associated natural persons and therefore 
are not able to provide an estimate of the number of associated natural persons.  We 
believe that the number of registered representatives is an appropriate approximation 
because they are the individuals at broker-dealers that provide advice and services to 
customers.  

936  See Advisers Act, [17 CFR §275.203A-3 (2019)].  However, we note that the data on 
numbers of registered IARs may undercount the number of supervised persons of 
investment advisers who provide investment advice to retail investors because not all 
supervised persons who provide investment advice to retail investors are required to 
register as IARs.  For example, Commission rules exempt from IAR registration 
supervised persons who provide advice only to non-individual clients or to individuals 
that meet the definition of “qualified client.” In addition, state securities authorities may 
impose different criteria for requiring registration as an investment adviser representative.  



424 

 

We estimate the number of registered representatives and registered IARs, including 

dually -registered representatives, (together “registered financial professionals”) at broker-

dealers, investment advisers, and dual-registrants by considering only the employees of those 

firms that have Series 6 or Series 7 licenses or are registered with a state as a registered 

representative or investment adviser representative.937  We only consider employees at firms 

who have retail-facing business, as defined previously.938  We observe in Table 5 that 

approximately 60% of registered financial professionals are employed by dually registered 

entities.  The percentage varies by the size of the firm.  For example, for firms with total assets 

between $1 billion and $50 billion, 67% of all registered financial professionals in that size 

category are employed by dually registered firms.  Focusing on dually registered firms only, 

approximately 60.5% of total registered financial professionals at these firms are dually 

registered representatives; approximately 39.1% are only registered representatives; and less than 

one percent are only registered investment adviser representatives.  

                                                                                                                                                             

 

937  We calculate these numbers based on Form U4 filings. Representatives of broker-dealers, 
investment advisers, and issuers of securities must file this form when applying to 
become registered in appropriate jurisdictions and with SROs. Firms and representatives 
have an obligation to amend and update information as changes occur. Using the 
examination information contained in the form, we consider an employee a registered 
financial professional if he or she has an approved, pending, or temporary registration 
status for either Series 6 or 7 (registered representative) or is registered as an investment 
adviser representative in any state or U.S. territory (IAR).  We limit the firms to only 
those that do business with retail investors, and only to licenses specifically required as a 
registered representative or IAR. 

938  See supra footnotes 900 and 927. 



425 

 

 

Table 5: Total Registered Representatives at Broker-Dealers, Investment Advisers, and 

Dually Registered Firms with Retail Investors939  

Size of Firm 
(Total Assets for 
Standalone BDs 
and Dually 
Registered 
Firms; AUM for 
Standalone IAs) 

Total 
Number of 

Reps 

% of Reps in 
Dually 

Registered 
Firms 

% of Reps in 
Standalone 

BD w/ an IA 
Affiliate 

% of Reps in 
Standalone 

BD w/o an IA 
Affiliate 

% of Reps in 
Standalone 
IA w/ a BD 

Affiliate 

% Reps in 
Standalone 
IA w/o a BD 

Affiliate 

>$50 billion 84,461 73% 7% 0% 19% 1% 

$1 billion to $50 
billion 170,256 67% 11% 0% 15% 7% 

$500 million to 
$1 billion 29,874 71% 5% 1% 7% 16% 

$100 million to 
$500 million 66,924 51% 27% 0% 4% 18% 

$10 million to 
$100 million 106,178 55% 42% 2% 1% 1% 

$1 million to $10 
million  33,790 35% 54% 11% 0% 0% 

< $1 million 12,522 8% 52% 36% 3% 1% 

Total Licensed 
Representatives 504,005 60% 23% 2% 9% 6% 

 

                                                                                                                                                             

 

939  The classification of firms as dually registered, standalone broker-dealers, and standalone 
investment advisers comes from Forms BD, FOCUS, and ADV as described earlier. The 
number of representatives at each firm is obtained from Form U4 filings.  Note that all 
percentages in the table have been rounded to the nearest whole percentage point.  



426 

 

In Table 6 below, we estimate the number of employees who are registered 

representatives, registered investment adviser representatives, or dually registered 

representatives.940  Similar to Table 5, we calculate these numbers using Form U4 filings. Here, 

we also limit the sample to employees at firms that have retail-facing businesses as discussed 

previously.941  

In Table 6, approximately 25% of registered employees at registered broker-dealers or 

investment advisers are dually registered representatives.  However, this proportion varies 

significantly across size categories.  For example, for firms with total assets between $1 billion 

and $50 billion,942 approximately 35% of all registered employees are dually registered 

representatives.  In contrast, for firms with total assets below $1 million, 13% of all employees 

are dually registered representatives.  

                                                                                                                                                             

 

940  We calculate these numbers based on Form U4 filings.  
941  See supra footnotes 900 and 927. 
942  Firm size is defined as total assets from the balance sheet for broker-dealers and dual-

registrants (source: FOCUS reports) and as AUM for investment advisers (source: Form 
ADV).  We are unable to obtain customer assets for broker-dealers, and for investment 
advisers, we can only obtain information from Form ADV as to whether the firm assets 
exceed $1 billion.  We recognize that our approach of using firm assets for broker-dealers 
and customer assets for investment advisers does not allow for direct comparison; 
however, our objective is to provide measures of firm size and not to make comparisons 
between broker-dealers and investment advisers based on firm size.  Across both broker-
dealers and investment advisers, larger firms, regardless of whether we stratify on firm 
total assets or AUM, have more customer accounts, are more likely to be dually 
registered, and have more representatives or employees per firm than smaller broker-
dealers or investment advisers. 



427 

 

Table 6: Number of Employees at Retail-Facing Firms who are Registered Representatives, 

Investment Adviser Representatives, or Both943  

Size of Firm (Total Assets for 
Standalone BDs and Dually 
Registered Firms; AUM for 
Standalone IAs) 

Total Number 
of Employees 

Percentage of Dually 
Registered 

Representatives 

Percentage of 
Registered 

Representatives 
Only 

Percentages of 
IARs Only 

>$50 billion 218,539 19% 16% 1% 

$1 billion to $50 billion 328,842 35% 12% 4% 

$500 million to $1 billion 43,211 18% 40% 10% 

$100 million to $500 million 119,214 23% 24% 9% 

$10 million to $100 million 176,559 20% 39% 1% 

$1 million to $10 million 56,230 17% 39% 1% 

< $1 million 18,334 13% 46% 3% 

Total Employees at Retail-
Facing Firms 960,929 25% 23% 4% 

 

Approximately 87% of investment adviser representatives are dually registered 

representatives.  This percentage is relatively unchanged from 2010.  According to information 

provided in a FINRA comment letter in connection with the 913 Study, 87.6% of registered 

investment adviser representatives were dually registered as registered representatives as of mid-

October 2010.944  In contrast, approximately 52% of registered representatives were dually 

registered as investment adviser representatives at the end of 2018.945  

                                                                                                                                                             

 

943  See supra footnotes 899, 920, 940, and 942. Note that all percentages in the table have 
been rounded to the nearest whole percentage point.  

944  See Letter from Angela C. Goelzer, FINRA, to Jennifer B. McHugh, Senior Advisor to 
the Chairman, U.S. Securities and Exchange Commission, re: File Number 4-606; 

 

 



428 

 

e. Investor Account Statistics 

Investors seek financial advice and services to achieve a number of different goals, such 

as saving for retirement or children’s college education.  Approximately 73% of adults live in a 

household that invests.946  The OIAD/RAND survey indicates that non-investors are more likely 

to be female, to have lower family income and educational attainment, and to be younger than 

investors.947  Approximately 35% of households that do invest do so through accounts such as 

broker-dealer or advisory accounts.948 

As shown above in Figures 2 and 3, the number of retail investors and their AUM 

associated with investment advisers has increased significantly, particularly since 2012.  As of 

                                                                                                                                                             

 

Obligations of Brokers, Dealers and Investment Advisers (Nov. 3, 2010), at 1, available 
at https://www.sec.gov/comments/4-606/4606-2836.pdf.   

945  In order to obtain the percentage of IARs that are dually registered as registered 
representatives of broker-dealers, we sum the representatives at dually registered entities 
and those at investment advisers across size categories to obtain the aggregate number of 
representatives in each of the two categories.  We then divide the aggregate dually 
registered representatives by the sum of the dually registered representatives and the 
IARs at investment adviser-only firms.  We perform a similar calculation to obtain the 
percentage of registered representatives of broker-dealers that are dually registered as 
IARs. 

946  See OIAD/RAND, defining "investors" as persons "owning at least one type of 
investment account, (e.g., an employer-sponsored retirement account, a non-employer 
sponsored retirement account such as an IRA, a college savings investment account, or 
some other type of investment account such as a brokerage or advisory account), or 
owning at least one type of investment asset (e.g., mutual funds, exchange-traded funds 
or other funds; individual stocks; individual bonds; derivatives; and annuities).” 

947  Id. at 36. 
948  Id. at 39. 



429 

 

December 2016, nearly $24.2 trillion is invested in retirement accounts, of which $7.5 trillion is 

in IRAs.949  A total of 43.3 million U.S. households have either an IRA or a brokerage account; 

an estimated 20.2 million U.S. households have a brokerage account, and 37.7 million 

households have an IRA (including 72% of households that also hold a brokerage account).950 

With respect to IRA accounts, one commenter documents that 43 million U.S. households own 

either traditional or Roth IRAs and that approximately 70% are held with financial professionals, 

with the remainder being direct market.951  Further, this commenter finds that approximately 

64% of households have aggregate IRA (traditional and Roth) balances of less than $100,000, 

and approximately 36% of investors have balances below $25,000. As noted in one study, the 

growth of assets in traditional IRAs comes from rollovers from workplace retirement plans; for 

                                                                                                                                                             

 

949  See Sarah Holden & Daniel Schrass, The Role of IRAs in U.S. Households’ Saving for 
Retirement, 2016, ICI RES. PERSP., Jan. 2017, available at https://www.ici.org/pdf/per17-
08.pdf. See also ICI Letter. 

950  The data is obtained from the Federal Reserve System’s 2016 Survey of Consumer 
Finances (“SCF Survey”), a triennial survey of approximately 6,200 U.S. households, and 
imputes weights to extrapolate the results to the entire U.S. population.  As noted, some 
survey respondent households have both a brokerage and an IRA. See Board of 
Governors of the Federal Reserve System, Survey of Consumer Finances (2016), 
available at https://www.federalreserve.gov/econres/scfindex.htm.  The SCF Survey data 
does not directly examine the incidence of households that could use advisory accounts 
instead of brokerage accounts; however, some fraction of IRA accounts reported in the 
survey could be those held at investment advisers. 

951  See Sarah Holden & Daniel Schrass, The Role of IRAs in US Households’ Saving for 
Retirement, 2018, ICI RES. PERSP., Dec. 2018, available at 
https://www.ici.org/pdf/per24-10.pdf.  See also ICI Letter. 



430 

 

example, 58% of traditional IRAs consist of rollover assets, and contributions due to rollovers 

exceeded $460 billion in 2015 (the most recently available data).952   

While the number of retail investors obtaining services from investment advisers and the 

aggregate value of associated AUM has increased, the OIAD/RAND study also suggests that the 

general willingness of investors to use planning or to take financial advice regarding strategies, 

securities, or accounts is relatively fixed over time.953  With respect to the account assets 

associated with retail investors, the OIAD/RAND survey also estimates that approximately 10% 

of investors who have brokerage or advisory accounts hold more than $500,000 in assets, while 

approximately 47% hold $50,000 in assets or less.  Altogether, investors who have brokerage or 

advisory accounts typically trade infrequently, with approximately 31% reporting no annual 

transactions and an additional approximately 30% reporting three or fewer transactions per 

year.954 

With respect to particular securities, commenters have provided us with additional 

information about ownership of mutual funds and IRA account statistics.  For example, one 

commenter stated that 56 million U.S. households and nearly 100 million individual investors 

own mutual funds, of which 80% are held through 401(k) and other work-based retirement plans, 

                                                                                                                                                             

 

952  See Holden & Schrass (2018), supra footnote 951. 
953  See OIAD/RAND at 50 (noting that this conclusion was limited by the methodology of 

comparing participants in a 2007 survey with those surveyed in 2018). 
954  See OIAD/RAND. 



431 

 

while 63% of investors hold mutual funds outside of those plans.955  Of those investors who own 

mutual funds outside of workplace retirement plans, approximately 50% use financial 

professionals, while nearly one-third purchase direct-sold funds either directly from the fund 

company or through a discount broker.956   

Table 7 below provides an overview of account ownership segmented by account type 

(e.g., IRA, brokerage, or both) and investor income category based on the SCF Survey.957  

Table 7: Ownership by Account Type in the U.S. by Income Group 

(as reported by the 2016 SCF Survey) 

Income Category % Brokerage Only % IRA Only % Both Brokerage and IRA 

Bottom 25% 1.2% 7.6% 2.4% 

25% - 50% 3.2% 14.5% 5.4% 

50% - 75% 4.1% 21.4% 11.4% 

75% - 90% 7.5% 33.4% 16.5% 

Top 10% 12.0% 24.7% 43.9% 

Average 4.4% 18.3% 11.6% 

 

                                                                                                                                                             

 

955  See ICI Letter; see also Sarah Holden, Daniel Schrass, & Michael Bogdan, Ownership of 
Mutual Funds, Shareholder Sentiment, and Use of the Internet, 2018, ICI RES. PERSP., 
Nov. 2018, available at https://www.ici.org/pdf/per22-06.pdf. 

956  See Holden et al. (2018), supra footnote 955. See also ICI Letter.  
957  See SCF Survey, supra footnote 950.  To the extent that investors have IRA accounts at 

banks that are not also registered as broker-dealers, our data may overestimate the 
numbers of IRA accounts held by retail investors that could be subject to Regulation Best 
Interest. 



432 

 

With respect to the nature of the accounts held by investors and whether they are 

managed by financial professionals, the OIAD/RAND survey finds that 36% of its sample of 

participants report that they currently use a financial professional and approximately 33% receive 

some kind of recommendation service.958  Of the subset of those investors who report holding a 

brokerage, advisory, or similar account, approximately 33% self-direct their own account, 25% 

have their account managed by a financial professional, and 10% have their account advised by a 

financial professional.959  For those investors who take financial advice, the OIAD/RAND study 

suggests that they may differ in characteristics from other investors.  The survey further finds 

that investors who take financial advice are generally older, retired, and have a higher income 

than other investors, but also may have lower educational attainment (e.g., high school or less) 

than other investors.960 

Similarly, one question in the SCF Survey asks what sources of information households’ 

financial decision-makers use when making decisions about savings and investments. 

Respondents can list up to fifteen possible sources from a preset list that includes “Broker” or 

“Financial Planner” as well as “Banker,” “Lawyer,” “Accountant,” and a list of non-professional 
                                                                                                                                                             

 

958  See OIAD/RAND at 48.  In a focus group preceding the survey, focus group participants 
provided a number of reasons for not using a financial professional in making 
investments, including being unable or unwilling to pay the fees, doing their own 
financial research, being unsure of how to work with a professional, and being concerned 
about professionals selling securities without attending to investors' plans and goals. 

959  See OIAD/RAND at 46. 
960  See OIAD/RAND at 48. 



433 

 

sources.961  Panel A of Table 8 below presents the breakdown of where households who have 

brokerage accounts seek advice about savings and investments. The table shows that of those 

respondents with brokerage accounts, 23% (4.7 million households) use advice services of 

broker-dealers for savings and investment decisions, while 49% (7.8 million households) take 

advice from a “financial planner.”  Approximately 36% (7.2 million households) seek advice 

from other sources such as bankers, accountants, and lawyers.  Almost 25% (5.0 million 

households) do not use advice from the above sources. 

 Panel B of Table 8 below presents the breakdown of advice received by households who 

have an IRA. Approximately 15% (5.7 million households) rely on advice services of their 

broker-dealers and 48% (18.3 million households) obtain advice from financial planners.  

Approximately 41% (15.5 million households) seek advice from bankers, accountants, or 

lawyers, while the 25% (9.5 million households) use no advice or seek advice from other sources. 

 

                                                                                                                                                             

 

961  See SCF Survey, supra footnote 950, which specifically asks participants “Do you get 
advice from a friend, relative, lawyer, accountant, banker, broker, or financial planner? 
Or do you do something else?” See Federal Reserve Codebook for 2016 Survey of 
Consumer Finances (2016), available at 
https://www.federalreserve.gov/econres/files/codebk2016.txt.  Other response choices 
presented by the survey include “Calling Around,” “Magazines,” “Self,” “Past 
Experience,” “Telemarketer,” and “Insurance Agent,” as well as other choices.  
Respondents could also choose “Do Not Save/Invest.”  The SCF Survey allows for 
multiple responses, so these categories are not mutually exclusive.  However, we would 
note that the list of terms in the question does not specifically include “investment 
adviser.” 



434 

 

Table 8, Panel A: Sources of Advice for Households who have a Brokerage Account in the 

U.S. by Income Group962  

Income Category % Taking Advice 
from Brokers 

% Taking Advice 
from Financial 

Planners  

% Taking Advice 
from Lawyers, 

Bankers, or 
Accountants 

% Taking no 
Advice or from 
Other Sources 

Bottom 25% 20.55% 53.89% 35.64% 24.30% 

25% - 50% 22.98% 38.03% 43.92% 32.36% 

50% - 75% 20.75% 52.00% 31.42% 23.61% 

75% - 90% 22.56% 48.94% 32.25% 28.10% 

Top 10% 25.29% 50.53% 38.47% 21.06% 

Average 23.02% 49.02% 35.99% 24.94% 

 

Table 8, Panel B: Sources of Advice for Households who have an IRA in the U.S. by 

Income Group963  

Income Category % Taking Advice 
from Brokers 

% Taking Advice 
from Financial 

Planners  

% Taking Advice 
from Bankers,  

Accountants, or 
Lawyers 

% Taking no 
Advice or from 
Other Sources 

Bottom 25% 12.14% 38.30% 43.69% 31.85% 

25% - 50% 9.79% 43.82% 40.67% 32.74% 

50% - 75% 14.93% 45.20% 41.23% 25.23% 

75% - 90% 14.68% 52.14% 41.65% 24.26% 

Top 10% 21.40% 55.40% 40.03% 18.56% 

Average 15.25% 48.45% 41.17% 25.28% 

 
                                                                                                                                                             

 

962  See SCF Survey, supra footnote 950. 
963  Id.  



435 

 

The OIAD/RAND survey notes that for survey participants who reported working with a 

specific individual for investment advice, 70% work with a dual-registrant, 5.4% with a broker-

dealer, and 5.1% with an investment adviser.964 

f. Financial Incentives of Firms and Financial Professionals 

Commission experience indicates that there is a broad range of financial incentives 

provided by standalone broker-dealers and dually registered firms to their financial 

professionals.965  While some firms provide base pay for their financial professionals ranging 

from approximately $45,000 to $85,000 per year, many firms provide compensation only 

through a percentage of commissions, plus performance-based awards, such as individual or 

team bonuses based on production.966  Commission-based compensation to financial 

professionals range from 30% to 95% of total commissions paid to the firm on a particular 

transaction, although this compensation is generally reduced by various costs and expenses 

attributable to the financial professional (e.g., clearing costs associated with some securities, 
                                                                                                                                                             

 

964  See OIAD/RAND at 53.  As documented by OIAD/RAND, retail investors surveyed had 
difficulty in accurately identifying the type of relationship that they have with their 
financial professional. 

965  Information on compensation and financial incentives generally relates to 2016 
compensation arrangements for a sample of approximately 20 firms, comprising both 
standalone broker-dealers and dually registered firms.  We acknowledge that the 
information provided in this baseline may not be representative of the compensation 
structures more generally because of the diversity and complexity of services and 
securities offered by standalone broker-dealers and dually registered firms. 

966  Commission experience indicates that some firms award production bonuses based on 
commissions generated, while other firms provide awards based on AUM. 



436 

 

charges related to an SRO or the Securities Investor Protection Corporation  (“SIPC”), and 

insurance, among others).   

Several firms have varying commission-based compensation rates depending on the 

investment type being sold.  For example, compensation ranges from 76.5% for stocks, bonds, 

options, and commodities to 90% for open-ended mutual funds, private placements, and unit 

investment trusts.  Several firms charge varying commissions on securities depending on the 

amount of security sold (e.g., rates on certain proprietary mutual funds range from 0.75% to 

5.75% depending on the share class), but do not provide those rates to financial professionals 

based on investment type.  Some firms also provide incentives for their financial professionals to 

recommend proprietary securities and services over third-party or non-proprietary securities.  

Commission rates for some firms, however, decline as the dollar amount sold increases, and such 

rates vary across asset classes as well (e.g., within a given share class, rates range from 1.50% to 

5.75% depending on the dollar amount of the fund sold).  With respect to compensation to 

individual financial professionals, if compensation rates for mutual funds are approximately 90% 

(as discussed above, for example), financial professionals can earn between 0.68% and 5.18%, 

depending on the type and amount of security sold.   

For financial professionals who do not earn commission-based compensation, some firms 

charge retail customers flat fees ranging from $500 to $2,500, depending on the level of service 

required, such as financial planning, while others charge hourly rates ranging from $150 to $350 

per hour.  For dually registered firms that charge clients based on a percentage of AUM, the 

average percentage charge varies based on the size of the account: the larger the AUM, the lower 

the percentage fee charged.  Percentage-based fees for the sample firms range from 

approximately 1.5% for accounts below $250,000 to 0.5% for accounts in excess of $1 



437 

 

million.967  If compensation rates range between 30% and 95%, a firm charging a customer $500 

can provide compensation to the financial professional between $150 and $475 for each financial 

plan provided.  For fee-based accounts, assuming that a retail customer has an account worth 

$250,000, the firm will charge account-level fees of $3,750 ($250,000 x 1.5%), and the financial 

professional can earn between $1,170 and $3,560 annually for each account. However, accounts 

may also be subject to additional fees beyond those described here and the financial 

professionals also may receive additional compensation. 

In addition to “base” compensation, most firms also provide bonuses (based on either 

individual or team performance) or variable compensation, ranging from approximately 10% to 

83% of base compensation.  These bonuses could be awarded based on either commissions 

generated or AUM.  While the majority of firms base at least some portion of their bonuses on 

production, usually in the form of total gross revenue, other forms of bonus compensation are 
                                                                                                                                                             

 

967  We note that some firms could have higher or lower commission-based compensation 
rates or asset-based fee percentages than those provided here.  For example, based on a 
review of Form ADV Part 2A (the brochure) of several large dual-registrants (not 
included in the sample above), asset-based fees for low AUM accounts could range as 
high as 2.0% to 3.0%, with the average fee for high AUM accounts ranging between 
0.5% to 1.5%.  See also  AdvisoryHQ, Average Financial Advisor Fees in 2018-2019: 
Fees Charged by Advisory & Wealth Management Firms, 
http://www.advisoryhq.com/articles/financial-advisor-fees-wealth-managers-planners-
and-fee-only-advisors/. The AdvisoryHQ report shows that average asset-based fees 
range from 1.18% for accounts less than $50,000 to less than 0.60% for accounts in 
excess of $30 million, while fixed-fees range from $7,500 for accounts less than 
$500,000 to $55,000 for accounts in excess of $7.5 million.  Again, we note that these are 
charges to clients and are not indicative of the total compensation earned by the financial 
professional per account. 



438 

 

derived from customer retention, customer experience, and manager assessment of performance.  

Moreover, some firms use a tiered system within their compensation grids depending on firm 

experience and production levels.  Financial professionals’ variable compensation can also 

increase when they enroll retail customers in advisory accounts versus other types of accounts, 

such as brokerage accounts.  Some firms also provide transition bonuses for financial 

professionals with prior work experience based on historical trailing production levels and AUM.  

Although many firms do not have any incentive-based contests or programs, some firms award 

non-cash incentives for meeting certain performance, best practices, or customer service goals, 

including trophies, dinners with senior officers, and travel to annual meetings with other award 

winners.968   

2. Regulatory Baseline and Current Market Practices 

Broker-dealers' current standards of conduct are governed by federal and state law and 

regulation as well as the rules and guidance of SROs,969 particularly, for the purposes of this 

                                                                                                                                                             

 

968  See FINRA Regulatory Notice 16-29, Gifts, Gratuities and Non-Cash Compensation 
Rules – FINRA Requests Comment on Proposed Amendments to Its Gifts, Gratuities and 
Non-Cash Compensation Rules (Aug. 2016).  At the time this notice was published, 
FINRA’s impression was that investment-specific internal sales contests for non-cash 
compensation were not widely used. 

969  Generally, all registered broker-dealers that deal with the public must become members 
of FINRA, a registered national securities association, and may choose to become 
exchange members.  See Exchange Act section 15(b)(8) and Exchange Act rule 15b9-1.  
FINRA is the sole national securities association registered with the SEC under section 
15A of the Exchange Act.  Accordingly, for purposes of discussing a broker-dealer’s 

 

 



439 

 

rulemaking, those related to the suitability of recommendations and disclosure of conflicts of 

interest.  In response to comment letters that stated the Proposing Release did not fully consider 

the current market practices, we have provided an overview of these practices reported by 

commenters and from industry studies.970  Together, these laws and regulations comprise the 

regulatory baseline. 

a. Federal and State Securities Laws 

Under the antifraud provisions of the federal securities laws and SRO rules, broker-

dealers are required to deal fairly with their customers.971  In addition, broker-dealers must 

comply with a wide range of specific obligations specified in the Exchange Act and the rules 

thereunder.  Moreover, there is a body of case law holding that broker-dealers that exercise 

                                                                                                                                                             

 

regulatory requirements when providing advice, we focus on FINRA’s regulation, 
examination, and enforcement with respect to member broker-dealers.   

970  See, e.g., AALU Letter; Letter from John L. Thornton, Co-Chair, Committee in Capital 
Markets Regulation (Jul. 18, 2018) (“CCMR Letter”); CFA August 2018 Letter; Davis & 
Harman Letter; EPI Letter; Lincoln Financial Letter; NASAA August 2018 Letter; UVA 
Letter (which stated that the Proposing Release did not adequately address current market 
practices and/or provide industry studies and surveys of those practices). 

971  See, e.g., FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade); 
NASD Interpretive Material 2310-2, Fair Dealing with Customers (“Implicit in all 
member and registered representative relationships with customers and others is the 
fundamental responsibility for fair dealing. Sales efforts must therefore be undertaken 
only on a basis that can be judged as being within the ethical standards of [FINRA’s] 
Rules, with particular emphasis on the requirement to deal fairly with the public.”); 
Charles Hughes & Co. v. SEC, 139 F.2d 434 (2d Cir. 1943), cert. denied, 321 U.S. 786 
(1944); Hanly v. SEC, 415 F.2d 589, 596 (2d Cir. 1969); see also e.g., 913 Study at 51 
and footnote 221. 



440 

 

discretion or control over customer assets, or have a relationship of trust and confidence with 

their customers, may owe customers a fiduciary duty, depending on the 

circumstances.972  Additionally, some states provide through statute or regulation, among other 

requirements such as minimum requirements for sales practices, that broker-dealers have some 

form of state-specific fiduciary duty to their customers in at least some circumstances.  

Substantial variation exists among states’ fiduciary standards, ranging from states with express 

fiduciary standards that apply to broker-dealers to those with limited or no such standards.973  

                                                                                                                                                             

 

972 See, e.g., U.S. v. Skelly, 442 F.3d 94, 98 (2d Cir. 2006) (fiduciary duty found “most 
commonly” where “a broker has discretionary authority over the customer’s account”); 
United States v. Szur, 289 F.3d 200, 211 (2d Cir. 2002) (“Although it is true that there ‘is 
no general fiduciary duty inherent in an ordinary broker/customer relationship,’ a 
relationship of trust and confidence does exist between a broker and a customer with 
respect to those matters that have been entrusted to the broker.”) (citations omitted); Leib 
v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 461 F. Supp. 951, 953-954 (E.D. Mich. 
1978), aff’d, 647 F.2d 165 (6th Cir. 1981) (recognizing that a broker who has de facto 
control over non-discretionary account generally owes customer duties of a fiduciary 
nature; looking to customer’s sophistication, and the degree of trust and confidence in the 
relationship, among other things, to determine duties owed); Arleen W. Hughes, 
Exchange Act Release No. 4048 (Feb. 18, 1948) (Commission Opinion), aff’d sub nom. 
Hughes v. SEC, 174 F.2d 969 (D.C. Cir. 1949) (“Release 4048”) (noting that fiduciary 
requirements generally are not imposed upon broker-dealers who render investment 
advice as an incident to their brokerage unless they have placed themselves in a position 
of trust and confidence, and finding that Hughes was in a relationship of trust and 
confidence with her clients). See also Gross Letter (which discussed the obligations of 
broker-dealers with discretionary or de facto control over customer accounts); Solely 
Incidental Interpretation. 

973  See AARP August 2018 Letter; PIABA Letter; U. of Miami Letter. See also Michael S. 
Finke & Thomas Patrick Langdon, The Impact of the Broker-Dealer Fiduciary Standard 
on Financial Advice (Working Paper, Mar. 9, 2012) for a discussion of state fiduciary 
standards. One comment letter also provided an extensive overview of the fiduciary441 

 

b. FINRA Rule 2111: Suitability  

FINRA Rule 2111 (the “Suitability Rule”) requires that a broker-dealer or associated 

person have a reasonable basis to believe that a recommended securities transaction or 

investment strategy involving securities is suitable for the retail customer.974  A broker-dealer 

cannot disclaim away its suitability obligation under the Suitability Rule.975  We reviewed the 

Suitability Rule and drew upon it and enhanced the suitability requirement in developing 

Regulation Best Interest.976  FINRA also requires additional specific suitability obligations with 

                                                                                                                                                             

 

obligations of state-registered investment advisers, “typified by an expectation of 
undivided loyalty where the adviser acts primarily for the benefit of its clients.” See 
NASAA February 2019 Letter at 22 and footnote 40.  This comment letter also stated that 
“[s]ome states also extend these fiduciary obligations beyond investment advisers to 
brokers, especially in dual-hatted scenarios,” and that these fiduciary obligations were 
extended even when broker-dealers handled non-discretionary accounts. Id. at 23-24 and 
footnote 41.  

974  See FINRA Rule 2111, supra footnote 161.  As a “General Principle,” the rule states that 
associated persons have a “fundamental responsibility for fair dealing” and that the rule is 
intended to promote ethical sales practices and high standards of commercial conduct. 
See FINRA Rule 2111.01.  See also, In re Application of Raghavan Sathianathan, 
Exchange Act Release No. 54722 at 10 (Nov. 8, 2006) (“Sathianathan’s 
recommendations… were unsuitable because they were designed to maximize his own 
commissions rather than to establish a suitable portfolio.”).  See also 913 Study at 59 and 
footnote 187. 

975  FINRA Rule 2111.02 (Disclaimers). 
976  See supra footnote 161. The primary requirements for the Suitability Rule are described 

in the Proposing Release at Section IV.B.2.a. 



442 

 

respect to certain types of securities or transactions, such as variable insurance products and 

derivatives securities, including options and securities-based futures.977 

  As discussed by several commenters,978 the regulatory baseline also includes FINRA 

guidance on best practices, such as guidance regarding suitability, which provides guidance on 

how broker-dealers and associated persons should comply with suitability obligations when 

making recommendations to customers. FINRA guidance regarding suitability includes 

Regulatory Notice 12-25, which states that under the Suitability Rule, “a broker’s 

recommendations must be consistent with his customers’ best interests,”979 as well as other 

regulatory notices that provide guidance on the suitability of specific securities or investment 

strategies involving securities, including, but not limited to, mutual funds, variable contracts 

including annuities, structured and complex securities, leveraged and inverse exchange-traded 

products, and IRA rollovers.980    

                                                                                                                                                             

 

977  See, e.g., FINRA Rule 2330 (Members’ Responsibilities Regarding Deferred Variable 
Annuities); FINRA Rule 2360 (Options); FINRA Rule 2370 (Securities Futures); FINRA 
Rule 2821 (Sales Practices for Deferred Variable Annuities including a Suitability 
Obligation). See also 913 Study at 65-66. 

978  See CFA August 2018 Letter; Bank of America Letter; Transamerica August 2018 Letter. 
979  See FINRA Regulatory Notice 12-25; see also FINRA Regulatory Notice 13-31, 

Suitability – FINRA Highlights Examination Approaches, Common Findings and 
Effective Practices for Complying With its Suitability Rules (Sep. 2013) (which provides 
“…effective practices… to help firms enhance compliance and supervision under the 
suitability rule”). 

980  See, e.g., NASD Notice to Members 94-16, NASD Reminds Members Of Mutual Fund 
Sales Practice Obligations (Mar. 1994) and NASD Notice to Members 95-80, NASD 

 

 



443 

 

c. FINRA Report on Conflicts of Interest 

In 2013, FINRA published as guidance a Report on Conflicts of Interest (“FINRA 

Conflicts Report”) to provide an overview of effective practices that broker-dealers could 

employ to manage and mitigate conflicts of interest.981  In the report, FINRA provides 

suggestions for broker-dealers for addressing conflicts of interest related to three broad areas: a 

firm-level approach to identify and manage conflicts of interest; the production and distribution 

of new securities; and compensation and other financial incentives of associated persons.982  

                                                                                                                                                             

 

Further Explains Members Obligations and Responsibilities Regarding Mutual Funds 
Sales Practices (Sep. 1995) (mutual fund suitability and sales practices); NASD Notice to 
Members 96-86, NASD Regulation Reminds Members and Associated Persons that Sales 
of Variable Contracts are Subject to NASD Suitability Requirements (Dec. 1996) and 
NASD 99-35, NASD Reminds Members of Their Responsibilities Regarding Sales of 
Variable Annuities (May 1999) (suitability and sales practices of variable contracts and 
variable annuities); NASD Notice to Members 05-59, NASD Provides Guidance 
Concerning the Sale of Structure Products;  and FINRA Regulatory Notice 12-03, 
Complex Products – Heightened Supervision of Complex Products (Jan. 2012);  
(suitability and sales practices of structured and complex products); FINRA Regulatory 
Notice 09-31, FINRA Reminds Firms of Sales Practice Obligations Relating to 
Leveraged and Inverse Exchange-Traded Funds (June 2009) (sales practices of leveraged 
and inverse ETFs); and FINRA Regulatory Notice 13-45, Rollovers to Individual 
Retirement Accounts – FINRA Reminds Firms of Their Responsibilities Concerning IRA 
Rollovers (Dec. 2013) (obligations when recommending a rollover or transfer of assets 
from a sponsored retirement plan to an IRA). 

981  See FINRA Conflicts Report, supra footnote 459. See also IRI Letter, which notes that 
the FINRA Conflicts Report “…provides valuable guidance as to the elements of an 
effective practice framework for managing BDs’ conflicts of interest…” See also SIFMA 
August 2018 Letter; CFA August 2018 Letter; Raymond James Letter; Ameriprise Letter; 
ACLI Letter; Fein Letter. 

982  See FINRA Conflicts Report, supra footnote 459. 



444 

 

With respect to new securities, the FINRA Conflicts Report recommends, among other things, 

new security review committees and disclosure of conflicts related to recommendations of new 

securities to customers.983  The FINRA Conflicts Report also provides guidance to broker-

dealers on managing conflicts of interest that arise from compensation and financial incentives of 

broker-dealers.  For example, the FINRA Conflicts Report recommends increased surveillance of 

recommendations near compensation thresholds and capping compensation credits across similar 

investment types to prevent representatives from preferentially recommending securities that 

yield the largest compensation.984   

d. Other Broker-Dealer Obligations: Disclosure, Supervision, and 

Compensation 

Broker-dealers are subject to other disclosure obligations under the federal securities laws 

and SRO rules.  For instance, under existing antifraud provisions of the Exchange Act, a broker-

dealer has a duty to disclose material adverse information to its customers.985  Broker-dealers 

                                                                                                                                                             

 

983  Id. 
984  Id. 
985  A broker-dealer may be liable if it does not disclose “material adverse facts of which it is 

aware.” See, e.g., Chasins v. Smith, Barney & Co., 438 F.2d 1167, 1172 (2nd Cir. 1970); 
SEC v. Hasho, 784 F. Supp. 1059, 1110 (S.D.N.Y. 1992); In the Matter of RichMark 
Capital Corp., Exchange Act Release No. 48758 (Nov. 7, 2003) (Commission Opinion) 
(“When a securities dealer recommends stock to a customer, it is not only obligated to 
avoid affirmative misstatements, but also must disclose material adverse facts of which it 
is aware. That includes disclosure of ‘adverse interests’ such as ‘economic self-interest’ 

 

 



445 

 

found to be acting as fiduciaries also have a duty to disclose material conflicts of interest.986  

Broker-dealers are also prohibited from making misleading statements.987  Courts have found 

that broker-dealers, in making recommendations, should have disclosed that they were: acting as 

a market maker for the recommended security; trading as a principal with respect to the 

recommended security; engaging in revenue sharing with a recommended mutual fund; or 

“scalping” a recommended security.988  

Broker-dealers are also currently subject to supervisory obligations under Section 

15(b)(4)(E) of the Exchange Act and SRO rules, including the establishment of policies and 

procedures reasonably designed to prevent and detect violations of, and to achieve compliance 

                                                                                                                                                             

 

that could have influenced its recommendation.”) (citations omitted). See also 
Relationship Summary Proposal. 

986  See, e.g., United States v. Szur, 289 F.3d 200, 212 (2d Cir. 2002) (broker’s fiduciary 
relationship with customer gave rise to a duty to disclose commissions to customer, 
which would have been relevant to customer’s decision to purchase stock); Arleen W. 
Hughes, Exchange Act Release No. 4048 (Feb. 18, 1948) (Commission Opinion), aff’d 
sub nom. Hughes v. SEC, 174 F.2d 969, 976 (D.C. Cir. 1949) (broker-dealer acted in the 
capacity of a fiduciary and, as such, broker-dealer was under a duty to make full 
disclosure of the nature and extent of her adverse interest when engaging in principal 
transactions, “including her cost of the securities and the best price at which the security 
might be purchased in the open market”). 

987  See Proposing Release at footnotes 175-177 and 205, and accompanying text.  See 
Exchange Act Sections 10(b) and 15(c). 

988  See 913 Study at footnotes 251-54. See also id. at footnotes 225-232 (which discuss 
existing SRO rules on disclosures). 



446 

 

with, the federal securities laws and regulations, as well as applicable SRO rules.989  Specifically, 

the Exchange Act authorizes the Commission to sanction a broker-dealer or any associated 

person that fails to reasonably supervise another person subject to the firm’s or the person’s 

supervision that commits a violation of the federal securities laws.990  The Exchange Act 

provides an affirmative defense against a charge of failure to supervise where reasonable 

procedures and systems for applying the procedures have been established and effectively 

implemented without reason to believe those procedures and systems are not being complied 

with.  Further, under the federal securities laws and FINRA rules, prices for securities and 

broker-dealer compensation are required to be fair and reasonable, taking into consideration all 

relevant circumstances.991   

Broker-dealers also register with and report information, including about their business 

and affiliates, to the Commission, the SROs, and other jurisdictions through Form BD.992  Form 

BD requires information about the background of the applicant, its principals, controlling 
                                                                                                                                                             

 

989  See supra footnote 809. See also Proposing Release at 21622. 
990  Exchange Act Sections 15(b)(4)(E) and (b)(6)(A). 
991  See, e.g., Exchange Act Sections 10(b) and 15(c); FINRA Rules 2121 (Fair Prices and 

Commissions), 2122 (Charges for Services Performed), and 2341 (Investment Company 
Securities).  See also FINRA Rule 3221 (Non-Cash Compensation).  Several commenters 
stated that, as part of their overall business practices, they use non-cash compensation 
(e.g., firm-sponsored business conferences), which they believe is in compliance with 
existing FINRA Rule 3221 on non-cash compensation practices. See Guardian August 
2018 Letter; NY Life Letter. 

992  See Relationship Summary Proposal at 21472; see also generally Form BD. 



447 

 

persons, and employees, as well as information about the type of business in which the broker-

dealer proposes to engage and all control affiliates engaged in the securities or investment 

advisory business.993  Once a broker-dealer is registered, it must keep its Form BD current by 

amending it promptly when the information is or becomes inaccurate for any reason.994  In 

addition, firms report similar information and additional information—such as written customer 

complaints and other disciplinary matters— to FINRA pursuant to FINRA Rule 4530 (Reporting 

Requirements).  

e. DOL Fiduciary Rule as it Relates to Current Market Practice 

This section discusses the recently vacated DOL Fiduciary Rule,995 the implications for 

broker-dealers, and the industry response to the DOL Fiduciary Rule.  Although the DOL 

Fiduciary Rule was vacated by the Fifth Circuit Court of Appeals in June, we discuss the DOL 

Fiduciary Rule as part of the baseline because certain broker-dealers and other industry 

participants may have adjusted their practices in order to plan for the implementation of the 

requirements of this rule.  It is possible that some of these broker-dealers may continue to 

operate their business using these adjusted practices, while other may have reverted to the pre-

DOL Fiduciary Rule practices.  Below, we discuss actual and potential costs, as well as changes 

                                                                                                                                                             

 

993  See generally Form BD. 

994  See Exchange Act rule 15b3-1(a). 

995  See supra footnote 32.       



448 

 

in services and securities offerings, in response to the DOL Fiduciary Rule as reported by 

industry participants through surveys.  We also describe how, following the Fifth Circuit Court 

of Appeals decision vacating the DOL Fiduciary Rule, certain of those costs have been reduced 

and the trend toward reduction in retail investor access to services and securities offerings that 

may have been caused in part by the DOL Fiduciary Rule appears to have ended and may be 

reversing. 

i. Department of Labor’s Fiduciary Rule and Temporary Enforcement Policy 

As noted above, prior to the Fifth Circuit decision, many firms took steps to come into 

compliance with the DOL Fiduciary Rule, and in particular, the BIC Exemption and other PTEs, 

including changes to business practices.996 

Following the decision by the Fifth Circuit, the DOL acknowledged that uncertainty 

about fiduciary obligations and the scope of exemptive relief under the prohibited transaction 

provisions of ERISA and the Internal Revenue Code following the court’s decision could 

temporarily disrupt existing investment advice arrangements during the transition period, and 

also that financial institutions had devoted significant resources to comply with PTEs issued in 

connection with the DOL Fiduciary Rule, including the BIC Exemption.997 Based on these 

                                                                                                                                                             

 

996  See supra footnotes 32-34 and accompanying text. 
997  See U.S. Department of Labor Field Assistance Bulletin 2018-02, available at 

https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-
bulletins/2018-02.   



449 

 

concerns, the DOL issued a temporary enforcement policy stating that it would not pursue claims 

against fiduciaries working in good faith to comply with the BIC Exemption’s Impartial Conduct 

Standards for transactions that would have been exempted by the BIC Exemption or treat such 

fiduciaries as violating applicable prohibited transactions rules.998  Prior to the Fifth Circuit 

decision, some broker-dealers that offered services to IRAs and other retirement accounts may 

have implemented changes to services and securities to comply with and meet the conditions of 

the BIC Exemption and other PTEs, including the Impartial Conduct Standards.999  Although the 

Commission does not currently have data on the number of firms that may have devoted 

resources to comply with the PTEs,1000 the Commission can broadly estimate the maximum 

number of broker-dealers that could have undertaken changes in order to comply with 

requirements of the PTEs from the number of broker-dealers that have retail customer accounts. 

                                                                                                                                                             

 

998  Id.  
999  See, e.g., Michael Wursthorn, A Complete List of Brokers and Their Approach to ‘The 

Fiduciary Rule’, WALL ST. J., Feb. 6, 2017, https://www.wsj.com/articles/a-complete-
list-of-brokers-and-their-approach-to-the-fiduciary-rule-1486413491?mod=article_inline 
for a discussion of how broker-dealers adjusted certain practices in response to the DOL 
Fiduciary Rule. 

1000       In order to perform this analysis, the Commission would need to know which financial 
firms offer services to IRAs and other retirement accounts.  Under the current reporting 
regimes for both broker-dealers and investment advisers, they are not required to disclose 
whether (or what fraction of) their accounts are held by retail investors in retirement 
accounts. 



450 

 

Approximately 73.5% (2,766) of registered broker-dealers report sales to retail customers.1001  

Similarly, approximately 8,235 (62% of) investment advisers serve high net worth and non-high 

net worth individual clients. The Commission understands that these numbers are an upper 

bound and likely overestimate the broker-dealers and investment advisers that provide retirement 

account services and began compliance with the requirements of the PTEs.1002   

ii. Industry Response to DOL Fiduciary Rule 

Although the DOL Fiduciary Rule became effective in June 2017, the DOL provided 

transitional relief through July 2019,1003 which is now indefinitely extended under the temporary 

enforcement policy put in place in June 2018 following the Fifth Circuit decision.  As described 

above, a significant subset of broker-dealers have retail customers with retirement accounts and 
                                                                                                                                                             

 

1001  As of December 2018, 3,764 broker-dealers have filed Form BD.  Retail sales by broker-
dealers were obtained from Form BR.  See supra footnote 900.   

1002  The Department of Labor Regulatory Impact Analysis (“DOL RIA”) identifies 
approximately 4,000 broker-dealers (FINRA, 2016), of which approximately 2,500 are 
estimated to have either ERISA accounts or IRA accounts serviced by broker-dealers, 
similar to the estimates that we provide above.  In addition to broker-dealers, the DOL 
RIA estimates that other providers of ERISA or IRA accounts include: approximately 
10,600 federally registered investment advisers and 17,000 state-registered investment 
advisers (NASAA 2012/2013 Report), of which approximately 17,000 of federal and 
state investment advisers that are not dually registered, approximately 6,000 ERISA plan 
sponsors (2013 Form 5500 Schedule C), and approximately 400 life insurance companies 
(2014 SNL Financial Data). See U.S. Department of Labor, Regulating Advice Markets: 
Definition of the Term 'Fiduciary', Conflicts of Interest, Retirement Investment Advice: 
Regulatory Impact Analysis for Final Rule and Exemptions (Apr. 2016), available at 
https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-
regulations/completed-rulemaking/1210-AB32-2/ria.pdf.   

1003  See supra footnote 1002. 



451 

 

would have been affected by the DOL Fiduciary Rule, and at least some broker-dealers began 

taking steps to effectuate compliance with the DOL Fiduciary Rule.  A number of commenters 

stated that we did not sufficiently consider the existing regulatory environment and the current 

market practices of firms and financial professionals in light of the DOL’s Fiduciary Rule and 

other existing rules and regulations.1004  Below, we discuss the industry response to the DOL 

Fiduciary Rule and the effect of the Fifth Circuit decision on broker-dealers. 

In the Proposing Release, we predominantly based our discussion of the industry and 

customer effects of the DOL Fiduciary Rule on information from a single industry study.1005  

Commenters provided additional citations to industry studies,1006 which describe changes in 

market practices across a broader-sample of broker-dealers in response to the DOL Fiduciary 

Rule.1007  In these studies, certain of the survey participants reported that they responded to the 

                                                                                                                                                             

 

1004  See, e.g., AALU Letter; CCMC Letters; CCMR Letter; CFA August 2018 Letter; Davis 
& Harman Letter; EPI Letter; Lincoln Financial Letter; Morningstar Letter; NASAA 
August 2018 Letter; Wells Fargo Letter. 

1005  See SIFMA Study, supra footnote 33.  The SIFMA Study surveyed 21 SIFMA members 
and captured 43% of U.S. “financial advisors” (132,000 out of 310,000), 35 million retail 
retirement accounts, and 27% of qualified retirement savings assets ($4.6 trillion out of 
$16.9 trillion).  The types of retirement accounts serviced by the participants in the 
SIFMA Study were not defined. 

1006  See, e.g., CCMC Letters; Davis & Harman Letter; EPI Letter; Lincoln Financial Letter. 
1007  See, e.g., Financial Services Roundtable & Harper Polling, Department of Labor 

Fiduciary Rule: National Survey of Financial Professionals (July 2017), available at 
https://www.sec.gov/comments/ia-bd-conduct-standards/cll4-2641320-161289.pdf (see 
Appendix A) (“FSR Study”).  The FSR Study surveyed 600 financial advisers in July 
2017, including certified financial planners, chartered financial analysts, broker-dealers, 

 

 



452 

 

DOL Fiduciary Rule and the BIC Exemption by reducing certain services and access to advice to 

small retirement accounts.  Certain participants further reported that they encouraged customers 

toward self-directed accounts and/or advisory accounts, including robo-advisors.  Certain other 

participants reported that they reduced or eliminated certain securities within certain types of 

retirement accounts that they offered. Finally, certain participants reported that they increased 

certain fees for some of their customers.  However, as it is generally the case with survey 

analysis, the surveys in the aforementioned studies are subject to potential selection biases (i.e., 

the sample of respondents is not necessarily random) and methodological limitations (e.g., the 

design of the questionnaire may influence the choices made by the respondents).  Given these 

limitations, it is generally not clear whether the results of these studies capture significant or 

                                                                                                                                                             

 

and dually registered representatives. See also Center for Capital Markets 
Competitiveness, Fiduciary Rule: Initial Impact Analysis, FTI Consulting Report 
Presented to the U.S. Chamber of Commerce (Sept. 7, 2017), available at 
https://www.centerforcapitalmarkets.com/wp-content/uploads/2017/07/Fiduciary-Rule-
Initial-Impact-Analysis.pdf (“Chamber Study”). The Chamber Study surveyed 14 
financial advisory companies (insurance companies, securities manufacturers, and 
broker-dealers) responsible for $10 trillion in AUM and nearly 26 million investment 
accounts. The types of accounts serviced by the participants in the Chamber Study were 
not defined. See also A.T. Kearney, The $20 Billion Impact of the New Fiduciary Rule on 
the U.S. Wealth Management Industry, Perspective for Discussion (Oct. 2016), available 
at https://www.atkearney.com/documents/10192/7041991/DOL+Perspective+-
+August+2016.pdf/b2a2176b-c821-41d9-b12e-d3d2b0807d69 (“Kearney Study”).  We 
note that the development of business models and practices discussed herein reflect 
changes made voluntarily by firms in response to the DOL Fiduciary Rule, but were not 
necessarily required by the DOL Fiduciary Rule. 



453 

 

marginal changes in broker-dealer practices, and whether these changes are indicative of broader 

trends in the market for advice in response to the DOL Fiduciary Rule.   

Changes to Services and Securities 

A number of studies indicated that, as a result of the DOL Fiduciary Rule, certain 

industry participants had already or were planning to alter their menu of services and securities 

that they made available to retail customers.  For example, of the 21 SIFMA members that 

participated in the SIFMA Study, 53% eliminated or reduced access to certain brokerage advice 

services and 67% migrated away from open choice to fee-based or limited brokerage 

services.1008  Another study also discussed a shift from commission-based accounts to fee-based 

accounts but offered no details about the sample or the methodology employed to arrive at the 

estimates.1009  Finally, another study documented that at least 29% of their survey participants 

expected to move clients, particularly those with low account balances, to robo-advisors.1010  In 

addition, a number of media articles describe several cases of broker-dealers that have adjusted 

                                                                                                                                                             

 

1008  See SIFMA Study, supra footnote 33.  
1009  See Kearney Study (provided by the Davis & Harman and Lincoln Financial Letters).  
1010  See FSR Study, which states that “[a]dvisors who say the average net worth of their 

clients is under $25,000 are more likely to say they will definitely, probably, or have 
already directed more clients to robo advisor services, both online and at call centers 
(43% vs. 29% overall).” 



454 

 

their practices with respect to the range of accounts offered as a result of the DOL Fiduciary 

Rule.1011 

Further, industry studies noted that certain of their respondents changed their securities 

offerings as a result of the DOL Fiduciary Rule.1012  For example, 95% of the SIFMA Study 

participants altered their securities offerings by reducing or eliminating certain asset or share 

classes;  86% of the respondents reduced the number or type of mutual funds (e.g., 29% 

eliminated no-load funds, while 67% reduced the number of mutual funds), and 48% reduced 

                                                                                                                                                             

 

1011  For example, in response to the DOL Fiduciary Rule, J.P. Morgan and Merrill Lynch 
phased out commission-based retirement plans and instead charged fees based on AUM. 
See Crystal Kim, BofA, JPMorgan, and the Fiduciary Rule: Will They or Won’t They, 
BARRON’S, Mar. 15, 2017, https://www.barrons.com/articles/bofa-jpmorgan-and-the-
fiduciary-rule-will-they-or-wont-they-1489588442.  However, upon the Fifth Circuit’s 
ruling on the DOL Fiduciary Rule, J.P. Morgan and Merrill Lynch reversed their earlier 
decision and began to offer commission-based retirement plans again. See Jed Horowitz, 
JPMorgan to Remove Some Fiduciary Rule Handcuffs, Others May Follow, 
ADVISORHUB, May 4, 2018, https://advisorhub.com/jpmorgan-to-remove-some-
fiduciary-rule-handcuffs-others-may-follow/; Imani Moise, Merrill Lynch Does about 
Face on Fiduciary-Era Policy, REUTERS, Aug. 30, 2018, 
https://www.reuters.com/article/us-bank-of-america-fiducuary/merrill-lynch-does-about-
face-on-fiduciary-era-policy-idUSKCN1LF1R9. See also Daisy Maxey, Winners and 
Losers in a Post-Fiduciary World, WALL ST. J., May 24, 2017, available at 
https://www.wsj.com/articles/winners-and-losers-in-a-post-fiduciary-world-1495638708;  
Nir Kaissir, Merrill Lynch Can’t Restore the Bad Old Days of Conflicts, BLOOMBERG, 
Sept. 4, 2018, available at https://www.bloomberg.com/opinion/articles/2018-09-
04/merrill-lynch-can-t-restore-the-bad-old-days-of-conflicts.  

1012  While the industry studies discussed in this section examined shifts in services and 
securities provided to retail investors, one limitation of these studies is that they did not 
discuss whether the quality of advice provided to retail investors also changed as a result. 



455 

 

annuity securities offerings. 1013  Similarly, another study found that nearly 30% of survey 

participants eliminated or reduced securities or services available to retirement investors in 

response to the DOL Fiduciary Rule,1014 while the Chamber Study noted that 13.4 million 

accounts of the companies surveyed had limited access to certain securities, including mutual 

funds, variable annuities, and exchange-traded funds.1015  Finally, the SIFMA Study states that 

although the DOL Fiduciary Rule applied only in connection with services for retirement 

accounts, certain of the survey participants had implemented the changes to both retirement and 

non-retirement accounts.1016  These studies do not discuss the attributes of the securities that the 

participants chose to no longer offer. In addition, as noted above, survey analysis is subject to 

                                                                                                                                                             

 

1013  See SIFMA Study, supra footnote 33.  
1014  See American Bankers Association, ABA Survey: Department of Labor Fiduciary Rule 

(July 20, 2017), available at https://www.aba.com/Advocacy/Issues/Documents/dol-
fiduciary-rule-survey-summary-report.pdf (“ABA Study”).  The ABA Study conducted a 
survey of 57 banks about their understanding of the DOL Fiduciary Rule on securities 
and services available to retirement investors. See also Kearney Study, which anticipated 
a shift from mutual funds to exchange-traded funds, and that “certain high-cost 
investment products (such as variable annuities) will be phased out as the business model 
is no longer viable under [the DOL Fiduciary Rule].”  See also FSR Study, which 
reported that 63% of its survey participants anticipated fewer investment options and 
56% had already reduced or anticipated reducing the number of mutual funds offered to 
retirement customers.  

1015  See Chamber Study. See also Editorial Board, Tom Perez’s Fiduciary Flop, WALL ST. J., 
Mar. 18, 2018, https://www.wsj.com/articles/tom-perezs-fiduciary-flop-1521412228, 
which noted that some firms restricted sales of commission-based securities such as load 
mutual funds and variable annuities in retirement accounts. 

1016  See, e.g., SIFMA Study, supra footnote 33. 



456 

 

certain limitations that, generally, complicate the interpretation of their results.  For instance, it is 

not generally clear whether the results of these studies capture significant or marginal changes in 

broker-dealer practices, and whether these changes are indicative of broader trends in the market 

for advice in response to the DOL Fiduciary Rule.  

Besides the studies mentioned above, a number of media articles provide anecdotal 

evidence of broker-dealers that chose to no longer offer certain securities.1017  Some commenters 

also provided data about historical trends in certain product markets.1018  For example, one 

commenter provided data for the market of mutual funds and showed that between 2007 and 

2018, the percentage of assets in load mutual funds declined from 27% to 12%, while no-load 

                                                                                                                                                             

 

1017  See Alex Steger, Exclusive: UBS to Cut over 800 Funds from Platform, CITYWIRE, Mar. 
13, 2018, https://citywireusa.com/professional-buyer/news/exclusive-ubs-to-cut-over-
800-funds-from-platform/a1100101; Michael Thrasher, Ameriprise Drops Hundreds of 
Funds Offered to Brokerage Clients, WEALTHMANAGEMENT.COM, June 8, 2017, 
https://www.wealthmanagement.com/industry/ameriprise-drops-hundreds-funds-offered-
brokerage-clients; Hugh Son, Morgan Stanley to Reduce Wealth Fees Even with Rule 
Uncertainty, BLOOMBERG, Jan. 26, 2017,  
https://www.bloomberg.com/news/articles/2017-01-26/morgan-stanley-to-proceed-with-
wealth-changes-ahead-of-new-rules; Margarida Correia, LPL Puts Final Touches on 
Product Lineups in Preparation for Fiduciary Rule, FINANCIALPLANNING, Mar. 9, 2017, 
https://www.financial-planning.com/news/lpl-puts-final-touches-on-product-lineups-in-
preparation-for-fiduciary-rule?tag=00000154-3e16-d45e-a175-7f9f48a20001; Bruce 
Kelly, Wells Fargo Advisors Restricting Investments for Retirement Accounts, 
INVESTMENTNEWS, May 24, 2017, 
https://www.investmentnews.com/article/20170524/FREE/170529959/wells-fargo-
advisors-restricting-investments-for-retirement-accounts. 

1018  See, e.g., ICI Letter. 



457 

 

share classes increased from 51% to 71% over the same time period.1019  Further, this commenter 

stated that this shift has occurred because of the growth in assets in 401(k) plans and other 

retirement accounts, as well as the increase in the number of advisory accounts, both of which 

tend to invest in no-load share classes. 

However, the DOL Fiduciary Rule may have caused certain product markets to adjust.1020 

For example, innovations, including the introduction of T and clean share classes of mutual 

funds, can be regarded as a paradigm shift in terms of how product sponsors compensate broker-

dealers for distribution services.  One commenter noted that these products may reduce the 

expected fund underperformance net of costs for retail investors relative to A shares by nearly 50 

basis points annually.1021  

The Effect of Costs and Fees 

Some firms may have responded to the DOL Fiduciary Rule by either presenting 

customers with the option to enter into different and potentially more costly advice relationships 

compared to a brokerage advice relationship or by passing some of the compliance costs to 

                                                                                                                                                             

 

1019  See id. 
1020  See, e.g., James Chen, Clean Shares, Investopedia, available at 

https://www.investopedia.com/terms/c/clean-shares.asp, stating that “[t]he mutual fund 
industry introduced clean shares, along with T shares, in response to the Department of 
Labor’s fiduciary rule.” 

1021  See Letter from Aron Szapiro, Director of Policy Research, Morningstar (Sept. 2017). 



458 

 

customers.1022 However, one study observed that 63% of the responding firms that limited or 

eliminated access to advised brokerage services stated that they had at least some customers who 

chose to move to self-directed accounts rather than fee-based accounts and cited the reasons that 

customers provided as (1) “did not want to move to a fee-based account,” (2) “was not in the 

retirement investor’s best interest to move to a fee-based account,” (3) “did not meet the account 

minimums,” or (4) “wished to maintain positions in certain asset classes which were not eligible 

for a fee-based account.”1023  Another study further observed that nearly 40% of the responding 

firms believed that the relationship with their customers had been altered as a result of the DOL 

Fiduciary Rule and that customers with smaller account balances were nearly ten times more 

likely to have been negatively affected by the DOL Fiduciary Rule than customers with larger 

account balances.1024  Further, another study observed that 68% of the responding firms were 

less likely to provide services to smaller accounts, and 46% anticipated that they may service 

fewer clients overall.1025  

                                                                                                                                                             

 

1022  See supra footnote 1011 (which describes how certain firms responded to the DOL 
Fiduciary Rule and later reversed changes in response to the Fifth Circuit decision). 

1023  See SIFMA Study, supra footnote 33. 
1024  See ABA Study.  
1025  See FSR Study.  See also Chamber Study, which found that some survey participants 

have added minimum account balances and have migrated away from commission-based 
models toward fee-based models. 



459 

 

One study observed that, generally, based on the numbers provided by the respondents, a 

fee-based account can be more costly than a brokerage account; however, such comparison is 

generally hard to make without knowing the securities in the two types of accounts, and it is not 

clear that the survey made this clear to respondents.1026  One study1027 observed that 

approximately 52% of its survey participants indicated that they may pass on the costs associated 

with complying with the DOL Fiduciary Rule to clients in the form of higher fees, while another 

study stated that more than 6 million client accounts of the survey participants may be subject to 

higher costs and fees as a result of the DOL Fiduciary Rule, although it is not clear whether this 

estimate assumes full adoption of the DOL Fiduciary Rule.1028   

Estimated Costs of Compliance and Effects on Compensation Structures 

One study observed that survey respondents were expecting to incur compliance costs as 

a result of the DOL Fiduciary Rule that would vary by the size of the respondent.1029  For 

                                                                                                                                                             

 

1026  See SIFMA Study.  We note that only a subset of the SIFMA Study participants provided 
information on the costs associated with brokerage and advisory accounts.  See CFA 
August 2018 Letter.  The SIFMA Study did not provide any information on the set of 
firms comprised in this subset that provided information on brokerage and advisory costs.  
See also ICI Letter (which provided similar estimates for fees and costs attributable to 
brokerage and advisory accounts). 

1027  See FSR Study. 
1028  See Chamber Study. 
1029  See SIFMA Study.  As a general matter, we note that the estimates reported by industry 

studies, including this study, are based on a rulemaking with more extensive requirements 
for changes to business models than those required by Regulation Best Interest.  



460 

 

instance, large firms with net capital in excess of $1 billion were expected to have start-up and 

ongoing compliance costs of $55 million and $6 million, respectively, while firms between $50 

million and $1 billion in net capital were expected to have start-up and ongoing compliance costs 

of $16 million and $3 million, respectively.  The study further estimated that the total start-up 

compliance costs for large and medium-size firms combined would have been approximately 

$4.7 billion, while ongoing costs would have been approximately $700 million per year.  

Another study observed that the costs of complying with DOL Fiduciary Rule would 

encompass technology, legal, process changes, educational, and training costs for firms.1030  This 

study forecasted that the DOL Fiduciary Rule may cause a $2 trillion redistribution in assets 

from broker-dealers to investment advisers, robo-advisors, and self-directed accounts, and a 

nearly $20 billion decrease in revenues to the entire financial services industry, including broker-

dealers.  

The study further forecasted that as a result of the DOL Fiduciary Rule product sponsors 

“will be incentivized to streamline product offerings, lower fees, and improve performance,” and 

investor would pay $7.5 billion less in mutual fund and ETF expenses by the end of 2010. 

However, as noted above, this study does not provide details about how it obtained its estimates. 

Several media articles provide some anecdotal evidence suggesting that as a response to 

the DOL Fiduciary Rule some broker-dealers began to alter the compensation structures of their 

                                                                                                                                                             

 

1030  See Kearney Study.461 

 

registered representatives.1031  For example, some broker-dealers have indicated that they 

adjusted their compensation structures by equalizing commissions and deferred sales charges 

across similar securities.1032  Other broker-dealers banned sales quotas, contests, special awards, 

and bonuses,1033 including deferred bonuses as part of recruitment efforts.1034  However, 

following the decision by the Fifth Circuit to vacate the DOL Fiduciary Rule, some firms 

reinstated back-end recruiting bonuses.1035 

                                                                                                                                                             

 

1031  See Son (2017), supra footnote 1017; Tara Siegel Bernard, Do Financial Advisers Have 
to Act in Your Interest? Maybe, N.Y. TIMES, Mar. 22, 2018, 
https://www.nytimes.com/2018/03/22/your-money/financial-advisers-customer-
interest.html. 

1032  See, e.g., Andrew Welsch, Facing Higher Costs, Raymond James Cuts Adviser Pay in 
Rare Move, FINANCIALPLANNING, July 11, 2017, https://onwallstreet.financial-
planning.com/news/facing-higher-costs-raymond-james-cuts-adviser-pay-in-rare-
move?tag=00000151-16d0-def7-a1db-97f024310000. 

1033  See Bernard (2018). 
1034  See Mason Braswell, Morgan Stanley Resumes Recruiting Offers – Slimmer and DOL-

Compliant, ADVISORHUB, Nov. 3, 2016, https://advisorhub.com/morgan-stanley-
resumes-recruiting-offers-slimmer-and-dol-compliant/; Deon Roberts, Wells Fargo 
Overhauling Bonuses to Comply with New Rules on Financial Advisers, CHARLOTTE 
OBSERVER, Dec. 14, 2016, 
https://www.charlotteobserver.com/news/business/banking/bank-watch-
blog/article120961138.html.  

1035  See Mason Braswell, Farewell Fiduciary Rule? Morgan Stanley Sweetens Recruiting 
Bonuses, ADVISORHUB, May 1, 2018, https://advisorhub.com/farewell-fiduciary-rule-
morgan-stanley-sweetens-recruiting-bonuses/.  “Back-end” bonuses are expressly 
contingent on the achievement of sales or asset targets. See U.S. Department of Labor, 
Conflict of Interest FAQs (Part I – Exemptions) (Oct. 27, 2016), available at 
https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-
center/faqs/coi-rules-and-exemptions-part-1.pdf.  



462 

 

iii. Additional Evidence of Current Market Practices 

In this section, we include information on Commission observations on the broker-dealer 

industry.  Commission experience indicates that there have been a number of changes to the 

broker-dealer industry and its business practices over time.1036  Consistent with the trend baseline 

provided in Section III.B.1.c and industry studies and anecdotal evidence described above, we 

have observed firms choosing to do business with retail investors as investment advisers, not as 

broker-dealers, by either migrating existing brokerage accounts to advisory accounts or directing 

new retail customers to advisory accounts.   

Beyond broker-dealer trends in business practices, Commission experience also indicates 

that some broker-dealers have responded to the DOL Fiduciary Rule and the Fifth Circuit 

decision vacating the DOL Fiduciary Rule by modifying their existing business practices.  For 

example, some firms, consistent with anecdotal evidence discussed above, eliminated brokerage 

IRA accounts in response to the DOL Fiduciary Rule; however, upon the Fifth Circuit decision, 

the firms reinstituted brokerage IRAs.  Other examples of changes following the Fifth Circuit 

                                                                                                                                                             

 

1036  Information on the broker-dealer industry and business practices comes from a variety of 
Commission resources and generally relates to market trends and changes to business 
practices that have emerged in recent years and is comprised of both standalone broker-
dealers and dually registered firms.  With respect to industry trends, Commission 
resources generally verify data cited above in Section III.B.2.e.ii.  We acknowledge that 
the information provided in this baseline may not be representative of business practices 
more generally because of the diversity and complexity of services and securities offered 
by standalone broker-dealers and dually registered firms. 



463 

 

decision include changes to incentive-based compensation in certain types of accounts and 

principal trading restrictions.   

3. Investment Advice and Evidence of Potential Investor Harm 

A number of commenters expressed the view that the Proposing Release did not fully 

document the problems attributed to potential conflicts of interest stemming from the broker-

dealer model and the resulting harm to retail customers.1037  In order to address these 

commenters’ concerns, we analyze academic and industry studies to present an overview of the 

market for advice for retail customers.1038  Below, we discuss which types of investors seek 

                                                                                                                                                             

 

1037  See, e.g., AARP August 2018 Letter; Better Markets August 2018 Letter; CFA August 
2018 Letter; EPI Letter; U. of Miami Letter; Morningstar Letter; PIABA Letter; Letter 
from Ron A. Rhoades, Director, Personal Financial Planning Program and Assistant 
Professor of Finance, Gordon Ford College of Business, Western Kentucky University 
(Aug. 6, 2018) (“Rhoades August 2018 Letter”); Former SEC Senior Economists Letter. 

1038  Although the discussion here generally focuses on studies provided by comment letters, 
at times we have included additional references either to more fully articulate specific 
arguments or to provide counterarguments to studies provided by comment letters in an 
effort to present a complete overview of pertinent literature.  Because the studies we cite 
in this section generically discuss investment advice or advice rather than 
recommendations, and use a variety of terms to describe financial professionals or firms 
(e.g., brokers, advisers, or financial advisers) and investors (e.g., investors, customers, or 
clients), in the discussion that follows, we use generic terms of advice or investment 
advice, financial professional, firm, and retail investor or investor.  Although we believe 
that the studies generally discuss advice as it relates to broker-dealers or investment 
advisers, because of generic terms used, such as “financial adviser,” it is possible that 
other types of advice providers (e.g., commercial banks, tax consultants, etc.) could be 
included in some of the studies cited below.  However, because not all authors clearly 
define which financial professionals are included in a given study, we are unable to 

 

 



464 

 

investment advice; the benefits attained through investment advice for retail investors; 

limitations to the value of that advice that stem from agency costs, particularly those related to 

conflicts of interest arising from financial professional compensation; and evidence of potential 

investor harm.  Where appropriate, we note limitations to the application of various academic 

studies that form the basis of other economic analyses, which investigate potential investor harm 

attributed to recommendations received from financial professionals. 

a. Who Seeks Investment Advice1039 

Approximately 37% of U.S. households currently engage with financial professionals 

according to OIAD/RAND; however, households who hire these professionals are not uniformly 

distributed among the U.S. population.1040  In addition to OIAD/RAND, a number of academic 

                                                                                                                                                             

 

provide an exhaustive list of all types of financial professionals that make up the market 
for advice.   

1039  One limitation of the majority of the studies examined is that we are unable to distinguish 
whether the retail investor is seeking and/or receiving investment advice from a broker-
dealer or an investment adviser (or some other type of financial professional).  The 
studies generally do not have sufficiently granular data to distinguish broker-dealer 
customers from investment adviser clients.  Further, for studies where retail investors can 
be distinguished by their investment choices (e.g., purchasing direct-sold versus broker-
sold funds), we are unable to determine whether differences exist between broker-sold 
funds sold by broker-dealers and broker-sold funds sold by investment advisers. As 
discussed below, some commenters expressed the view that buy-and-hold retail investors 
were more likely to prefer the services of brokerage accounts over advisory accounts. See 
infra footnote 1055. 

1040  According to OIAD/RAND, the use of financial professionals varies by both income and 
education levels.  For example, 38% of retail investors with income greater than 
$100,000 engage with financial professionals, while only 13.7% of retail investors with 

 

 



465 

 

studies, provided with comment letters, examine characteristics of investors and their propensity 

for seeking (and following) investment advice.  Older, wealthier, more educated, and financially 

more literate retail investors are more likely to seek and act on advice obtained from financial 

professionals, suggesting that investors who may benefit most from advice (younger, less 

educated, and less financially sophisticated) are least likely to obtain it.1041  Several studies 

examine the choice by retail investors to select into broker-sold or direct-sold mutual funds. 
                                                                                                                                                             

 

incomes below $25,000 did so. Another study, the Survey of Consumer Finance, 
indicates that the use of financial professionals by American households is closer to 60%, 
but also includes financial planners, accountants, lawyers, and bankers, in addition to 
broker-dealers and investment advisers. See SCF Survey, supra footnote 950. 

1041  See, e.g., Utpal Bhattacharya et al., Is Unbiased Financial Advice to Retail Investors 
Sufficient? Answers from a Large Field Study, 25 REV. FIN. STUD. 975 (2012); Daniel 
Hoechle et al., The Impact of Financial Advice on Trade Performance and Behavioral 
Biases, 21 REV. FIN. 871 (2017); Jeremy Burke & Angela A. Hung,  
Do Financial Advisors Influence Savings Behavior?, RAND Labor and Population 
Report Prepared for the Department of Labor (2015), available at 
https://www.rand.org/content/dam/rand/pubs/research_reports/RR1200/RR1289/RAND_
RR1289.pdf; Claude Montmarquette & Nathalie Viennot-Briot, Econometric Models on 
the Value of Advice of a Financial Advisor, CIRANO Project Report No. 2012RP-17 
(July 2012), available at https://www.cirano.qc.ca/pdf/publication/2012RP-17.pdf; 
Andreas Hackethal, Michael Haliassos, & Tullio Jappelli, Financial Advisors: A Case of 
Babysitters?, 36 J. BANKING & FIN. 509 (2012). See also AARP August 2018 Letter; 
CFA August 2018 Letter; FPC Letter; Primerica Letter; Wells Fargo Letter (which 
provided several studies cited here; other studies (e.g., Hoechle et al. (2017)) are included 
because they capture characteristics of the investors most likely to seek and act on 
financial advice that are not captured by the studies suggested by the commenters).  
Studies also note that the characteristics of investors most likely to seek advice are also 
likely to be those most attractive to financial professionals as they have more assets to 
manage. See Michael S. Finke, Financial Advice: Does it Make a Difference? (Working 
Paper, May 5, 2012) (which describes the relationship between investors and financial 
professionals). 



466 

 

These studies find less financially sophisticated investors are more likely to purchase “broker-

sold” funds and therefore more likely to receive advice from a financial professional.1042   

As we detail below, retail investors bear costs associated with obtaining advice from 

financial professionals, which may deter some investors, especially those with limited wealth or 

income, from seeking investment advice.  However, an investor’s lack of sophistication may also 

prevent the investor from obtaining or using investment advice even when advice is provided at 

no cost.  One paper examines the outcomes from a large sample of active retail investors of a 

large broker-dealer. 1043  These retail investors received unsolicited and unbiased advice from the 

broker-dealer at no cost.  Although the advice was designed to improve the efficiency of the 

investors’ portfolios, only 5% of investors accepted the offer to receive the free advice.  

Moreover, those that did accept the advice rarely followed the advice.  Investors who 
                                                                                                                                                             

 

1042  See, e.g., Christopher J. Malloy & Ning Zhu, Mutual Fund Choices and Investor 
Demographics (Working Paper, Mar. 14, 2004), available at 
https://pdfs.semanticscholar.org/16a1/8daed89c3c48a765ad3a265018b4d27bd0f4.pdf; 
John Sabelhaus, Daniel Schrass, & Steven Bass, Characteristics of Mutual Fund 
Investors, 2008, ICI RES. FUNDAMENTALS, Feb. 2009, available at 
https://www.ici.org/pdf/fm-v18n2.pdf; John Chalmers & Jonathan Reuter, Is Conflicted 
Advice Better than No Advice? (Working Paper, Sept. 14, 2015), available at 
https://www.semanticscholar.org/paper/Is-Conflicted-Investment-Advice-Better-than-No-
Chalmers-Reuter/3337ce8c3a72bf55dac43f407fd104b93aec863b. See also AARP August 
2018 Letter; CFA August 2018 Letter; EPI Letter (which provided the Chalmers & 
Reuter (2015) citation; Malloy & Zhu (2004) and Sabelhaus et al. (2009) are included 
because they capture aspects of the mutual fund selection decision by retail investors that 
are not captured by the studies suggested by the commenters). We provide a more 
detailed discussion of these studies below in Section III.B.3.c. 

1043  See Bhattacharya et al. (2012), supra footnote 1041. 



467 

 

participated in the study had only minimal improvements to their portfolio efficiency. The 

authors cite lack of financial sophistication and lack of familiarity or trust as reasons why the 

unsolicited advice was not followed.1044 

b. Benefits and Limitations of Investment Advice 

A number of commenters provided academic studies of benefits that investors may obtain 

from hiring financial professionals.1045  One benefit of hiring a firm or financial professional is 

that professional advice can help the average retail investor overcome common “investment 

mistakes” that he or she may make when investing.1046  Common “investment mistakes” made 

by retail investors include limited allocation of assets to equities, under-diversification, excessive 

trading, and home bias.1047  These studies also attempt to identify reasons why retail investors 

persistently make inefficient investment choices.   

                                                                                                                                                             

 

1044  See id. 
1045  See infra footnote 1048. 
1046  See Bhattacharya et al. (2012), supra footnote 1041. “Investment mistakes” are investors’ 

actions that would go against what a rational investor would do when undertaking 
efficient investment decisions (here and below, infra footnote 1047, we provide studies 
that analyze common “investment mistakes” made by retail investors).  For example, 
evidence suggests that retail investors tend to trade too frequently.  See Brad M. Barber & 
Terrance Odean, Trading is Hazardous to Your Wealth: The Common Stock Performance 
of Individual Investors, 55 J. FIN. 773 (2000). 

1047  As described in Bhattacharya et al. (2012), supra footnote 1041, possible explanations for 
common “investment mistakes” may arise from behavioral biases (e.g., cognitive errors), 
the cost of information acquisition, or the selection of the financial professional. See, e.g., 
Luigi Guiso, Paolo Sapienza, & Luigi Zingales, People’s Opium? Religion and Economic 
Attitudes, 50 J. MONETARY ECON. 225 (2003); Laurent E. Calvet, John Y. Campbell, & 

 

 



468 

 

Beyond correcting potential “investment mistakes,” academic studies document a 

multitude of other benefits that accrue to retail investors as a result of seeking investment advice, 

including, but not limited to: higher household savings rates, setting long-term goals and 

calculating retirement needs, more efficient portfolio diversification and asset allocation, 

increased confidence and peace of mind, improvement in financial situations, and improved tax 

efficiency.1048  For example, one study notes that investors who engaged financial professionals 

                                                                                                                                                             

 

Paolo Sodini, Down or Out: Assessing the Welfare Costs of Household Investment 
Mistakes, 115 J. POL. ECON. 707 (2007); Barber & Odean (2000), supra footnote 1046; 
Karen K. Lewis, Trying to Explain Home Bias in Equities and Consumption, 37 J. ECON. 
LITERATURE 571 (1999).  

1048  See, e.g., Mitchell Marsden, Catherine D. Zick, & Robert N. Mayer, The Value of Seeking 
Financial Advice, 32 J. FAM. & ECON. ISSUES 625 (2011); Jinhee Kim, Jasook Kwon, & 
Elaine A. Anderson, Factors Related to Retirement Confidence: Retirement Preparation 
and Workplace Financial Education, 16 J. FIN. COUNSELING & PLAN. 77 (2005); 
Michael S. Finke, Sandra J. Huston, & Danielle D. Winchester, Financial Advice: Who 
Pays, 22 J. FIN. COUNSELING & PLAN. 18 (2011); Daniel Bergstresser, John M.R. 
Chalmers, & Peter Tufano, Assessing the Costs and Benefits of Brokers in the Mutual 
Fund Industry, 22 REV. FIN. STUD. 4129 (2009); Ralph Bluethgen, Steffen Meyer, & 
Andreas Hackethal, High-Quality Financial Advice Wanted! (Working Paper, Feb. 2008), 
available at http://citeseerx.ist.psu.edu/viewdoc/summary?doi=10.1.1.596.2310; Neal M. 
Stoughton, Youchang Wu, & Josef Zechner, Intermediated Investment Management, 66 
J. FIN. 947 (2011).  Marsden et al. (2011) documents benefits attributable to hiring a 
financial professional, such as better retirement account diversification and savings goals, 
but does not find that hiring a financial professional measurably increases the amount of 
overall wealth accumulation for those investors. See also, Burke & Hung (2015), supra 
footnote 1041, for additional studies on the causal relation between the use of a financial 
professional and wealth accumulation.  Francis M. Kinniry et al., Putting a Value on Your 
Value: Quantifying Vanguard Advisor's Alpha, Vanguard Research (Sept. 2016), 
available at https://www.vanguard.com/pdf/ISGQVAA.pdf, estimates the value to 
investors associated with obtaining financial advice of approximately 3% in net returns to 

 

 



469 

 

for at least 15 years had approximately 173% more assets on average than investors who did not 

hire financial professionals, driven by higher household savings rates and increased asset 

allocation to non-cash instruments.1049  Further, financial professionals may be able to help retail 

investors overcome information asymmetries that exist between firms that supply securities and 

their customers that retail investors would not be able to disentangle on their own.1050 

Commenters also provided academic studies which discussed the limitations of the 

advice received from financial professionals, including how both direct and indirect costs of 

advice can reduce returns earned by investors.1051  How financial professionals are compensated 

                                                                                                                                                             

 

investors, associated with suitable asset allocation, managing expense ratios, behavioral 
coaching, alleviating home bias, among others.  See also AARP August 2018 Letter; 
CCMC Letters; CFA August 2018 Letter; Edward Jones Letter; Letter from Brian M. 
Nelson (Jul. 10, 2018) (“Nelson Letter”) (which provided several of these studies; other 
studies were included because they capture aspects of the benefits of advice for retail 
investors that are not captured by the studies suggested by the commenters (e.g., Marsden 
et al. (2011), Finke et al. (2011)). 

1049  See Montmarquette & Vionnet-Briot (2012), supra footnote 1041. While this study 
describes the benefits of hiring financial professionals on asset accumulation, it also notes 
that termination of relationships with financial professionals resulted in a significant loss 
of overall investment asset value. See Primerica Letter; Wells Fargo Letter (which 
provided references to this academic study). 

1050  See Roman Inderst & Marco Ottaviani, Financial Advice, 50 J. ECON. LITERATURE 494 
(2012). See also AARP August 2018 Letter. 

1051  See, e.g., AARP August 2018 Letter; CFA August 2018 Letter; EPI Letter; Letter from 
Ron A. Rhoades, Director, Personal Financial Planning Program and Assistant Professor 
of Finance, Gordon Ford College of Business, Western Kentucky University (Dec. 6, 
2018) (“Rhoades December 2018 Letter”). 



470 

 

can erode the value of advice in two primary ways: (1) the direct costs associated with 

purchasing advice detract from returns over time1052; and (2) the indirect costs to retail investors 

that arise from conflicts of interest between financial professionals and investors.  Financial 

professionals are generally compensated directly by retail investors in three principal ways: 

commission-based (e.g., broker-dealers), fee-based on AUM (e.g., investment advisers), and flat 

or hourly fees (e.g., financial planners), although some financial professionals may receive 

compensation in multiple ways for providing advice to the same investor.1053  

                                                                                                                                                             

 

1052  As noted in one study, the direct costs (fees and expenses) may not be transparent to 
retail investors. Coupled with conflicts of interest that can bias any advice provided, 
information asymmetry between financial professionals and retail investors may be large. 
See Finke (2012), supra footnote 1041. 

1053  For example, investment advisers and supervised persons may receive account-level 
advisory fees, and may also receive compensation for the sale of securities or other 
investment products, including asset-based sales charges or service fees for the sale of 
mutual funds to their advisory clients.  See Items 5.C, 5.E, and 14.A of Form ADV Part 
2A; Items 4.A.2, 4.B, and 5 of Form ADV Part 2B.  When we refer to advisers and 
supervised persons receiving fees for the sale of securities or other investment products, 
we generally mean advisers that are also registered broker-dealers or advisers whose 
affiliated broker-dealers receive these fees.  Form ADV instructs advisers that if they 
receive compensation in connection with the purchase or sale of securities, they should 
carefully consider the applicability of broker-dealer registration requirements of the 
Exchange Act and any applicable state securities statutes.  See Form ADV, Part 2A, Note 
to Item 5.E. 

  

 



471 

 

One study estimates that the average annual costs associated with commission-based 

accounts are approximately 75 bps, while the average fee-based account costs 130 bps.1054  We 

acknowledge that in addition to the fees charged for particular types of services, other expenses 

may be incurred that reduce returns earned by investors, some of which may be earned by the 

financial professional or the firm and paid by the firm’s product or service providers (e.g., fund 

loads, 12b-1 fees, and shareholder servicing fees).   

Some commenters expressed the view that certain investors (e.g., buy-and-hold investors) 

may prefer to pay a single commission relative to an ongoing fee-based obligation that is tied to 

AUM in their account.1055  We note that this choice may be dependent on the investor’s holding 

period and other ongoing expenses that affect an investor’s net return over time.  For example, a 

buy-and-hold investor that chooses an account where fees are based on AUM may pay more over 

time than a similar buy-and-hold investor that pays a single commission.  Further, some 

commission-based securities, such as mutual funds, may have ongoing expenses, including 12b-1 
                                                                                                                                                             

 

1054  See John H. Robinson, Who's the Fairest of Them All? A Comparative Analysis of 
Financial Advisor Compensation Models, 20 J. FIN. PLAN. 56 (2007). See also AARP 
August 2018 Letter. One study, however, argues that when the direct costs associated 
with commissions are combined with the estimated agency costs, there is little difference 
in the costs between commission-based and fee-based advice. See Quinn Curtis, The 
Fiduciary Rule Controversy and the Future of Investment Advice (Univ. of Va. Sch. of 
Law, Law & Econ. Research Paper Series No. 2018-04, Mar. 2018). See also UVA 
Letter.  We note that services provided may also vary between brokerage and advisory 
accounts, which could also affect differences in costs paid by retail investors.   

1055  See, e.g., Cetera August 2018 Letter; AALU Letter; Pacific Life August 2018 Letter; 
NAIFA Letter; Empower Retirement Letter; CCMR Letter; Primerica Letter. 



472 

 

fees, which could lead to an erosion of net returns over time.1056  Such ongoing expenses, 

however, may not be adequately accounted for by investors when making investment decisions 

about the type of account to open and what type of security to purchase.1057  Several commenters 

provided analyses to show the expected effect of one-time costs and ongoing expenses (e.g., 

operating costs or advisory fees) to investors from both commission-based and fee-based 

perspectives, conditional on the investor’s holding period.1058   

Separately, investors may face indirect costs that are a result of agency problems that 

emerge when financial professionals seek to maximize their own compensation and take actions 

that place their own interests ahead of the investors that they are supposed to serve.1059  A 

number of commenters and academic studies have stated that commission-based compensation is 

                                                                                                                                                             

 

1056  See CFA August 2018 Letter; EPI Letter.  See also ICI Letter (which described a shift 
from load to no load funds, decreasing expense ratios, and a decline in the percentage of 
funds that charge 12b-1 fees). 

1057  See infra footnote 1084 and corresponding discussion. 
1058  See, e.g., Cetera August 2018 Letter and November 2018 Letter; Pacific Life August 

2018 Letter. 
1059  See Jeremy Burke et al., Impacts of Conflicts of Interest in the Financial Services 

Industry (RAND Labor & Population, Working Paper No. WR-1076, Feb. 2015), 
available at https://www.rand.org/pubs/working_papers/WR1076.html; Hamid Mehran 
& Rene M. Stulz, The Economics of Conflicts of Interest in Financial Institutions, 85 J. 
FIN. ECON. 267 (2007).  See also Letter from D. Bruce Johnsen, Professor of Law, Scalia 
Law School, George Mason University (Aug. 7, 2018) (“Johnsen Letter”); Robinson 
(2007), supra footnote 1054.  Broker-dealers may act in a brokerage (i.e., agency) 
capacity or a dealer (i.e., principal) capacity.  See Proposing Release at Section I.  While 
the discussion is framed in terms of agency problems, it is applicable to both capacities. 



473 

 

more likely to contribute to conflicts of interest between financial professionals and retail 

investors than fee-based compensation.1060  Other commenters, however, indicated that 

commission-based compensation provides benefits to investors.1061  One study finds that 

conflicts of interest are likely to be present in all forms of compensation earned by financial 

professionals.  For example, fee-based compensation could result in so-called “reverse churning” 

and a disincentive to reduce AUM, even if that would be in the investor’s best interest, while 

flat-fee models can lead to shirking and overbilling.1062  However, due to limitations on the data 

available regarding fee-based advice, most of the academic studies to date regarding conflicts of 

interest focus on commission-based compensation models.  As such, the potential conflicts 

associated with the fee-based compensation models, including fee-based compensation earned by 

broker-dealers, have not been subject to as much analysis.  Studies show that commission-based 

compensation potentially leads to biased advice, including excessive trading in accounts and 

recommendations to purchase high-commission securities, both of which benefit the financial 

professional and may lead to lower net returns.1063   

                                                                                                                                                             

 

1060  See IPA Letter; CFA August 2018 Letter.   
1061  See AALU Letter; Invesco Letter; ACLI Letter; NAIFA Letter. See Burke et al. (2015), 

supra footnote 1059 for a survey on the academic literature on conflicts of interest. 
1062  See Robinson (2007), supra footnote 1054.   
1063  See, e.g., Stoughton et al. (2011), supra footnote 1048; Roman Inderst & Marco 

Ottaviani, Misselling Through Agents, 99 AM. ECON. REV. 883 (2009); Max Beyer, 
David de Meza, & Diane Reyniers, Do Financial Advisor Commissions Distort Client 

 

 



474 

 

Financial professionals also may benefit from other forms of transaction-based payment 

from customers, such as mark-ups and mark-downs; for instance, one study documents that the 

size of the mark-up or mark-down is significantly positively related to whether the broker-dealer 

solicits the transaction and whether the broker-dealer acts in a principal capacity.1064  Because 

mark-ups and mark-downs are payments from the customer to the broker-dealer, they give rise to 

conflicts of interest between a broker-dealer and his or her customer at the time of a 

recommendation, particularly if they are opaque to the customer, at the time of the 

recommendation.  Mechanisms, including regulation,1065 disclosure, and reputation,1066 may be 

                                                                                                                                                             

 

Choice?, 119 ECON. LETTERS 117 (2013). See also AARP August 2018 Letter.  
Financially unsophisticated investors, as discussed by Stoughton et al. (2011), are those 
most likely to purchase inefficient assets.   

1064  See Allen Ferrell, The Law and Finance of Broker-Dealer Mark-Ups (Harvard John M. 
Olin Ctr. for Law, Econ., and Bus., Discussion Paper, Apr. 6, 2011), available at 
https://www.finra.org/sites/default/files/NoticeAttachment/p123492.pdf. See AARP 
August 2018 Letter. 

1065  See, e.g., antifraud provisions of the federal securities laws, FINRA Rule 2121 (Fair 
Prices and Commissions); MSRB Rules G-15 and G-30, amended pursuant to Exchange 
Act Release No. 79347 (Nov. 17, 2016) [81 FR 84637] (Nov. 23, 2016); and FINRA 
Rules 2121 and 2232, amended pursuant to Exchange Act Release No. 79346 (Nov. 17, 
2016) [81 FR 84659] (Nov. 23, 2016). 

1066  See William P. Rogerson, Reputation and Product Quality, 14 BELL J. ECON. 508 (1983); 
Benjamin Klein & Keith B. Leffler, The Role of Market Forces in Assuring Contractual 
Performance, 89 J. POL. ECON. 615 (1981); W. Bentley MacLeod, Reputations, 
Relationships, and Contract Enforcement, 45 J. ECON. LITERATURE 595 (2007) for 
theoretical models of the effect of reputation on investment quality.  See AARP August 
2018 Letter.  For example, FINRA and MSRB introduced rules in May 2018 regarding 
mark-up disclosure rules for same-day trades, allowing investors to be able to see what 

 

 



475 

 

able to mitigate the risk of financial professionals acting on conflicts of interest to the detriment 

of their customers.1067  In addition to direct payments of commissions from retail investors, 

financial professionals may receive payments from third parties, such as securities issuers, which 

can increase costs to investors through higher management fees and reduced net returns, and 

provide incentives to recommend these securities over those that do not provide such 

incentives.1068 

While a number of studies suggest that conflicts of interest may lead to investor harm, 

one study, which provides a survey of the literature on conflicts of interest, states that “although 

conflicts of interest are omnipresent when contracting is costly and parties are imperfectly 
                                                                                                                                                             

 

they have paid for riskless principal transactions (FINRA Rule 2232 and MSRB Rule G-
15).  The Commission has also brought enforcement cases for undisclosed excessive 
markups under Exchange Act Rule 10b-5.  

1067  See, e.g., Inderst & Ottaviani (2012), supra footnote 1050.  See also Bolton et al. (2007), 
infra footnote 1073, which posits that competition or consolidation affect reputation costs 
and provide a disciplining mechanism for providers of financial advice.  Although 
various mechanisms exist to address agency problems in general, such as monitoring, 
bonding, and contracting (see, e.g., Finke (2012), supra footnote 1041), the agency 
problem between financial professionals and retail investors is not necessarily one that 
can be solved cost-effectively through these approaches.  See infra Section III.A.2 for a 
discussion of limitations to these approaches.  See also Curtis (2018), supra footnote 
1054. See also AARP August 2018 Letter; CFA August 2018 Letter; UVA Letter. 

1068  See Stoughton et al. (2011), supra footnote 1048. The authors also state that “[i]n 
addition to the advisory fees charged to the clients, wrap account managers may receive 
rebates from fund management companies as well,” and that wrap accounts have 
increased in popularity.  See also Mark Egan, Brokers vs. Retail Investors: Conflicting 
Interests and Dominated Products, J. FIN. (forthcoming 2019).  See also AARP August 
2018 Letter; CFA August 2018 Letter. 



476 

 

informed, there are important factors that mitigate their impact and, strikingly, it is possible for 

customers of financial institutions to benefit from the existence of such conflicts… The existence 

of a conflict of interest… does not mean that… the customers of that institution will be 

harmed… [A] variety of mechanisms help control conflicts of interest and their impact [e.g., a 

financial institution’s reputation].”1069  Another study of commission-based compensation in the 

United Kingdom indicates that commission-based compensation leads to significant bias in 

certain types of securities (e.g., with profit bonds or distribution bonds) and financial 

professionals and when bias exists, retail investors are harmed and the costs associated with such 

harm are significant; however, the study also states that the advice market in the United 

Kingdom is not overrun with bias (“adviser recommendations are not dominated by self-

interest”) and the market for advice generally works well.1070  

                                                                                                                                                             

 

1069  See Mehran & Stulz (2007), supra footnote 1059.  See also Johnsen August 2018 Letter. 
1070  See Robert Laslett, Tim Wilsdon, & Kyla Malcolm, Polarisation: Research into the 

Effect of Commission Based Remuneration on Advice, Charles River Associates Report 
Submitted to the U.K. Financial Services Authority (Jan. 2002), available at 
http://www.crai.com/sites/default/files/publications/polarisation-research-into-the-effect-
of-commission-based-remuneration-on-advice.pdf. Laslett et al. (2002) estimate harm 
resulting from biased advice of approximately £140 million per year.  Following the ban 
on commission-based compensation in the U.K. in 2013, another study finds that while 
the quality of financial advice increases, increased costs of providing advice lead some 
financial professionals to turn away small retail investors.  See Tracey McDermott & 
Charles Roxbury, Financial Advice Market Review, Financial Conduct Authority and HM 
Treasury Final Report (Mar. 2016) , available at 
https://www.fca.org.uk/publication/corporate/famr-final-report.pdf (which provides an 
overview of the effects of the Retail Distribution Review by the Financial Conduct 
Authority in the United Kingdom).  Further, McDermott & Roxbury (2016) report that 

 

 



477 

 

Although financial professionals may aid retail investors in correcting common investing 

mistakes and overcoming informational hurdles associated with securities transactions or 

investment strategies, the average retail investor may not be able to assess the quality of advice 

received from financial professionals.1071  The difficulty in assessment can arise from several 

sources, including a large degree of heterogeneity in the quality of advice, insufficient financial 

literacy on the part of investors, and information asymmetry between the financial professional 

and investors.1072  Information asymmetry arises when information necessary to assess the 

quality of the advice received may not be available to the retail investor, even when it is 

available to the financial professional.  For example, a financial professional may disclose 
                                                                                                                                                             

 

financial advice costs approximately £150 per hour and that giving retirement advice 
requires an average of nine hours on the part of the financial professional. 

1071  A number of studies consider advice to be a credence good, which is a type of good with 
qualities that cannot be observed by the consumer after purchase, making it difficult to 
assess its utility.  See, e.g., Roman Inderst, Consumer Protection and the Role of Advice 
in the Market for Retail Financial Services, 167 J. INSTITUTIONAL & THEORETICAL 
ECON. 4 (2011) (which provides a review of investors’ ability to assess the quality of 
investment advice). 

1072  See, e.g., Bluethgen et al. (2008), supra footnote 1048.  Although this study documents 
reasons why investors may be unable to assess the quality of advice, the focus is on using 
adviser characteristics as screening mechanisms to alleviate the first complication noted, 
the high degree of heterogeneity in the quality of advice.  The paper finds that good 
predictors of high quality advice include the financial professional’s cognitive ability 
(e.g., analytical skills, rationality, and financial knowledge), how financial professionals 
are compensated (financial professionals that have a high fraction of commission-based 
revenue are less likely to recommend high quality investments, e.g., index funds), and the 
firm’s business model. See also Finke (2012), supra footnote 1041; AARP August 2018 
Letter.  See also Relationship Summary Adopting Release. 



478 

 

conflicts of interest that could affect the advice provided, but the information may not be 

sufficiently precise to help a retail investor gauge how those conflicts affect the advice provided. 

Conflicts of interest, therefore, can erode the benefits of advice provided to retail 

investors, particularly if investors are unaware that the conflicts exist or if they do not understand 

the implications of conflicts.1073  Financial professionals may use this information asymmetry, 

particularly with unsophisticated investors, to capture economic rents for themselves, and this 

could exacerbate biases that investors sometimes exhibit, such as return chasing or under-

diversification.1074  One experimental study sent “mystery shoppers” to broker-dealers and 

investment advisers in several large cities in the United States and found that financial 

professionals provided recommendations that benefited themselves and exacerbated behavioral 

                                                                                                                                                             

 

1073  See, e.g., Inderst & Ottaviani (2012), supra footnote 1050; Patrick Bolton, Xavier 
Freixas, & Joel Shapiro, Conflicts of Interest, Information Provision, and Competition in 
the Financial Services Industry, 85 J. FIN. ECON. 297 (2007). See also AARP August 
2018 Letter. 

1074  See, e.g., Marco Ottaviani, The Economics of Advice (Working Paper, May 2000), 
available at http://faculty.london.edu/mottaviani/EOA.pdf (included because they capture 
aspects of the information asymmetries between retail investors and financial 
professionals that are not captured by the studies suggested by the commenters); Miriam 
Krausz & Jacob Paroush, Financial Advising in the Presence of Conflict of Interests, 54 
J. ECON. & BUS. 55 (2002); Inderst & Ottaviani (2012), supra footnote 1050; Stoughton 
et al. (2011), supra footnote 1048. See also AARP August 2018 Letter. 



479 

 

biases on the part of investors, including return chasing or recommendations of high-cost 

actively managed funds.1075 

Although financial professionals may be hired to help overcome “investment mistakes” 

made by investors,1076 a number of studies show that financial professionals themselves may be 

subject to the same behavioral biases as unadvised retail investors, such as return chasing and 

overconfidence.1077  One study, using data on Canadian investors and their financial 

                                                                                                                                                             

 

1075  See Sendhil Mullainathan, Markus Noeth, & Antoinette Schoar, The Market for Financial 
Advice: An Audit Study (Nat'l Bureau of Econ. Research, Working Paper No. 17929, Mar. 
2012), available at https://www.nber.org/papers/w17929.pdf.  See also AARP August 
2018 Letter; CFA August 2018 Letter; EPI Letter.  Although the Mullainathan et al. 
(2012) study included both broker-dealers and investment advisers, the study notes that 
most professionals in their sample focused on the lower end of the retail spectrum and 
tended to be compensated through commissions rather than fees based on AUM. See also 
Santosh Anagol, Shawn Cole, & Shayak Sarkar, Understanding the Advice of 
Commissions Motivated Agents: Evidence from the Indian Life Insurance Market 
(Harvard Bus. Sch., Working Paper No. 12-055, Oct. 2015), available at 
https://www.hbs.edu/faculty/Publication%20Files/12-055_13c23c02-e57f-4aea-9630-
316aa4b772ce.pdf, which used a similar audit approach to evaluate the quality of advice 
provided by life insurance agents in India, and found that agents recommended unsuitable 
products and strategies that paid high commissions. 

1076  See supra footnote 1046. 
1077  See, e.g., Mullinathan et al. (2012), supra footnote 1075; Terrance Odean, Are Investors 

Reluctant to Realize Their Losses?, 53 J. FIN. 1775 (1998); Zur Shapira & Itzhak 
Venezia, Patterns of Behavior of Professionally Managed and Independent Investors, 25 
J. BANKING & FIN. 1573 (2001).  See also AARP August 2018 Letter.  See also Anagol 
et al. (2015), supra footnote 1075, which documents that life insurance agents in India 
purchase the same inefficient products that they recommend to their clients.  One study of 
Canadian financial professionals and their clients observed a commonality among 
portfolios of a given financial professional, and that the financial professional’s own 
portfolio allocations strongly predicted the asset allocations of his or her customers, 

 

 



480 

 

professionals, observes that financial professionals appear to have the same “misguided beliefs” 

as their investors, and therefore do not correct, and may even exacerbate common investment 

mistakes.1078  In that study, financial professionals invested in the same manner that they 

recommended to their clients; they traded excessively, chased returns, bought expensive actively 

managed funds, under-diversified their portfolios, and earned similar net returns.  Further, these 

financial professionals continued to follow similar investment strategies as those they 

recommended to their clients, even after they had left the industry, suggesting that they believed 

their own investment advice.1079  

                                                                                                                                                             

 

indicating limited customization, regardless of the customer’s risk tolerance, age, or 
financial sophistication.  Although the results of this paper indicate that conflicts of 
interest are unlikely to motivate advice because financial professionals and their investors 
hold similar portfolios, it does raise questions of the high cost of financial advice when 
customization is limited. See Stephen Foerster et al., Retail Financial Advice: Does One 
Size Fit All?, 72 J. FIN. 1441 (2017) (included because they capture insights into how 
financial professionals may be subject to similar biases as retail investors that are not 
captured by the studies suggested by the commenters).  See Robinson (2007), supra 
footnote 1054. 

1078  See Juhani T. Linnainmaa, Brian T. Melzer, & Alessandro Previtero, The Misguided 
Beliefs of Financial Advisors (Kelley Sch. of Bus., Research Paper No. 18-9, May 2018), 
available at http://www.aleprevitero.com/wp-content/uploads/2018/06/SSRN-
id3101426.pdf. See also CFA August 2018 Letter. 

1079  Linnainmaa et al. (2018), supra footnote 1078, also suggest that conflicts of interest may 
not be driven by financial professionals, but instead are between the firm and its clients, 
and that firms deliberately hire financial professionals who believe their misguided (and 
ultimately expensive) advice.  In light of their findings, the authors suggest that 
regulation designed to stem conflicts of interest could be ineffective if aligning investors 
and financial professionals does not alter the advice that they provide, could raise barriers 
to entry that could reduce the amount of advice available, and may limit investor choice.481 

 

c. Evidence of Potential Investor Harm 

A number of commenters provided citations to academic studies that analyze the 

evidence of potential investor harm driven by conflicts of interest of financial professionals.1080  

A number of these studies, including Bergstresser et al. (2009), Del Guercio and Reuter (2014), 

and Christoffersen, Evans, and Musto (2013), underpinned the economic analyses of the Council 

of Economic Advisors 2015 Study (“CEA Study”) and the DOL RIA assessment of the 

aggregate harm borne by retail investors in retirement plans due to conflicts of interest.1081  

                                                                                                                                                             

 

1080  See, e.g., AARP August 2018 Letter; Better Markets August 2018 Letter; CFA August 
2018 Letter; EPI Letter; State Attorneys General Letter.  

1081  See Letter from Linda Agerbak (Jun. 21, 2018) (“Agerbak Letter”); Better Markets 
August 2018 Letter; CFA August 2018 Letter; EPI Letter; Letter from Public Citizen 
(Aug. 7, 2018) (“Public Citizen Letter”); State Attorneys General Letter; Former SEC 
Senior Economists Letter.  See also Bergstresser et al. (2009), supra footnote 1048; 
Diane Del Guercio & Jonathan Reuter, Mutual Fund Performance and the Incentive to 
Generate Alpha, 69 J. FIN. 1673 (2014); Susan E.K. Christoffersen, Richard Evans, & 
David K. Musto, What Do Consumers' Fund Flows Maximize? Evidence from Their 
Brokers’ Incentives, 68 J. FIN. 201 (2013).  See Office of the President of the United 
States, Council of Economic Advisers, The Effects of Conflicted Investment Advice on 
Retirement Savings (Feb. 2015), available at 
https://obamawhitehouse.archives.gov/sites/default/files/docs/cea_coi_report_final.pdf.  
See also DOL RIA, supra footnote 1002.  Both the CEA Study and the DOL RIA 
assumed that the DOL Fiduciary Rule would eliminate all conflicts of interest and, 
therefore, all of the harms to retirement investors resulting from conflicts.  See also Curtis 
(2018) and infra footnote 1103.  By contrast, Regulation Best Interest would not require 
elimination or mitigation of firm-level conflicts, and will require written policies and 
procedures reasonably designed to eliminate or mitigate of some representative-level 
conflicts, which means that some conflicts and their attendant harms may remain, 
especially at the firm level.  The disclosure requirements of Regulation Best Interest, 

 

 



482 

 

Below we discuss evidence of potential investor harm attributable to recommendations of certain 

investments by financial professionals, including mutual funds, 401(k) plans, corporate bonds, 

and non-traded REITs.  We then discuss the aggregate measures of investor harm estimated by 

the CEA Study and the DOL RIA and the limitations of those estimates.   

Directly addressing the question of whether and how brokerage customers or advisory 

clients are affected by conflicts of interest (e.g., through quantification) requires measurement of 

the effect of advice, subject to different levels of conflict, received from broker-dealers or 

investment advisers.  Most data currently available to researchers does not make distinctions 

between types of firms or financial professionals, and generally aggregates all firms or financial 

professionals into a single category of financial professionals (e.g., “adviser” or “financial 

adviser”).  Further, an investor’s propensity to choose a particular type of relationship may be 

correlated with the investor’s skill or choice of investment and, therefore, may introduce bias 

into studies that are able to differentiate between types of advice relationships.  Despite these 

limitations, by examining the existing academic literature, discussed below, we are able to gain 

qualitative insight into, and address commenter concerns, about conflicts of interest in the market 

for financial advice and the potential harm to investors.  

                                                                                                                                                             

 

however, may empower some customers to push back on broker-dealer conflicts of 
interest and more generally may have a deterrent effect. 



483 

 

The majority of studies to date that investigate the potential harm to investors arising 

from potential conflicts of interest have generally centered on findings based on analysis of 

investments in mutual funds.  Due to the readily available data for mutual funds, the literature is 

rich with studies exploring various aspects of those securities, including the performance of 

funds, relationships between flows and performance or expenses, and differences in performance 

of funds depending on the distribution channel.  These studies have further been used by 

commenters and other providers of economic analyses to estimate the magnitude of investor 

harm potentially stemming from conflicts of interest as it relates to mutual fund investments.1082 

Evidence suggests that there is a strong relationship between past performance and 

subsequent fund flows, even when funds do not persistently outperform, suggesting that 

investors and/or their financial professionals may engage in return-chasing behavior.1083  Several 

                                                                                                                                                             

 

1082  See CEA Study, supra footnote 1081, and DOL RIA, supra footnote 1002. See also EPI 
Letter; Better Markets August 2018 Letter; St. John’s U. Letter; Letter from Royce A. 
Charney, President, Trust Administrators (Aug. 7, 2018) (“Charney Letter”); Agerbak 
Letter; CFA August 2018 Letter. 

1083  See Judith Chevalier & Glenn Ellison, Risk Taking by Mutual Funds as a Response to 
Incentives, 105 J. POL. ECON. 1167 (1997); Jonathan B. Berk & Richard C. Green, 
Mutual Fund Flows and Performance in Rational Markets, 112 J. POL. ECON. 1269 
(2004); Brad M. Barber, Terrance Odean, & Lu Zheng, Out of Sight, Out of Mind: The 
Effects of Expenses on Mutual Fund Flow, 78 J. BUS. 2095 (2005); Erik R. Sirri & Peter 
Tufano, Costly Search and Mutual Fund Flows, 53 J. FIN. 1589 (1998). In the theoretical 
model provided by Berk and Green (2004), active funds do not outperform passive funds 
because investors compete to invest in strong past performers (i.e., they chase returns), 
driving these funds’ returns to the competitive level. See also AARP August 2018 Letter; 
CFA August 2018 Letter. 



484 

 

studies also examine the effect of mutual fund costs, and find that (1) fund flows are negatively 

related to front-end loads, but are relatively insensitive to fund-level operating expenses (e.g., 

12b-1 fees), indicating that investors may be aware of upfront costs when selecting funds, but 

may be less attuned to the effect on net returns of ongoing operating expenses;1084 and (2) 

unsophisticated investors are more likely to pay higher fees than sophisticated investors and are 

less likely to expend search costs to look for lower-fee funds.1085  Retail investors, however, can 

benefit when funds commence operation of an institutional “twin” fund as overall expenses 

decrease and managerial effort increases, suggesting that retail investors may not be able to 

monitor fund managers as effectively as institutional investors.1086 

Analyses in the CEA Study and the DOL RIA focus on the underperformance of certain 

broker-sold funds, potentially driven by conflicts of interest and a misalignment of incentives 

between financial professionals and investors.1087  A number of studies document that actively 

managed load mutual funds purchased by investors through a financial professional 

                                                                                                                                                             

 

1084  See Barber et al. (2005), supra footnote 1083. 
1085  See Todd Houge & Jay Wellman, The Use and Abuse of Mutual Fund Expenses, 70 J. 

BUS. ETHICS 23 (2007). See AARP August 2018 Letter. 
1086  See Richard B. Evans & Rudiger Fahlenbrach, Institutional Investors and Mutual Fund 

Governance: Evidence from Retail-Institutional Fund Twins, 25 REV. FIN. STUD. 3530 
(2012). See AARP August 2018 Letter.  The authors identify funds as “twins” if they 
share the same manager, investment objectives, fund families, and have a gross return 
correlation of 0.95 or greater. 

1087  See CEA Study, supra footnote 1081, and DOL RIA, supra footnote 1002. 



485 

 

underperform other types of mutual funds.1088  For example, several studies find that actively 

managed load funds underperform a buy-and-hold strategy by between 1.56% and 2.28% 

annually, while other studies show that actively managed load funds underperform no-load funds 

by between 1% and 1.5% per year.1089  This underperformance could be driven by poor market 

timing of investors (e.g., return chasing),1090 or because increased expenditures by the funds on 

marketing and advertising successfully attract retail flows, and such expenses decrease net 

returns to investors over time.1091  Fees and expenses, as documented by several studies, are two 

                                                                                                                                                             

 

1088  See Bergstresser et al. (2009), supra footnote 1048; Del Guercio & Reuter (2014), supra 
footnote 1081.  

1089  See, e.g., Mercer Bullard, Geoffrey Friesen, & Travis Sapp, Investor Timing and Fund 
Distribution Channels (Working Paper, 2008); Geoffrey C. Friesen & Travis R.A. Sapp, 
Mutual Fund Flows and Investor Returns: An Empirical Examination of Fund Investor 
Timing Ability, 31 J. BANKING & FIN. 2796 (2007); Matthew R. Morey, Should You 
Carry the Load? A Comprehensive Analysis of Load and No-Load Mutual Fund Out-of-
Sample Performance, 27 J. BANKING & FIN. 1245 (2003). See also Eugene F. Fama & 
Kenneth R. French, Luck Versus Skill in the Cross-Section of Mutual Fund Returns, 65 J. 
FIN. 1915 (2010), which notes that although some active managers may outperform 
passive benchmarks while others underperform, on average, the alpha attributable to 
active management will net to zero; therefore, net of fees, on average, and the alpha 
earned by actively managed funds will be reduced by the aggregate amount of fees and 
expenses of active management.  See also William F. Sharpe, The Arithmetic of Active 
Management, 47 FIN. ANALYSTS J. 7 (1991). See AARP August 2018 Letter; CFA 
August 2018 Letter. 

1090  See, e.g., Bullard et al. (2008), supra footnote 1089; Friesen & Sapp (2007), supra 
footnote 1089. 

1091  One study documents that heavily advertised funds outperform their benchmarks prior to 
the marketing efforts, but do not outperform their benchmarks in the post-advertising 
period.  These funds, however, attract significantly more inflows, relative to a control 

 

 



486 

 

of the most reliable predictors of future returns, and fees should reflect performance (e.g., funds 

with high fees hypothetically should have better ex post performance in order to justify the fees), 

as at least some portion of the fees are dedicated to portfolio management; however, these 

studies consistently find a negative relationship between fees and performance—lower cost 

funds on average are more likely to generate higher performance net of fees than high cost 

funds.1092 

A number of studies, also cited by the DOL RIA and the CEA Study, explore the 

distinction between broker-sold funds and direct-sold funds, and the effect of the distribution 

channel on fund flows and performance.  When examining a sample of only broker-sold funds, 

one study shows that funds that pay higher fees to financial professionals or charge higher excess 

                                                                                                                                                             

 

group.  See Prem C. Jain & Joanna Shuang Wu, Truth in Mutual Fund Advertising: 
Evidence on Future Performance and Fund Flows, 55 J. FIN. 937 (2000). See also 
Nikolai Roussanov, Hongxun Ruan, & Yanhao Wei, Marketing Mutual Funds (Nat’l 
Bureau of Econ. Research, Working Paper No. 25056, Sept. 2018), available at 
https://www.nber.org/papers/w25056.pdf. See AARP August 2018 Letter; CFA August 
2018 Letter; EPI Letter. 

1092  See Javier Gil-Bazo & Pablo Ruiz-Verdu, The Relation Between Price and Performance 
in the Mutual Fund Industry, 64 J. FIN. 2153 (2009); Russel Kinnel, Predictive Power of 
Fees: Why Mutual Fund Fees Are So Important, Morningstar Manager Research (May 
2016); William F. Sharpe, The Arithmetic of Investment Expenses, 69 FIN. ANALYSTS J. 
34 (2013).  Gil-Bazo & Ruiz-Verdu (2009) find that actively managed funds with the 
worst performance charge, on average, the highest fees.  See AARP August 2018 Letter; 
CFA August 2018 Letter. 



487 

 

loads generate greater fund inflows.1093  Moreover, broker-sold funds, on average, underperform 

direct-sold funds by between 23 bps and 255 bps per annum, with most studies observing 

average underperformance of approximately 100 bps (1%) per year.1094   

Further, conflicts of interest appear to depend upon the choice of investment (e.g., 

broker-sold versus direct-sold funds) as well as the magnitude of the costs (e.g., mutual fund 

loads).  One study suggests that the market for funds is segmented: more financially 

sophisticated investors select direct-sold funds, which unbundle portfolio management from 

advice of financial professionals, while less financially sophisticated investors purchase broker-

sold funds, which combine portfolio management and advice.1095  Another study focuses 

                                                                                                                                                             

 

1093  See Christoffersen et al. (2013), supra footnote 1081; Chalmers & Reuter (2015), supra 
footnote 1042; Jasmin Sethi, Jake Spiegel, & Aron Szapiro, Conflicts of Interest in 
Mutual Fund Sales: What Do the Data Tell Us?, 6 J. RETIREMENT 46 (2019). 
Christoffersen et al. (2013) and Sethi et al. (2019) measure excess loads by first 
estimating the baseline (average) load paid with regressions of loads on a number of 
explanatory variables, then using the residuals from these regressions (excess loads) to 
explain fund flows and performance.  See also Morningstar Letter; Letter from Aron 
Szapiro, Director of Policy Research, Morningstar, Inc., et al. (Aug. 24, 2018) 
(“Morningstar Letter Supplement”). Sethi et al. (2019) find, however, that the relation 
between excess loads and fund flows tapered off after the DOL Fiduciary Rule was 
adopted, suggesting that the DOL Fiduciary Rule may have discouraged financial 
professionals from directing flows to funds with high excess loads. 

1094  See, e.g., Bergstresser et al. (2009), supra footnote 1048; Chalmers & Reuter (2015), 
supra footnote 1042; Xuanjuan Chen, Tong Yao, & Tong Yu, Prudent Man or Agency 
Problem? On the Performance of Insurance Mutual Funds, 16 J. FIN. INTERMEDIATION 
175 (2007). See AARP August 2018 Letter. 

1095  See Del Guercio & Reuter (2014), supra footnote 1081.  Moreover, this study finds that 
broker-sold actively managed funds underperform broker-sold index funds by between 

 

 



488 

 

exclusively on broker-sold funds, but segments those funds into groups that depend on the size of 

excess loads and whether the funds are sold by affiliated or unaffiliated brokers.1096  That study 

observes that funds with a one-standard deviation increase in excess loads are related to a 

reduction in future performance of between 34 bps and 49 bps in the following year.  As detailed 

in Bergstresser et al. (2009), the broker-sold channel is likely to include funds sold through both 

broker-dealers and investment advisers; however, the data provided to the authors is not granular 

enough to be able to distinguish the performance characteristics of the two distinct channels.1097 

A number of commenters stated that the Proposing Release did not appropriately account 

for existing economic analyses produced by the CEA Study and the DOL RIA to measure the 

                                                                                                                                                             

 

1.1% and 1.3% per year, which the authors suggest may reflect an agency conflict. See 
also Diane Del Guercio, Jonathan Reuter, & Paula A. Tkac, Broker Incentives and 
Mutual Fund Market Segmentation (Nat'l Bureau of Econ. Research, Working Paper No. 
16312, Aug. 2010), available at https://www.nber.org/papers/w16312.pdf. See AARP 
August 2018 Letter; CFA August 2018 Letter.  Although some of the growth in direct-
sold funds comes from passive investing (e.g., index funds), greater than 75% of the 
number of direct-sold funds are actively managed (as of 2012).  See Jonathan Reuter, 
Revisiting the Performance of Broker-Sold Mutual Funds (Working Paper, Nov. 2, 2015), 
available at https://www2.bc.edu/jonathan-reuter/research/brokers_revisited_201511.pdf. 

1096  See Christoffersen et al. (2013), supra footnote 1081. 
1097  See Bergstresser et al. (2009), supra footnote 1048. The Bergstresser et al. study also 

notes that many funds in the direct-sold channel may be recommended by fee-based 
advisers, whose services “are typically paid for with an advisory fee that is outside of the 
fund expenses or distribution costs.  As a practical matter, the ‘direct’ channel may not be 
as direct as one might imagine.” 



489 

 

potential harm to investors from conflicts of interest.1098  The CEA Study and the DOL RIA use 

the literature on underperformance of broker-sold mutual funds as the foundation for their 

analyses on the potential harm of retail investors, focusing on harm specifically directed at 

retirement savings.  Applying an estimate of approximately 1% underperformance to broker-sold 

funds, which is consistent with estimates of underperformance provided by several studies,1099 

the CEA Study and the DOL RIA apply different methods and approaches to calculate the 

aggregate dollar harm for retail investors in their retirement accounts.1100  Based on $1.7 trillion 

invested in potentially conflicted funds, the CEA Study estimates annual harm to retirement 

investors of approximately $17 billion.1101  Similarly, the DOL RIA, which estimates potential 

                                                                                                                                                             

 

1098  See also ARA August 2018 Letter; EPI Letter; Better Markets August 2018 Letter; St. 
John’s U. Letter; Charney Letter; Agerbak Letter; CFA August 2018 Letter. 

1099  See Bergstresser et al. (2009), supra footnote 1048; Del Guercio & Reuter (2014), supra 
footnote 1081; Christoffersen et al. (2013), supra footnote 1081.  A number of 
commenters, regarding the DOL RIA, indicated that both the CEA Study, supra footnote 
1081, and the DOL RIA, supra footnote 1002, misinterpreted estimated effects described 
in the Christoffersen et al. (2013) paper, and overstated the potential harm associated 
with funds with high excess loads by more than double the actual estimate had the 
interpretation been correct. See Craig M. Lewis, The Flawed Cost-Benefit Analysis 
Underlying the Department of Labor’s Fiduciary Rule (White Paper, Aug. 2017), 
available at https://www.sec.gov/comments/ia-bd-conduct-standards/cll4-2268185-
160965.pdf; Public Interest Comment from Mark Warshawsky & Hester Peirce, George 
Mason University Mercatus Center (Apr. 17, 2017), available at 
https://www.mercatus.org/system/files/warshawsky-dol-fiduciary-rule-pic-v1.pdf. See 
also Curtis (2018), supra footnote 1054. 

1100  See CEA Study, supra footnote 1081, and DOL RIA, supra footnote 1002. 
1101  See CEA Study, supra footnote 1081. 



490 

 

loss due to conflicts of interest of between 50 bps and 100 bps per year, produces ten-year 

aggregate estimates of investor harm of between $95 billion and $189 billion stemming from the 

underperformance of broker-sold mutual funds. 

The level of underperformance due to fund selection is highly sensitive to the data sample, 

including the sample period, as well as the methodology employed to calculate performance.  

Many of the studies used to support the analyses underlying the CEA Study and the DOL RIA 

rely on data obtained prior to 2011.  However, since 2011 there have been a number of advances 

in the market for mutual funds (e.g., shifts from load to no-load funds and increase in no-load 

funds without 12b-1 fees), likely leading some of the inferences drawn from those studies to be 

dated and not reflective of the current market environment.1102  A number of commenters 

indicated potential flaws associated with the approach and interpretation of the analyses used by 

the CEA Study and the DOL RIA.1103  One study updates the Del Guercio and Reuter (2014) 

                                                                                                                                                             

 

1102  See ICI Letter and Section III.B.2.e.ii, supra. 
1103  See Lewis (2017), supra footnote 1099; Warshawsky & Peirce (2017), supra footnote 

1099.  See also Curtis (2018), supra footnote 1054. To date, only one academic study of 
which we are aware (Curtis (2018)) has analyzed the DOL Fiduciary Rule and the DOL 
RIA, and discusses issues with the approach taken by the DOL RIA in estimating the 
benefits and costs of the DOL Fiduciary Rule, noting that the DOL RIA likely 
underestimates the potential costs of the rule.  This study also indicates that the net 
benefits of the DOL Fiduciary Rule are expected to be close to zero because the DOL 
Fiduciary Rule may not completely eliminate conflicts of interest and the actual cost of 
investment advice at the intermediary-level was excluded from the DOL RIA 
computation of benefit.  Once the calculation accounted for costs of advice, Curtis (2018) 
estimates that the total costs attributed to conflicts of interest, including 

 

 



491 

 

sample using data from between 2003 and 2012 and tests the robustness of the methodology by 

examining the underperformance of broker-sold funds relative to direct-sold funds.1104  While 

underperformance of broker-sold funds still existed, depending on the methodology and 

empirical approach used, the underperformance of these funds was reduced to between 20 bps 

and 70 bps, with the majority of the estimation approaches falling to between 20 bps and 50 bps, 

indicating a reduction in the underperformance of broker-sold funds relative to earlier studies.1105  

Another study replicates the Christoffersen et al. (2013) analysis of excess loads on 

underperformance using data from between 2010 and 2017, and finds that after 2010, funds with 

high excess loads did not underperform funds with low excess loads, which the authors interpret 

as evidence that financial professionals have improved their recommendations over time.1106  

                                                                                                                                                             

 

underperformance of some securities, is only slightly higher than the costs associated 
with advice that is free of conflicts. 

1104  See Reuter (2015), supra footnote 1095. 
1105  Reuter (2015), supra footnote 1095, states that “[t]hese changes suggest that the average 

broker-sold fund has become more competitive with the average direct-sold fund”; 
however additional research would be required to determine if these changes are driven 
by existing fund families, new fund families, or some combination of factors.  When 
performance is value-weighted, Reuter (2015) discusses that brokers appear to direct 
clients toward funds that pay “higher-than-average distribution costs.” 

1106  See Sethi et al. (2019), supra footnote 1093.  The authors note that the underperformance 
of high excess load funds becomes statistically insignificant in the analysis only with the 
inclusion of prior-year performance of the fund (which Christoffersen et al. (2013), supra 
footnote 1081, include in one of their models). The authors suggest that the reduction in 
flows to funds with excess loads could be due in part to the DOL Fiduciary Rule; 
however, they also note that their analysis does not reveal a clear association between the 

 

 



492 

 

Taken together, these recent studies on fund selection suggest that the magnitude of potential 

investor harm likely is not as large as that estimated by the CEA Study and the DOL RIA when 

more recent data is used to compute the underperformance of broker-sold mutual funds. 

Another recent study replicates and extends the Friesen and Sapp (2007) and Bullard et al. 

(2008) analyses of market timing ability by investors in mutual fund sales and purchases to 

newer data (2007 through 2016).1107  The study shows that the difference between dollar returns 

and buy-and-hold returns (“performance gap”) declined from 1.56% between 1991 and 2004 to 

1.01% between 2007 and 2016 for a combined sample of load and no-load funds, suggesting a 

moderation in market timing errors in the most recent period.  However, the excess performance 

gap (the difference between the performance gap on load funds and no load funds) has slightly 

increased between 2007 and 2016, from approximately 1% to 1.12%, indicating that, to the 

extent that load funds are sold by financial professionals and that all inflows and outflows are 

due solely to market timing motivations, investors who hold load funds are more prone to market 

timing errors than investors in no-load funds, and these errors are not being corrected by 

financial professionals.  The studies discussed above acknowledge that interpretation of the 
                                                                                                                                                             

 

DOL Fiduciary Rule and returns.  The authors further cite to Holden et al. (2018), supra 
footnote 955, which discusses the shift away from load mutual funds to no-load funds 
over time.  See also ICI Letter; Morningstar Letter; Morningstar Letter Supplement.  

1107  See Karthik Padmanabhan, Constantijn Panis, & Timothy Tardiff, The Ability of Investors 
to Time Purchases and Sales of Mutual Funds (Working Paper, Nov. 1, 2017) (see also 
Department of Labor April 2019 memo). See, e.g., Bullard et al. (2008), supra footnote 
1089; Friesen & Sapp (2007), supra footnote 1089. 



493 

 

empirical result that broker-sold funds underperform direct-sold funds is subject to another 

caveat because there is likely to be a selection bias in the type of investor that utilizes the direct-

sold fund channel relative to those investors who rely on financial professionals for advice and 

recommendations about which funds to purchase.  A similar selection bias is likely to exist for 

investors who purchase no-load funds versus those that purchase load funds from financial 

professionals.  For example, although numerous studies discussed above suggest that financial 

advice is more likely to be obtained by older, more financially sophisticated, and wealthier 

investors,1108 Chalmers and Reuter (2015) observe that younger, less financially experienced, 

and less wealthy investors are more likely to buy broker-sold funds.1109   

  Beyond mutual funds, a nascent literature is emerging on other securities that may be 

prone to conflicts of interest by financial professionals.1110  Recent studies have examined 

                                                                                                                                                             

 

1108  See supra Section III.B.3.a. 
1109  See supra footnote 1042. 
1110  Some commenters (see, e.g., CFA August 2018 Letter; AARP August 2018 Letter; EPI 

Letter) also provided studies about conflicts of interest in 401(k) plans which have shown 
that (i) plan sponsors tilt securities toward high-cost securities (see Ian Ayres & Quinn 
Curtis, Beyond Diversification: The Pervasive Problem of Excessive Fees and 
"Dominated Funds" in 401(k) Plans, 124 YALE L.J. 1476 (2015)); (ii) plans have 
inadequate or excessive investment choices (see Edwin J. Elton, Martin J. Gruber, & 
Christopher R. Blake, The Adequacy of Investment Choices Offered by 401(K) Plans, 90 
J. PUB. ECON. 1299 (2006); Sheena Sethi-Iyengar, Gur Huberman, & Wei Jiang, How 
Much Choice is Too Much? Contributions to 401(k) Retirement Plans, in PENSION 
DESIGN AND STRUCTURE: NEW LESSONS FROM BEHAVIORAL FINANCE (Olivia S. Mitchell 
& Stephen P. Utkuss eds., 2004)); (iii) plans may include proprietary funds even when 
other funds perform better (see Veronika K. Pool, Clemens Sialm, & Irina Stefanescu, It 

 

 



494 

 

potential conflicts of interest in markets for more complex investments, including reverse 

convertible corporate bonds and non-traded REITs.  One study uses a sample of reverse 

convertible corporate bonds that differ only in the financial incentives provided to financial 

professionals and the coupon rate, and finds that investors are more likely to purchase—based on 

the advice given—the inferior bond (lower coupon, all else equal) with the higher “kick-back” to 

the broker-dealer, which appears to be driven by conflicts of interest between the financial 

professional and the investors.1111  In an examination of non-traded REITs, one study documents 

that retail investors in non-traded REITs underperformed by over $45 billion relative to a 

portfolio of traded REITs, and that nearly one-third of that underperformance was driven by 

upfront fees used to compensate broker-dealers.1112  

Finally, although a significant amount of empirical evidence suggests that there may be 

investor harm due to conflicts of interest between financial professionals and investors, because 

                                                                                                                                                             

 

Pays to Set the Menu: Mutual Fund Investment Options in 401(K) Plans, 71 J. FIN. 1779 
(2016)); and (iv) funds included in 401(k) plans underperform passive benchmarks by 
approximately 31 bps annually (see Edwin J. Elton, Martin J. Gruber, & Christopher T. 
Blake, How do Employer's 401(K) Mutual Fund Selections Affect Performance?, Ctr. for 
Retirement Research at Bos. Coll., Issue in Brief No. 13-1 (Jan. 2013), available at 
https://crr.bc.edu/wp-content/uploads/2013/01/IB_13-1-508.pdf).   

1111  See Egan (2019), supra footnote 1068. 
1112  See Craig McCann, Fiduciary Duty and Non-Traded REITs, INVESTMENTS & WEALTH 

MONITOR, July/Aug. 2015, at 39, available at 
https://www.slcg.com/pdf/workingpapers/Fiduciary%20duty%20and%20Non-
traded%20REITs.pdf. See CFA August 2018 Letter. 



495 

 

of changes to the mutual fund industry (e.g., shifts from load to no-load funds and the 

introduction of new share classes),1113 increased competition,1114 and the anticipation of 

regulation designed to ameliorate potential conflicts of interest, several new studies indicate that 

potential harm to investors arising from conflicts of interest may be declining.1115  One survey 

paper concludes that although the empirical evidence is consistent with financial professionals 

having conflicts of interest that may harm consumers, “none of the articles concludes that clients 

would have been better off by foregoing advice.  Even if people receive lower returns… 

consulting with an advisor may provide intangible benefits that consumers value,” and “it is 

important to bear in mind that these studies may have data limitations and in general cannot 

                                                                                                                                                             

 

1113  See ICI Letter and Holden et al. (2018), supra footnote 951. See also Capital Group 
Letter; Money Management Institute Letter; FPC Letter at footnote 73.  As noted above, 
innovations, including the introduction of T and clean share classes of funds may reduce 
the expected fund underperformance net of costs for retail investors relative to A shares 
by nearly 50 basis points annually. See supra footnote 1021 and accompanying text. See 
also supra footnote 1020 and accompanying text.  

1114  See LPL December 2018 Letter; Morgan Stanley Letter (which discuss the migration to 
open architecture platforms). 

1115  See Reuter (2015), supra footnote 1042; Sethi et al. (2019), supra footnote 1093. See also 
CFA August 2018 Letter; EPI Letter; Morningstar Letter; Morningstar Letter 
Supplement.  We include recent studies provided by commenters to present the current 
baseline of empirical findings on potential investor harm stemming from conflicts of 
interest. 



496 

 

account for selection issues and the intangible benefits that investors receive from financial 

advisors.”1116 

4. Trust, Financial Literacy, and the Effectiveness of Disclosure 

A number of commenters stated that the Proposing Release did not sufficiently address 

how issues related to trust in financial professionals, investors’ level of financial literacy or 

sophistication, and limitations on the effectiveness of disclosure likely exacerbate the problems 

of information asymmetry and potential conflicts of interest between retail investors and 

financial professionals.1117  In order to address commenters’ concerns, we examined and discuss 

below both academic and industry research on how trust and financial literacy could affect the 

recommendations provided by financial professionals to retail investors, as well as the 

effectiveness and limitations of disclosure in ameliorating potential conflicts of interest. 

a. Trust in Investment Advice 

In seeking financial advice, a retail investor places not only money but also trust in a 

financial professional.  Commenters stated that retail investors will follow the advice of their 

                                                                                                                                                             

 

1116  See Burke et al. (2015), supra footnote 1059. The DOL RIA, supra footnote 1002, and 
some commenters, however, have stated that no advice is a better alternative to advice 
subject to conflicts of interest. See also EPI Letter; Betterment Letter; PIABA Letter; 
CFA August 2018 Letter.  The DOL RIA suggests that investors who obtain advice 
subject to conflicts of interest are worse off due to the costs associated with obtaining 
such advice (e.g., underperformance) than had they not sought or received advice at all. 

1117  See AARP August 2018 Letter; CFA August 2018 Letter; FPC Letter; Rhoades 
December 2018 Letter; EPI Letter.  



497 

 

“trusted advisors,” because they believe “financial professional[s] will place the investor’s 

financial interest before his or her own.”1118  Moreover, one industry study of over 800 investors 

notes that “96% of U.S. investors report that they trust their financial professional and 97% 

believe their financial professional has their best interest in mind.”1119 Academic studies have 

explored the issue of trust and how it affects financial decisions of investors.  Studies in this 

strand of academic literature find that higher levels of trust increase investors’ propensity to seek 

investment advice and hire financial professionals,1120 increase levels of stock market 

                                                                                                                                                             

 

1118  See Letter from Christine Lazaro, President, PIABA (Dec. 7, 2018) (“PIABA December 
2018 Letter”).  See also, e.g., Rhoades December 2018 Letter; Gross Letter; Letter from 
William W. McGinnis, W. McGinnis Advisors (Aug. 7, 2018) (“McGinnis Letter”); EPI 
Letter; Betterment Letter; State Attorneys General Letter; Better Markets August 2018 
Letter; OIAD/RAND (providing a survey on academic literature on trust). One survey 
notes, however, that approximately 15% of survey participants do not consult with 
financial professionals because they “don’t trust them.” See Cetera November 2018 
Letter. 

1119  See CCMC Letters.  See also Center for Capital Markets Competitiveness, Working with 
Financial Professionals: Opinions of American Investors (2018), available at 
https://www.centerforcapitalmarkets.com/wp-
content/uploads/2018/04/CCMC_InvestorPolling_v5-1.pdf.  

1120  See Jeremy Burke & Angela A. Hung, Trust and Financial Advice (RAND Labor & 
Population, Working Paper No. WR-1075, Jan. 2015), available at 
https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-
regulations/proposed-regulations/1210-AB32-2/trust-and-financial-advice.pdf.  This 
study indicates that increased financial trust is associated with higher levels of both 
seeking and following investment advice. See also AARP August 2018 Letter; FPC 
Letter; CFA August 2018 Letter. 



498 

 

participation,1121 and increase willingness to take on higher-risk investments.1122  Regarding the 

importance of trust in established advice relationships, some studies find that trust in financial 

professionals is greater when investors have lower financial literacy or when purchasing complex 

products, such as insurance products.1123 Further, as trust in financial professionals grows, 

investors may be more likely to delegate all investment decisions to the financial professional, 

irrespective of their level of financial education.1124  

                                                                                                                                                             

 

1121  See Luigi Guiso, Paola Sapienza, & Luigi Zingales, Trusting in the Stock Market, 63 J. 
FIN. 2557 (2008). Guiso et al. (2008) find that higher levels of trust in financial 
professionals by investors is associated with a 50% increase in the probability of buying 
stocks and a 3.4% increase in the proportion of equity investments in the aggregate 
portfolio. See Rhoades December 2018 Letter. 

1122  See Nicola Gennaioli, Andrei Shleifer, & Robert Vishny, Money Doctors, 70 J. FIN. 91 
(2015). This study suggests that increased trust in financial professionals by investors 
alleviates anxiety in undertaking higher-risk investments (e.g., equities) (included 
because they capture aspects of the benefits of higher levels of trust in financial 
professionals by retail investors that are not captured by the studies suggested by the 
commenters). 

1123  See Thomas Pauls, Oscar Stolper, & Adreas Walter, Broad-Scope Trust and Financial 
Advice (Working Paper, Nov. 17, 2016), available at 
https://www.researchgate.net/publication/314235638_Broad-
scope_trust_and_financial_advice; David de Meza, Bernd Irlenbusch, & Diane Reyniers, 
Disclosure, Trust and Persuasion in Insurance Markets (IZA Discussion Paper Series, 
No. 5060, July 2010), available at http://repec.iza.org/dp5060.pdf. See also 
OIAD/RAND, which shows that investors most likely in need of investor protection (e.g., 
financially unsophisticated) are most likely to place their trust in financial professionals. 
See also Letter from AFL-CIO et al. (Dec. 7, 2018) (“AFL-CIO December 2018 Letter”). 

1124  See Riccardo Calcagno, Maela Giofre, & Maria Cesira Urzi-Brancati, To Trust is Good, 
but to Control is Better: How Investors Discipline Financial Advisors’ Activity, 140 J. 
ECON. BEHAV. & ORG. 287 (2017). See OIAD/RAND. 



499 

 

Several commenters stated that some financial professionals respond to the trust that 

retail investors place in them by acting on their conflicts of interest, which could benefit the 

financial professional at the expense of the investor.1125  In addition, some studies have shown 

that higher levels of trust by retail investors can provide incentives for financial professionals to 

provide conflicted investment advice or undertake actions that benefit themselves at the expense 

of their customers.  For example, one study found that because investors trust their financial 

professionals to provide higher ex ante expected returns on their risky investments, firms 

employing those professionals increased fees above levels that, in the author’s view, were 

consistent with a competitive equilibrium, resulting in lower ex post net returns to investors.1126  

Further, this study documents that, although a relationship with a trusted professional can 

encourage investors to invest in financial markets when it is efficient for them to do so, in some 

cases financial professionals may instead provide more conflicted investment advice or 

inefficient advice in order to satisfy the desires of investors who trust them (e.g., undertaking 

lottery-like behavior by investing in the riskiest securities).1127 Although trust in financial 

professionals can help alleviate certain behavioral biases and encourage participation in the 

securities markets, one commenter stated that “[r]etail customers who place their trust in 

                                                                                                                                                             

 

1125  See, e.g., Rhoades December 2018 Letter; EPI Letter; Better Markets August 2018 Letter. 
1126  See Calcagno et al. (2017), supra footnote 1124. 
1127  See id. 



500 

 

salespeople that market services as acting in their best interest can end up paying excessively 

high costs for higher risk or underperforming investments that only satisfy a suitability standard, 

not a fiduciary standard.” 1128 

b. Financial Literacy and Investment Advice 

As discussed above, financial literacy affects those who seek investment advice from 

financial professionals.  One commenter noted that “[a]s consumers move closer to retirement, 

they may be more vulnerable to the negative impact of advice that is not in their best interest for 

three reasons: (1) the assets they have to invest are larger; (2) they may lack strong financial 

literacy skills; and (3) reduced cognition may affect financial decision making.”1129 A number of 

studies have shown that financial literacy is significantly related to retirement planning and 

wealth accumulation by retail investors.1130  Generally, studies find that investors who are more 

financially literate or sophisticated are more likely to seek investment advice and are more likely 

                                                                                                                                                             

 

1128  See AARP August 2018 Letter.  See also PIABA Letter; St. John’s U. Letter. See also 
Joseph C. Peiffer & Christine Lazaro, Major Investor Losses Due to Conflicted Advice: 
Brokerage Industry Advertising Creates the Illusion of a Fiduciary Duty, PIABA Report 
(Mar. 25, 2015), available at https://piaba.org/sites/default/files/newsroom/2015-
03/PIABA%20Conflicted%20Advice%20Report.pdf.  

1129  See AARP August 2018 Letter. 
1130  See, e.g., Jere R. Behrman et al., Financial Literacy, Schooling, and Wealth 

Accumulation (Nat'l Bureau of Econ. Research, Working Paper No. 16452, Oct. 2010), 
available at https://www.nber.org/papers/w16452.pdf; Hans-Martin von Gaudecker, How 
Does Household Portfolio Diversification Vary with Financial Literacy and Financial 
Advice?, 70 J. FIN. 489 (2015) (included in response to comment letters that expressed 
views about limited financial literacy by some retail investors).501 

 

to follow that advice than less financially sophisticated investors.1131  Further, one study shows 

that investors with lower financial literacy who do not seek investment advice underperform 

investors with higher financial literacy who seek investment advice by more than 50 bps on 

average, and these losses are predominantly driven by under-diversification of their 

portfolios.1132   

A number of studies link retail investor demographic characteristics to financial literacy 

and document that financial illiteracy, although widespread, is most significant among investors 

with lower levels of educational attainment, women, and minorities.1133  Moreover, many studies 

have examined the relationship between age, cognition, and financial literacy, and have shown 

that older investors, on average, are the least likely to be financially literate, and that financial 
                                                                                                                                                             

 

1131  See supra Section III.B.3.  See also Riccardo Calcagno & Chiara Monticone, Financial 
Literacy and the Demand for Financial Advice, 50 J. BANKING & FIN. 363 (2015), who 
observe that investors with lower levels of financial literacy are less likely to consult 
advisers and avoid risky assets; however, when they do seek advice, they generally 
delegate investment decisions to their financial professionals. Lusardi & Mitchell (2011) 
indicate that investors who are more financially sophisticated are more likely to plan for 
wealth accumulation and be successful in their planning. See Annamaria Lusardi & 
Olivia S. Mitchell, Financial Literacy and Planning: Implications for Retirement 
Wellbeing (Nat’l Bureau of Econ. Research, Working Paper No. 17078, May 2011), 
available at https://www.nber.org/papers/w17078.pdf. See AARP August 2018 Letter. 

1132  See von Gaudecker (2015), supra footnote 1130. This study finds that losses borne by 
investors with lower financial literacy are predominantly driven by under-diversification 
of their portfolios.  

1133  See Lusardi & Mitchell (NBER 2011), supra footnote 1131. See also Annamaria Lusardi 
& Olivia S. Mitchell, Financial Literacy and Retirement Planning in the United States, 
10 J. PENSION ECON. & FIN. 509 (2011). See AARP August 2018 Letter. 



502 

 

literacy degrades as investors age.1134  A number of these studies show, however, that investors 

with low levels of financial literacy are likely to be over-confident in their financial abilities.  For 

example, several studies that explore the relationship between age and financial literacy show 

that confidence in financial decision making does not decline with age, and potentially leads to 

poor decisions (e.g., paying higher mortgage rates).1135  Although over-confident investors with 

low levels of financial literacy could potentially benefit most from seeking and following 

investment advice, one study shows that over-confident investors are less likely to seek advice 

and perceive it as less valuable.1136 

One potential problem, however, for investors with lower financial literacy is that they 

may not be able to distinguish the quality of their financial professional or the advice that they 

                                                                                                                                                             

 

1134  See Michael S. Finke, John Howe & Sandra J. Huston, Old Age and Decline in Financial 
Literacy (Working Paper, Aug. 24, 2011), who document that financial literacy scores 
decline by approximately 1% each year over the age of 60. See also Annamaria Lusardi, 
Olivia S. Mitchell, & Vilsa Curto, Financial Literacy and Financial Sophistication 
Among Older Americans (Nat’l Bureau of Econ. Research, Working Paper No. 15469, 
Nov. 2009), available at https://www.nber.org/papers/w15469.pdf; Keith Gamble et al., 
Aging and Financial Decision Making, 61 MGMT. SCI. 2603 (2015). See AARP August 
2018 Letter. 

1135  See Finke et al. (2011) and Gamble et al. (2015), supra footnote 1134. 
1136  See Marc M. Kramer, Financial Literacy, Overconfidence and Financial Advice Seeking 

(Working Paper, Dec. 19, 2014), available at 
https://efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2015-
Amsterdam/papers/EFMA2015_0067_fullpaper.pdf.  



503 

 

receive.1137  One study documents that small traders, relative to large institutional investors, are 

unable to recognize biases in recommendations provided by securities analysts, and therefore 

follow analyst recommendations to buy and sell securities without considering other information 

produced by the analyst.1138  Additionally, financial literacy may influence the quality of advice 

that financial professionals are willing to provide their clients.  Some financial professionals 

appear to be more likely to provide superior information to more financially literate investors, 

who may be able to discern the quality of the advice, and more likely to provide inferior and 

potentially more conflicted information to investors who are less financially literate.1139 

c. Evidence on the Effectiveness and Limitations of Disclosure 

Regulation Best Interest relies in part on disclosure of certain material facts to retail 

customers.1140  A number of commenters, however, stated that we failed to sufficiently account 

                                                                                                                                                             

 

1137  See Lauren E. Willis, Against Financial-Literacy Education, 94 IOWA L. REV. 197 
(2008). See AARP August 2018 Letter. 

1138  See Ulrike Malmendier & Devin Shanthikumar, Are Small Investors Naive About 
Incentives?, 85 J. FIN. ECON. 457 (2007). See AARP August 2018 Letter. 

1139  See Willis (2008), supra footnote 1137, and Calcagno & Monticone (2015), supra 
footnote 1131. See also John A. Turner, Bruce W. Klein, & Norman P. Stein, Financial 
Illiteracy Meets Conflicted Advice: The Case of Thrift Savings Plan Rollovers (Working 
Paper, Apr. 2015), available at https://gflec.org/wp-content/uploads/2015/04/Turner-
0408Assessing-the-Standard-for-Financial-Advice.pdf, which documents that financial 
professionals often suggest rolling over from thrift savings plans to more expensive plans 
(e.g., IRAs), and that such behavior is pervasive among both broker-dealers and 
investment advisers. See AARP August 2018 Letter. 

1140  See supra Section II.C.1. 



504 

 

for limitations of disclosure in the Proposing Release of Regulation Best Interest.1141  One 

commenter stated that “studies show that regulation by disclosure alone can actually undermine 

investor protection by emboldening advisers to ignore the client’s best interest once they have 

‘checked the disclosure box,’ and by rendering investors even more vulnerable to conflicted 

advice once they receive disclosures.”1142  Another commenter asserted that the ineffectiveness 

of disclosure arises because of investors’ failure to understand the disclosure, inadequate time to 

read and process the information, cognitive dissonance, and trust in financial professionals’ oral 

representations over written disclosures, among others.1143  Below, we discuss studies that have 

identified characteristics that make disclosure effective as well as limitations to the effectiveness 

of disclosure to investors, in particular focusing on issues related to disclosure of conflicts of 

interest and how disclosure could inflate potential conflicts between financial professionals and 

investors. 

Characteristics of effective disclosures include saliency of information, clear and concise 

information delivered in a transparent manner, and increased use of visual and interactive design, 

                                                                                                                                                             

 

1141  See AARP August 2018 Letter; Better Markets August 2018 Letter; State Attorneys 
General Letter; EPI Letter; Morningstar Letter; Warren Letter; UVA Letter. 

1142  See Better Markets August 2018 Letter. See infra footnote 1148 for studies submitted by 
this commenter. 

1143  See State Attorneys General Letter. See also EPI Letter. 



505 

 

among others.1144  One study, examining the effect of disclosure of fees and costs for mutual 

funds, observes that disclosures that prominently feature fees are more effective than others, but 

do not appear to reduce the importance that investors place on other fund characteristics, such as 

performance or risk.1145  Other studies, however, have found that disclosures may be ineffective, 

particularly if the intended audience does not read the disclosure documents or does not 

understand the material presented to them. One study, for example, notes that as the length and 

complexity of the disclosure document increases, so does the time that it takes for investors to 

read and understand the material contained within; therefore, investors are more likely to prefer 

shorter, simpler, and more straightforward language in disclosures.1146 

                                                                                                                                                             

 

1144  See Relationship Summary Adopting Release at Section IV, which also discusses the 
benefits and limitation of disclosure.  See also Margaret Hagan, Designing 21st Century 
Disclosure Methods for Financial Decision Making, Stanford Law School Policy Lab 
(2016), available at https://law.stanford.edu/publications/designing-21st-century-
disclosures-for-financial-decision-making/.  One study finds that when fund expenses are 
bundled with brokerage commissions, reducing the transparency of various fees and 
costs, investors experience larger degrees of underperformance than when the fees are 
more transparent.  See Roger M. Edelen, Richard B. Evans, & Gregory B. Kadlec, 
Disclosure and Agency Conflict: Evidence from Mutual Fund Commission Bundling, 103 
J. FIN. ECON. 308 (2012). See AARP August 2018 Letter. 

1145  See Lucy Hayes, William Lee, & Anish Thakrar, Now You See It: Drawing Attention to 
Charges in the Asset Management Industry (Fin. Conduct Auth., Occasional Paper No. 
32, Apr. 2018), available at https://www.fca.org.uk/publication/occasional-
papers/occasional-paper-32.pdf. See Morningstar Letter. See also Anagol et al. (2015), 
supra footnote 1075. 

1146  See Tamar Frankel, The Failure of Investor Protection by Disclosure, 81 U. CIN. L. REV. 
421 (2013). See FPC. See also Omri Ben-Shahar & Carl E. Schneider, The Failure of 
Mandated Disclosure, 159 U. PA. L. REV. 647 (2011), which also questions the 

 

 



506 

 

Many studies have explored the effect of revealing conflicts of interest to consumers and 

note that disclosure of conflicts may produce undesirable behavior by the disclosing party, or 

that receivers of the information provided by disclosures may fail to appropriately account for 

the implications.1147  A series of studies documents that consumers do not account for conflicts 

of interest revealed through disclosures, and that such disclosures of conflicts can have the 

perverse effect of increasing bias and moral licensing in the provision of advice.1148  Moral 

licensing arises when the discloser of information “take[s] an ethical action that validates [her] 

self-image as a good person” so she feels as though she “may well give [herself] permission to 

                                                                                                                                                             

 

effectiveness of disclosures and finds mandated disclosures ineffective substitutes for 
more direct regulation. See AARP August 2018 Letter; Better Markets August 2018 
Letter; State Attorneys General Letter.   

1147  See also Relationship Summary Adopting Release. 
1148  See Daylian M. Cain, George Loewenstein, & Don A. Moore, When Sunlight Fails to 

Disinfect: Understanding the Perverse Effects of Disclosing Conflicts of Interest, 37 J. 
CONSUMER RES. 836 (2011); Daylian M. Cain, George Loewenstein, & Don A. Moore, 
The Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts of Interest, 34 J. 
LEGAL STUD. 1 (2005); George Loewenstein, Daylian M. Cain & Sunita Sah, The Limits 
of Transparency: Pitfalls and Potential of Disclosing Conflicts of Interest, 101 AM. 
ECON. REV. (PAPERS & PROC.) 423 (2011). These studies also note that, although 
disclosure is intended to help financially unsophisticated consumers, disclosure is most 
likely to be beneficial to sophisticated users of the information. One study, however, 
notes that disclosure can reduce biased advice if the disclosure acts as a deterrent against 
entering into conflicts, and may improve trust in advisers. See Sunita Sah & George 
Loewenstein, Nothing to Declare: Mandatory and Voluntary Disclosure Leads Advisors 
to Avoid Conflicts of Interest, 25 PSYCH. SCI. 575 (2014). See also Morningstar Letter; 
EPI Letter; Better Markets August 2018 Letter; Warren Letter; UVA Letter; AARP 
August 2018 Letter; Johnsen Letter. 



507 

 

play fast and loose with the rules for a while.”1149  Disclosure may also lead to a decrease in trust 

of biased advice because consumers feel pressured to satisfy the discloser’s self-interest 

(“panhandler effect”);1150 however, the panhandler effect can be mitigated if the disclosure is 

provided from an external source, the disclosure is not common knowledge between the discloser 

and the receiver of the information, the receiver can change his or her mind at a later date, and 

the receiver can change his or her mind in private.1151  One study notes that, beyond conflicts 

disclosures, disclosures of actual bias lead to an improvement in performance of portfolios 

relative to investors who only receive conflict disclosures.1152 

From the perspective of the investor, conflicts disclosures may lead to under- or over-

reaction by investors.  According to one study, investors may not know how to appropriately 

                                                                                                                                                             

 

1149  See Robert A. Prentice, Moral Equilibrium: Stock Brokers and the Limits of Disclosure, 
2011 WIS. L. REV. 1059 (2011). See AARP August 2018 Letter; Better Markets August 
2018 Letter; State Attorneys General Letter. 

1150  See Cain et al. (2011), supra footnote 1148; Sunita Sah, Prashant Malaviya, & Debora 
Thompson, Conflict of Interest Disclosure as an Expertise Cue: Differential Effects of 
Automatic and Deliberative Processing, 147 ORGANIZATIONAL BEHAV. & HUM. 
DECISION PROCESSES 127 (2018), whereby disclosures of conflicts of interest act “as a 
heuristic cue to infer greater trust in advisors’ expertise.” 

1151  See Sunita Sah, George Loewenstein, & Daylian M. Cain, The Burden of Disclosure: 
Increased Compliance With Distrusted Advice, 104 J. PERSONALITY & SOC. PSYCHOL. 
289 (2013). See Morningstar Letter; Better Markets August 2018 Letter; EPI Letter. 

1152  See Christopher Tarver Robertson, Biased Advice, 60 EMORY L.J. 653 (2011).  This study 
also suggests that obtaining an opinion from an unbiased adviser “is a much better 
remedy for biased advice than disclosure.”  See AARP August 2018 Letter. 



508 

 

respond to information about conflicts (e.g., estimating the effects on the quality of advice or 

knowing how to search for an unbiased second opinion) and therefore may fail to adequately 

adjust their behaviors when conflicts are disclosed.1153  Alternatively, some investors may 

overreact to disclosures of conflicts of interest, and may instead forgo valuable investment 

advice.1154 

C. Benefits and Costs 

1. General 

In formulating Regulation Best Interest, the Commission has considered the potential 

benefits of establishing a best interest standard of conduct for broker-dealers, as well as the 

potential costs.   
                                                                                                                                                             

 

1153  See Angela A. Hung, Min Gong, & Jeremy Burke, Effective Disclosures in Financial 
Decisionmaking, RAND Labor and Population Report Prepared for the Department of 
Labor (2015), available at 
https://www.rand.org/content/dam/rand/pubs/research_reports/RR1200/RR1270/RAND_
RR1270.pdf.  See also AARP August 2018 Letter; Better Markets August 2018 Letter; 
Warren Letter.  See also James M. Lacko & Janis K. Pappalardo, The Effect of Mortgage 
Broker Compensation Disclosures on Consumers and Competition: A Controlled 
Experiment, Federal Trade Commission, Bureau of Economics Staff Report (Feb. 2004), 
available at https://www.ftc.gov/sites/default/files/documents/reports/effect-mortgage-
broker-compensation-disclosures-consumers-and-competition-controlled-
experiment/030123mortgagefullrpt.pdf, which documents that when mortgage customers 
receive information about mortgage broker compensation through disclosures, such 
disclosures lead to an increase in more expensive loans and create a bias against broker-
sold loans, even when the broker-sold loans are the more cost effective option. See EPI 
Letter. 

1154  See George Loewenstein, Cass R. Sunstein, & Russell Golman, Disclosure: Psychology 
Changes Everything, 6 ANN. REV. ECON. 391 (2014). See IRI Letter. 



509 

 

Regulation Best Interest enhances the broker-dealer standard of conduct beyond existing 

suitability obligations, and aligns the standard of conduct with retail customers’ reasonable 

expectations.  Under Regulation Best Interest, broker-dealers and their associated persons will be 

required, 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.  As a result, Regulation Best Interest should enhance the 

efficiency of recommendations that broker-dealers provide to retail customers, help retail 

customers evaluate the recommendations received, and improve retail customer protection when 

receiving recommendations from broker-dealers.  The four component obligations of Regulation 

Best Interest’s work together to enhance the current standard of conduct for broker-dealers and 

improve disclosure of material facts relating to the scope and terms of the relationship and 

conflicts of interest.  Both on its own and together with the other new rules and forms we are 

adopting,1155 we anticipate that Regulation Best Interest will reduce the agency costs of the 

                                                                                                                                                             

 

1155  See, e.g., Relationship Summary Adopting Release. 



510 

 

relationship between the associated persons of the broker-dealer and their retail customers, while 

preserving access to financial advice and choice in the scope of services and how to pay for them. 

 In this section, we discuss broader themes associated with the costs and benefits of 

Regulation Best Interest, including general comments we received on our analysis of the costs 

and benefits in the Proposing Release.  Following this more general discussion, we discuss the 

specific costs and benefits associated with Regulation Best Interest’s four component obligations. 

 While the Commission has considered the potential benefits and costs of Regulation Best 

Interest, the Commission notes that generally it is difficult to quantify such benefits and costs 

with meaningful precision.1156  Where possible, the Commission has provided an estimate of 

specific costs; however, several factors make the quantification of many of the effects of 

Regulation Best Interest difficult.  With respect to costs to broker-dealers, there is a lack of data 

on the extent to which broker-dealers with different business practices engage in disclosure and 

conflict mitigation activities to comply with existing requirements, and therefore how costly it 

would be to comply with the proposed requirements.  Also, the final rule will provide broker-

dealers flexibility in complying with Regulation Best Interest, and, as a result, there could be 

multiple ways in which broker-dealers will satisfy this obligation, although broker-dealers must 

comply with each of the elements of the obligation.  In addition, Regulation Best Interest may 
                                                                                                                                                             

 

1156  See supra Section III.B.3.c for discussion of the wide range of estimates of the potential 
benefits of Regulation Best Interest stemming from a reduction in investor harm, and 
discussion surrounding infra footnotes 1165-1182 for other issues associated with these 
estimates. 



511 

 

affect broker-dealers differently depending on their business model (e.g., full service broker-

dealer, broker-dealer that uses independent contractors, insurance-affiliated broker-dealer) and 

size.  More generally, estimates of the magnitude of such benefits and costs depend on 

assumptions about (1) the extent to which broker-dealers currently engage in disclosure and 

conflict mitigation activities, (2) how broker-dealers currently develop recommendations for 

their customers, (3) how broker-dealers choose to comply with Regulation Best Interest, (4) 

whether and how broker-dealers change investments and share classes offered as a result of 

Regulation Best Interest, (5) whether and how product  manufacturers change their investment 

offerings as a result of Regulation Best Interest, (6) whether broker-dealers restrict access to 

brokerage accounts by raising minimum account sizes or adding additional qualification 

requirements, (7) whether broker-dealers try to shift customers to advisory accounts as a result of 

Regulation Best Interest, (8) how retail customers perceive the risk and return of their portfolios, 

(9) how likely retail investors are to act on a recommendation that complies with Regulation Best 

Interest, (10) how the risk and return of retail customer portfolios change as a result of how they 

act on the recommendation, and (11) how investment advisers, including dually registered 

advisers, react to the adoption of Regulation Best Interest and the other regulatory developments, 

including the rules we are adopting and interpretations we are issuing simultaneously with 

Regulation Best Interest.  Because many of these factors are firm-specific and thus inherently 

difficult to quantify, even if it were possible to calculate a range of potential quantitative 

estimates, that range would be so wide as to not be informative about the magnitude of the 

benefits or costs associated with Regulation Best Interest. 

Broader economic forces, beyond broker-dealer and retail customer behavioral responses 

to Regulation Best Interest, also make meaningful estimates of economic impacts difficult to 



512 

 

develop.  The market for investment advice and services is complex and vast, and as history 

demonstrates, is dynamic and affected by market-specific facts (including product developments 

and regulatory changes) as well as macroeconomic factors (including general economic 

conditions).  For example, the introduction of indexation to the retail investment market and the 

subsequent increase in index products (and providers) and reduction in the costs of indexing for 

retail investors have had substantial effects on the market for retail investment advice and 

services.  The more recent introduction of ETFs has had similar unanticipated and 

underestimated effects, including, in general, reducing investor costs and increasing tax 

efficiency, as well as increasing the array of product offerings.  Developments such as the 

employer-driven shift from defined benefit plans to defined contribution plans also have had 

significant effects on the market for investment advice.  We expect these and other factors, 

including factors not currently identified, will continue to affect the market and, accordingly, 

may change the economic effects of the rule.  These sources of uncertainty and complexity make 

meaningfully quantifying many of the costs and benefits of the rule difficult and, particularly 

over long time periods, inherently speculative. 

a. Broad Commenter Concerns with Respect to Costs and Benefits 

We received many comments regarding our analysis in the Proposing Release of the 

benefits and costs.  In this section, we discuss comments that address broader aspects of our 



513 

 

analysis.  Comments that address costs and benefits of more specific components of Regulation 

Best Interest are discussed in the corresponding sections for each rule component that follows. 

Some commenters stated that our analysis in the Proposing Release did not properly 

incorporate current market practices into the baseline.1157  As discussed above, we have revised 

the discussion to include those practices, which may reflect guidance by SROs such as FINRA, 

requirements and obligations under state laws, practices implemented by broker-dealers in 

response to the (now vacated) DOL Fiduciary Rule that have not been reversed, and any 

practices implemented by broker-dealers to fulfill their obligations under existing federal 

securities laws.1158  While we acknowledged in the Proposing Release that variation in the extent 

to which broker-dealers with different business practices already engage in disclosure and 

conflict mitigation activities makes quantifying Regulation Best Interest’s costs and benefits with 

meaningful precision difficult, we more explicitly emphasize how this variation in current 

market practices affects the costs and benefits of Regulation Best Interest in the discussion that 

follows.1159  In general, to the extent that broker-dealer practices are already aligned with the 

requirements of Regulation Best Interest, the anticipated magnitude of both the costs and the 

benefits associated with a given component of Regulation Best Interest will be correspondingly 

reduced, and vice versa. 
                                                                                                                                                             

 

1157  See, e.g., CFA August 2018 Letter; CCMC Letters. 
1158  See supra Section III.B.2. 
1159  See Proposing Release at 21643. 



514 

 

As discussed above,1160 commenters noted the existence of fiduciary standards in various 

states.  One commenter provided an overview of the fiduciary obligations of state-registered 

investment advisers, “typified by an expectation of undivided loyalty where the adviser acts 

primarily for the benefit of its clients.”1161  This commenter also stated that “[s]ome states also 

extend these fiduciary obligations beyond investment advisers to brokers, especially in dual-

hatted scenarios,” and that these fiduciary obligations were extended even when broker-dealers 

handled non-discretionary accounts.1162  We recognize that there is substantial variation in the 

sources, scope, and application of state fiduciary law.  And we acknowledge that such state-level 

obligations for broker-dealers mean that they may already engage in practices under the baseline 

that overlap with certain requirements under Regulation Best Interest.  To the extent that state-

level law incorporates fiduciary principles similar to those reflected in Regulation Best Interest, 

the magnitude of the costs and benefits discussed below that stem from the application of those 

principles to broker-dealers will be correspondingly reduced.  However, costs and benefits that 

arise from obligations under Regulation Best Interest that differ from obligations under state law, 

such as the Conflict of Interest Obligation, will be maintained.1163 

                                                                                                                                                             

 

1160  See supra Section III.B.2. 
1161  See NASAA February 2019 Letter at 22 and footnote 40. 
1162  Id. at 23-24. 
1163  Whether Regulation Best Interest would have a preemptive effect on any state law would 

be determined in future judicial proceedings, and would depend on the language and 
operation of the particular state law at issue.  We considered whether we could determine 

 

 



515 

 

Some commenters suggested that certain types of costs should remain outside the scope 

of our analysis.  Some stated that our analysis should not consider, for example, costs to broker-

dealers resulting from lost revenues on securities they cease offering or costs associated with any 

potential increase in arbitration claims as a result of Regulation Best Interest, except to the extent 

that they are passed on to investors in the form of higher fees.1164  These commenters suggested 

that because these types of costs are a direct result of policies that make investors better off, they 

should not factor into an assessment of Regulation Best Interest.  The Commission has an 

obligation to consider the economic effect of Regulation Best Interest on affected parties, 

including broker-dealers, even when those costs are associated with benefits to investors.  

However, in the specific discussion of each rule component that follows, we highlight instances 

where a given cost is directly associated with a benefit to investors. 

                                                                                                                                                             

 

the economic impact of possible, future state-law preemption on retail customers, but 
concluded that we cannot analyze the economic effects of the possible preemption of 
state law at this point because the factors that will shape those judicial determinations are 
too speculative.  Among the unknown factors are: (1) the final language in any proposed 
state legislation or regulation adopting a fiduciary or other standard for broker-dealers; 
(2) whether that language would constitute the type of law, rule, or regulation that is 
expressly preempted by the securities law or impliedly preempted under principles 
applied by courts; and (3) whether, if there was preemption, that preclusion of state law 
would have any positive or negative effects on investors when compared with the 
economic effects of Regulation Best Interest. 

1164  See AARP August 2018 Letter; EPI Letter; Better Markets August 2018 Letter; Cetera 
August 2018 Letter. 



516 

 

Commenters raised several issues related to the quantification of costs and benefits, or 

lack thereof, in the Proposing Release.  They asserted that our analysis focused too much on 

Regulation Best Interest’s costs and did not quantify any of the benefits, such as the reduction in 

investor harm.1165  As discussed above, some studies present anecdotal evidence of behavior by 

certain broker-dealers, such as recommending investments that are inferior to available 

alternatives, that is harmful to investors.1166  A potential benefit of Regulation Best Interest is 

therefore a reduction in that harm, as asserted by commenters.  However, the anecdotal evidence 

of investor harm in these studies does not lend itself to aggregation. 

Commenters also stated that we should have incorporated the approach used by the DOL 

RIA and the CEA to quantify aggregate investor harm.1167  While both of these analyses 

surveyed a broad literature on the relative performance of broker-sold versus direct-sold mutual 

funds, they both relied on a particular study to estimate aggregate investor harm, extrapolating 

the effect of “excess loads” on the performance of broker-sold funds to total industry-wide 

AUM.1168  We disagree with this approach because, as noted by commenters, we believe these 

                                                                                                                                                             

 

1165  See AARP August 2018 Letter; Better Markets August 2018 Letter; CFA August 2018 
Letter. 

1166  See supra footnotes 1068 and 1075. 
1167  See Better Markets August 2018 Letter. 
1168  See supra footnotes 1081 and 1099. 



517 

 

analyses misapplied the particular study’s results.1169  When the results of the study are correctly 

applied, the aggregate estimate of investor harm obtained using this approach is negligible.1170 

Another commenter advocated a similar approach, claiming that risk-adjusted returns net 

of fees, which calculate the excess return of an investment above a benchmark that matches the 

risk of the investment, are the only appropriate measure of whether a recommendation is in a 

retail customer’s best interest.1171  While there are studies showing that broker-sold mutual funds 

underperform direct-sold funds to varying degrees,1172 we do not believe, for the reasons 

explained below, that applying estimates of this under-performance to industry-wide AUM 

produces a meaningful estimate of the aggregate investor harm attributable to recommendations 

made by broker-dealers that is sufficiently precise to inform our policy choices.  First, as 

discussed above, these studies do not necessarily cleanly distinguish under-performance 

attributable to broker-dealers from under-performance attributable to investment advisers.1173  

Second, interpreting the relative underperformance of broker-sold funds as a measure of 

investor harm due to conflicts of interest implicitly evaluates investor harm against a benchmark 

                                                                                                                                                             

 

1169  See, e.g., Lewis (2017), supra footnote 1099. 
1170  See id. 
1171  See EPI Letter.  See also Former SEC Senior Economists Letter, stating that risk-adjusted 

returns are an appropriate measure of investor harm. 
1172  See, e.g., Bergstresser et al. (2009), supra footnote 1048; Del Guercio & Reuter (2014), 

supra footnote 1081.  
1173  See supra footnote 1097. 



518 

 

that does not include financial advice.  However, that benchmark does not necessarily reflect the 

appropriate alternative available to investors in broker-sold funds.  Extrapolating from these 

studies leads to the conclusion that investors would do better investing on their own, yet there are 

other studies showing that is not the case, at least not for all investors.1174  We further note that 

calculating the investor harm against a benchmark that includes the fees retail customers would 

pay for equivalent advice could significantly reduce the magnitude of these estimates.1175 

Finally, while risk-adjusted returns may be useful in comparing the performance of 

particular mutual funds, particularly when trying to evaluate fund manager skill, they do not 

necessarily reflect the utility that investors achieve from their investments.1176  Heterogeneous 

investors value investments and the services provided by financial professionals differently 

depending on their investment profile and preferences, and risk-adjusted returns do not 

necessarily represent aggregate utility across all investors in a way that permits us to arrive at an 

aggregate measure of investor harm.  For example, consumers invest in various forms of 

insurance products in order to hedge their exposure to bad outcomes (e.g., home insurance 

policies), even though the expected returns on such investments are generally negative.  The 
                                                                                                                                                             

 

1174  See supra footnotes 1045-1048. 
1175  See also supra footnote 1103.  
1176  Even in the context of evaluating fund manager skill, there is debate about whether risk-

adjusted returns are an appropriate measure of fund performance.  See e.g., Vincent 
Glode, Why Mutual Funds “Under Perform”, 99 J. FIN. ECON. 546 (2011); Jonathan B. 
Berk & Jules H. van Binsbergen, Measuring Skill in the Mutual Fund Industry, 118 J. 
FIN. ECON. 1 (2015).   



519 

 

relative underperformance of broker-sold mutual funds also may not capture any intangible 

benefits investors derive from receiving tailored financial advice.1177  Alternatively, the relative 

performance of mutual funds sold through these two channels may reflect other factors that are 

unrelated to conflicts of interest.1178 Accordingly, while we do not dispute the existence of 

broker-dealer behavior under the baseline that is harmful to investors, based on our analysis, 

including our analysis of the comments received, we continue to believe that quantifying that 

harm, and therefore quantifying the benefits associated with reducing it, depends on many 

contingent factors that would render any estimates insufficiently precise to inform our policy 

choices.1179   

With respect to the magnitude of the costs we assessed in the Proposing Release, some 

commenters asserted that our analysis underestimated the costs of complying with Regulation 

                                                                                                                                                             

 

1177  See, e.g., Bergstresser et al. (2009), supra footnote 1048, who note that “[o]ne possibility 
is that brokers provide other intangible benefits, which we cannot measure” when 
interpreting the relative performance of broker-sold versus direct-sold mutual funds. 

1178  See, e.g., The DOL RIA, supra footnote 1002, at footnote 473, noting that the relative 
performance of broker-sold versus direct-sold funds “…is an imperfect measure of the 
impact of conflicts of interest; other factors, aside from conflicts of interest, affect the 
relative performance of mutual funds sold through the two distribution channels.” 

1179  See Discussion following footnote 1156 for a discussion of these factors.  See also infra 
Section III.C.7, where we have endeavored to estimate some of the potential benefits of 
Regulation Best Interest based on many assumptions. 



520 

 

Best Interest, though only a few provided estimates of these costs.1180  Where commenters 

provided estimates for a specific component of Regulation Best Interest, particularly the 

Disclosure Obligation, we discuss those estimates when discussing that component of Regulation 

Best Interest below.  Based on its experience with the DOL Rule, one commenter provided a 

broad estimate of the compliance costs associated with the entire package of rules we proposed, 

including Regulation Best Interest and Form CRS, indicating that the rule package would entail 

initial costs of $20 million and ongoing costs of $5 million per year for their firm, but that these 

costs would be manageable.1181  Another commenter stated that for a small broker-dealer with 

$500,000 in net capital, the compliance costs estimated in the Proposing Release could constitute 

12% of that net capital, making compliance with Regulation Best Interest burdensome for such 

broker-dealers.1182  We acknowledge that the costs of Regulation Best Interest could be more 

burdensome for small broker-dealers and discuss any corresponding competitive effects in 

Section III.D.1. 

Although the majority of the industry studies provided by commenters focused on the 

effects of the DOL Fiduciary Rule on broker-dealers and their customers, one industry survey 

provided information about industry beliefs about potential effects of proposed Regulation Best 
                                                                                                                                                             

 

1180  See Schwab Letter; ICI Letter; Letter from James J. Angel, Associate Professor of 
Finance, Georgetown University (Aug. 7, 2018) (“Angel Letter”); LPL August 2018 
Letter; NSCP Letter. 

1181  See Raymond James Letter.   
1182  See NSCP Letter.521 

 

Interest.1183  The survey consisted of approximately 30 individual financial professionals across a 

mix of 15 companies providing financial advisory services and products, including broker-

dealers and dually registered firms, with $23 trillion in AUM and administration and nearly 79 

million investment accounts.  All of the participants surveyed stated that it was unlikely that they 

would reconsider their broker-dealer registration status, while nearly 40% stated that they may 

alter their investment choices and 35% could alter the services that they offer.  With respect to 

the costs of Regulation Best Interest and Form CRS, approximately 36% of respondents stated 

that the implementation costs could be between 1% and 5% of annual profits; however, nearly 

80% of respondents noted that costs are likely to decline over time.1184  We note that one of the 

cost estimates provided by a commenter above is consistent with this range.1185  One commenter 

suggested that for firms that offer access to thousands of unique securities, many of which likely 

                                                                                                                                                             

 

1183  See Center for Capital Markets Competitiveness, SEC Regulation Best Interest Rule 
Proposals: Request for Information Analysis, FTI Consulting Report Presented to the 
U.S. Chamber of Commerce (Jul. 25, 2018), available at 
https://www.centerforcapitalmarkets.com/wp-content/uploads/2018/08/Reg-BI-Rule-
Proposal-Research_8.7.18_FTI-Updated_final.pdf.  See CCMC Letters.  Survey 
participants also addressed questions related to beliefs regarding investor protection, 
choices for retail customers, and the standard of conduct for broker-dealers. 

1184  One commenter stated that the “costly” recordkeeping requirements described in the 
Proposing Release “are unnecessary as self-interest will lead firms to keep proof of 
compliance” and should be eliminated. See Angel Letter. 

1185  See supra footnote 1181.  Relative to this commenter’s 2018 fiscal year profits, its initial 
cost estimate of $20 million would represent approximately 2% of annual profits for this 
firm. See https://www.sec.gov/Archives/edgar/data/720005/000072000518000083/rjf-
20180930x10k.htm. 



522 

 

have similar strategies (e.g., index mutual funds or ETFs), requiring broker-dealers to “consider 

reasonably available alternatives offered by the broker-dealer as part of having a reasonable basis 

for making the recommendation” would make it cost prohibitive for broker-dealers and financial 

professionals to evaluate the costs associated with “every similar investment product available 

through the broker-dealer’s platform.”1186  Many survey participants, although they believed that 

the Commission underestimated the aggregate costs of Regulation Best Interest and Form CRS, 

agreed that the benefits to investors were likely to justify the costs. 

Other commenters stated that a number of elements of the Proposing Release potentially 

could increase litigation exposure for some broker-dealers.  For example, one commenter 

discussed that, because proposed Regulation Best Interest did not “expressly define ‘financial 

incentive’” for purposes of the proposed requirement of policies and procedures designed to 

disclose and mitigate, or eliminate, conflicts arising from financial incentives, broker-dealers 

could face challenges to “design and maintain effective compliance programs that appropriately 

address the conflicts inherent in their particular business models” thereby potentially increasing 

litigation risks.1187  Another commenter indicated that, with respect to proprietary products, 

“[s]tate courts in enforcement actions and in review of such actions” may find it difficult to 

distinguish the best interest standard for broker-dealers from a fiduciary standard for investment 

                                                                                                                                                             

 

1186  See LPL December 2018 Letter. 
1187  See Primerica Letter. 



523 

 

advisers, and may cause certain associated persons of broker-dealers to “shy away from the risks 

of litigation in this regulatory environment, causing a substantial market contraction away from 

middle class investors.”1188 

In the Proposing Release, we were able to quantify costs for limited portions of 

Regulation Best Interest, particularly those stemming from requirements related to document 

creation for purposes of the Paperwork Reduction Act.  While we have updated these estimates 

in Section IV.B, we continue to believe that it is not possible to meaningfully quantify the full 

costs and benefits of Regulation Best Interest because such analysis would depend on many 

contingent factors that render any estimate insufficiently precise to inform our policy choices.1189  

So while we acknowledge, for example, that Regulation Best Interest may impose costs that are a 

significant portion of the estimate of initial and ongoing costs of $20 million and $5 million by 

the commenter cited above, we cannot anticipate the associated costs for all firms because of the 

wide variation in size and scope of business practices across firms as well as the many unknown 

factors associated with the principles-based nature of Regulation Best Interest.  In discussing 

Regulation Best Interest’s component obligations below, we address any estimates provided by 

commenters where we can and otherwise explain the specific factors that preclude quantifying 

                                                                                                                                                             

 

1188  See Letter from Douglas M. Ommen, Iowa Insurance Commissioner (Aug. 6, 2018) 
(“Iowa Insurance Commissioner Letter”). 

1189  See Discussion following footnote 1156 for a discussion of these factors.  See also infra 
Section III.C.7, where we have endeavored to estimate some of the potential benefits of 
Regulation Best Interest based on many assumptions. 



524 

 

the costs of Regulation Best Interest with meaningful precision beyond our Paperwork Reduction 

Act estimates. 

b. Broad Investor Protection Benefits 

As discussed above, in addition to any enhancements provided above and beyond current 

requirements and market practices, each of the component obligations of Regulation Best 

Interest share features with market best practices under the baseline, as shaped by FINRA’s 

guidance on relevant rules or as described in its Report on Conflicts of Interest.  Given this 

overlap, FINRA, in response to a congressional request, enumerated the ways it believes 

Regulation Best Interest enhances existing broker-dealer obligations under current FINRA 

rules.1190 

In addition to the enhancements that each of Regulation Best Interest’s component 

obligations provide above and beyond existing broker-dealer obligations under the baseline, 

which we discuss below, Regulation Best Interest increases retail customer protections by 

establishing these obligations under the Exchange Act so that the Commission may enforce them 

directly and examine for compliance.  Additionally, to the extent that market best practices may 

reflect some FINRA guidance that is not required by FINRA’s rules, some broker-dealers may 

not currently implement these practices.  To the extent that broker-dealers and their associated 

persons do not currently implement existing best practices that will be codified in Regulation 

                                                                                                                                                             

 

1190  See FINRA 2018 Letter. 



525 

 

Best Interest, retail customers will benefit because it will increase the implementation of these 

best practices throughout the industry. 

2. Disclosure Obligation 

As adopted, the Disclosure Obligation of Regulation Best Interest’s requires a broker-

dealer, prior to or at the time of the recommendation, to provide to the retail customer, in writing, 

full and fair disclosure of all material facts relating to the scope and terms of the relationship and 

all material facts relating to conflicts of interest that are associated with the recommendation.  

Regulation Best Interest explicitly requires 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 or 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 material limitations on the securities or investment strategies 

involving securities that may be recommended to the retail customer; and all material facts 

relating to conflicts of interest that are associated with the recommendation. 

Under the baseline, some disclosure obligations already exist, as do an array of market 

practices with respect to the disclosure of capacity, fees, services, and conflicts of interest.1191 

                                                                                                                                                             

 

1191  For instance, broker-dealers are subject to a number of disclosure obligations under the 
Exchange Act when they effect certain customer transactions.  These disclosure 
obligations include written disclosure about capacity, compensation, and third-party 

 

 



526 

 

The Disclosure Obligation will enhance disclosure obligations that exist under the baseline and 

bring greater alignment to market practices by establishing an explicit and broad disclosure 

requirement under the Exchange Act that applies to all broker-dealers when they make a 

recommendation to a retail customer.  We expect this change to improve the quality and 

consistency of disclosures and thus (1) reduce the information asymmetry that may exist between 

a retail customer and her broker-dealer, and (2) facilitate customer comparisons of different 

broker-dealers which we expect will, in turn, increase competition among broker-dealers, 

including with respect to fees and costs, as discussed below.1192 

Relative to the baseline, the Disclosure Obligation will change how broker-dealers 

disclose information to their retail customers in several specific ways.  First, under the baseline, a 

                                                                                                                                                             

 

remuneration related to the transaction, and disclosures about whether the broker-dealer 
has any control, affiliation, or interest in the security or the issuer of the security being 
offered. Broker-dealers also face liability under the antifraud provisions of the federal 
securities laws for failure to provide disclosure, such as disclosure of “honest and 
complete information” or any material adverse facts or materials conflicts of interest, 
including any economic self-interest, when recommending a security (see supra footnote 
988). In addition, broker-dealers must comply with a number of SRO disclosure 
obligations—such as FINRA Rule 2124 (Net Transactions with Customers), FINRA Rule 
2262 (Disclosure of Control Relationship with Issuer), and FINRA Rule 2269 (Disclosure 
of Participation or Interest in Primary or Secondary Distribution). Finally, broker-dealers 
may also adjust their practices consistent with existing SRO guidance on specific 
disclosures—such as FINRA Regulatory Notice 13-23, Brokerage and Individual 
Retirement Account Fees (July 2013) on fee disclosure. See Proposing Release at 
footnotes 175, 176, 177, and 192; supra footnotes 303 and 985-988 for a more detailed 
discussion on existing disclosure practices.  

1192  See supra footnote 1072 for a discussion of potential information asymmetries between 
broker-dealers and retail customers. 



527 

 

broker-dealer and its associated persons are not explicitly required to disclose that they are acting 

in a broker-dealer capacity when making a recommendation.  We also clarify above that the use 

of the terms “adviser” or “advisor” in a name or title by (i) a broker-dealer that is not also 

registered as an investment adviser, or (ii) a financial professional that is not also a supervised 

person of an investment adviser would presumptively violate this particular disclosure 

requirement.  Second, Regulation Best Interest requires that any disclosure made by a broker-

dealer be “full and fair,” meaning that the broker-dealer is required to provide sufficient 

information to enable a retail investor to make an informed decision with regard to the 

recommendation, even where this information is about aspects of the relationship between a 

retail customer and a broker-dealer that may already require disclosure, implicitly or explicitly, 

under the baseline.  We expect the “full and fair” requirement to benefit retail customers in cases 

where it results in disclosures that are not currently required under broker-dealer antifraud 

provisions.  Finally, Regulation Best Interest requires that broker-dealers provide these 

disclosures to retail customers in writing at or before the time of a recommendation.  However, 

we are permitting oral disclosures prior to or at the time of a recommendation and written 

disclosures after a recommendation under the circumstances outlined in Section II.C.1, Oral 

Disclosure or Disclosure After a Recommendation.1193  We focus our discussion of both the 

benefits and costs of the Disclosure Obligation on these changes relative to the baseline.1194 

                                                                                                                                                             

 

1193  For example, when oral disclosures are used prior to or at the time of a recommendation, 
 

 



528 

 

Regulation Best Interest’s Disclosure Obligation is different from the Proposing 

Release’s Disclosure Obligation in two ways.  First, while the Proposing Release required that a 

broker-dealer “reasonably disclose” material facts to retail customers, Regulation Best Interest 

requires that a broker-dealer provide retail customers with “full and fair” disclosure of material 

facts.  As discussed above, this change from the Proposing Release does not have a substantive 

effect on the expected economic effect of the Disclosure Obligation.  Specifically, in both the 

Proposing Release and Regulation Best Interest, the formulation of the Disclosure Obligation, as 

described in the release text, required that a broker-dealer provide sufficient information to 

enable a retail investor to make an informed decision with regard to a recommendation.1195  

Therefore, we do not expect this change to affect our assessment of Regulation Best Interest’s 

costs and benefits.  Second, whereas the Proposing Release’s Disclosure Obligation did not 

explicitly require a broker-dealer to disclose particular types of material facts relating to the 

scope and terms of its relationship with a retail customer, Regulation Best Interest explicitly 

requires that these material facts include the capacity in which the broker-dealer is acting, fees 

and costs, and the type and scope of services provided, including material limitations on the 

                                                                                                                                                             

 

broker-dealers must maintain a record of the fact that oral disclosure was provided.  See 
supra footnotes 301 and 507-508 and surrounding discussion for more detail on when 
oral disclosure prior to or at the time of a recommendation and disclosure in writing after 
a recommendation are permitted. 

1194  See supra footnotes 1157-1159. 
1195  See Proposing Release at Section II.D.1.c. 



529 

 

securities or investment strategies that may be recommended.  We include any economic effects 

associated with this change in our discussion of Regulation Best Interest’s benefits and costs.  

Finally, while we discuss the direct benefits and costs of the Disclosure Obligation in this section, 

retail customers, broker-dealers, investment advisers, and their financial professionals may 

experience indirect benefits or costs due to competitive effects caused by the Disclosure 

Obligation.  We discuss any competitive effects below in Section III.D.1. 

a. Benefits 

Regulation Best Interest requires that brokers, dealers, or natural persons associated with 

a broker-dealer disclose that they are acting as a broker, dealer, or an associated person of a 

broker-dealer prior to or at the time of a recommendation to a retail customer.  Broker-dealers 

are not explicitly required to disclose this information prior to or at the time of a 

recommendation under the baseline, though they may disclose it to comply with other federal 

securities laws and SRO rules, or because they consider it to be a market best practice.1196  This 

requirement is most likely to have economic effects when retail customers have both brokerage 

and advisory accounts with the same financial professional, as may be the case if the financial 

professional is dually-registered.  It is designed to make all retail customers aware of the capacity 
                                                                                                                                                             

 

1196  For example, under the baseline, broker-dealers may decide that disclosing the capacity 
in which it is acting is necessary in order to meet its duty of fair dealing under the 
antifraud provisions of the federal securities laws.  In addition, broker-dealers must 
disclose whether they effected the transaction as a principal or agent in the customer 
confirmation statement pursuant to Exchange Act Rule 10b-10, which a retail customer 
generally receives after the trade is completed. 



530 

 

in which their broker-dealer is acting when a recommendation is made, which may help the retail 

customer better evaluate the advice they receive.  For instance, the cost to the retail customer of 

acting on such advice will typically depend on whether the advice is tied to the retail customer’s 

brokerage or advisory account.  In addition, understanding the capacity in which a financial 

professional is acting may provide the retail customer with context for, and facilitate review of, 

other relevant disclosures by the broker-dealer. Knowing that she is receiving advice from a 

broker-dealer, or an associated person of a broker-dealer, may focus the retail customer’s 

attention on any potential conflicts of interest specifically associated with receiving a 

recommendation from a broker-dealer.  For example, a disclosure that a firm is acting in the 

capacity of a broker-dealer may encourage a retail customer to seek additional information about 

commissions, which could give the firm or its financial professional an incentive to recommend 

transactions that may be inconsistent with the client’s most efficient investment strategy, such as 

a buy-and-hold strategy.   

While the capacity disclosure requirement and the disclosures investors will receive in 

Form CRS will increase the likelihood that retail customers understand the nature of their 

relationship with a broker-dealer or financial professional, and hence how this relationship might 

affect the recommendations retail customers receive, some investors may form beliefs about the 

nature of their relationship with a broker-dealer or financial professional based on their use of 

particular names and titles such as “adviser” or “advisor,” as well as how their services are 

marketed.  In cases where these terms are used by (i) a broker-dealer that is not also registered as 

an investment adviser, or (ii) a financial professional that is not also a supervised person of an 

investment adviser, some retail customers may not fully understand that their broker-dealer or 

financial professional is not acting in the capacity of an investment adviser, even though 



531 

 

investors receive some information about the capacity their broker-dealer or financial 

professional is acting in on Form CRS or other disclosures.1197 

To the extent that, despite the disclosures provided on Form CRS, the use of the titles 

“adviser” and “advisor” causes investor confusion about the nature of the relationship retail 

investors have, or will have, with a broker-dealer or financial professional, the presumption that 

the use of these titles by (i) a broker-dealer that is not also registered as an investment adviser, or 

(ii) a financial professional that is not also a supervised person of an investment adviser would 

violate the capacity disclosure requirement will potentially benefit investors in two ways.1198  

First, certain investors may seek an advisory relationship and would be better off receiving 

advice from an investment adviser.  In situations where confusion associated with titles might 

cause such an investor to mistakenly engage in a relationship with a broker-dealer or an 

associated person of a broker-dealer, the presumption should mitigate costs the investor might 

incur associated with receiving and, potentially, acting on recommendations from a broker-dealer, 

                                                                                                                                                             

 

1197  Investors may not fully understand this capacity disclosure because, for example, their 
financial professional is not a supervised person of an investment adviser but works for a 
dual-registrant, and they interpret Form CRS as suggesting the financial professional also 
provides both types of services.  Alternatively, even if an investor’s broker-dealer or 
financial professional solely offers services in a broker-dealer capacity, the use of the 
titles “adviser” or “advisor” may leave her confused about the nature of the services 
provided, despite the capacity disclosure on Form CRS.  See Relationship Summary 
Proposal at footnotes 411-412. 

1198  Several commenters generally ascribed benefits to restricting the usage of the terms 
“adviser” and “advisor.”  See supra footnotes 326-330. 



532 

 

as well as costs associated with correcting this mismatch by switching to an investment 

adviser.1199  Second, to the extent that, as a result of the use of the titles “advisor” or “adviser,” 

any confusion might remain about the capacity in which a broker-dealer or its associated person 

is acting, the presumption should alleviate that confusion and thus increase the likelihood that 

retail customers focus their attention on any potential conflicts of interest specifically associated 

with receiving a recommendation from a broker-dealer. Any benefits associated with the 

presumption will apply for current and potential retail customers of the approximately 100 

broker-dealers with retail customers that are not also investment advisers and use the terms 

“adviser” or “advisor” in their names, and for current and potential retail customers of the 

approximately 16% of all registered representatives that use these titles and are not dually 

registered.1200  These benefits will be limited to the extent that broker-dealers and their financial 

professionals choose other names or titles that may indicate that they provide advisory services 

or use marketing materials that hold them out as providing advisory services but do not trigger 

                                                                                                                                                             

 

1199  See Relationship Summary Proposal at footnote 674 for further discussion of the costs 
associated with a mismatch between an investor and their preferred type of investment 
advice provider.  

1200  Staff analysis found that 100 retail-facing broker-dealers as of December 2018 use either 
“adviser” or “advisor” in their firm names.  See Relationship Summary Proposal at 
footnote 685 for more discussion of the estimate that approximately 16% of all registered 
representatives use these titles and are not dually registered. 



533 

 

the presumption or preclude application of the solely incidental prong of the broker-dealer 

exception to the definition of investment adviser.1201 

As discussed above, under the baseline, broker-dealers may, in practice, already disclose 

information about the fees they charge, the type and scope of services they provide, and any 

conflicts of interest associated with their recommendations.1202  However, Regulation Best 

Interest’s explicit requirement that broker-dealers disclose all material facts related to the scope 

and terms of their relationship with a retail customer and all material facts relating to conflicts of 

interest that are associated with a recommendation may provide retail customers with useful 

information that they may not currently receive, enabling them to make more informed 

investment decisions.  The magnitude and nature of this benefit will depend on the extent to 

which a broker-dealer already discloses these material facts and how broker-dealers choose to 

disclose this information.  For example, if broker-dealers choose to disclose all material facts in 

one consolidated document, the disclosure may, depending on the facts and circumstances of the 

disclosure, be more informative to some retail customers than disclosures that are provided 

                                                                                                                                                             

 

1201  See supra footnotes 336-340. 
1202  These disclosures may stem from implicit or explicit requirements under federal 

securities laws.  For example, broker-dealers are explicitly required to disclose certain 
aspects of the fees their retail customers pay, directly and indirectly, under Exchange Act 
Rule 10b-10 (see, e.g., 913 Study at footnotes 256-259).  In other cases, courts have 
found that broker-dealers may implicitly be required to disclose conflicts of interest or 
other material facts related to the scope and terms of their relationship with retail 
customers (see, e.g., 913 Study at footnotes 249-255).  See also NASD Notice to 
Members 92-11. 



534 

 

across many documents. In other cases, layered disclosures may allow broker-dealers to target 

their disclosures to their particular retail customer base at the relevant point in time, increasing 

the likelihood that investors read these disclosures.1203 

While the Proposing Release’s Disclosure Obligation did not explicitly require a broker-

dealer to disclose particular types of material facts relating to the scope and terms of its 

relationship with a retail customer, Regulation Best Interest explicitly requires that these material 

facts include: (1) the capacity in which the broker-dealer is acting; (2) fees and costs; and (3) the 

type and scope of services provided, including material limitations on the securities or 

investment strategies that may be recommended.  We generally anticipate greater benefits under 

Regulation Best Interest than under the Proposing Release.  Specifically, to the extent that 

broker-dealers may not have disclosed the types of information we are requiring under 

Regulation Best Interest, Regulation Best Interest should increase the consistency of disclosure 

practices across broker-dealers, which may make it easier for investors to compare disclosures 

from and services offered by different broker-dealers or other firms.  In addition, if some broker-

dealers would not have disclosed the specific types of information required under Regulation 

Best Interest, and retail customers find that information useful, Regulation Best Interest may 

facilitate more informed decisions by retail customers when they are deciding whether or not to 

open an account or use a recommendation.  For example, disclosures about the scope and terms 
                                                                                                                                                             

 

1203  See the discussion of layered disclosure in supra Section II.C.1.c.  See also supra 
footnote 540 on the potential benefits of layered disclosure. 



535 

 

of services offered by a broker-dealer or about their fees and costs may facilitate more informed 

decisions by retail customers as to which type of account is appropriate for them and whether 

they should open an account with a given broker-dealer.  Alternatively, disclosures about 

conflicts of interest or fees and costs may facilitate more informed decisions by retail customers 

as to whether or not they should use a recommendation of a securities transaction or investment 

strategy. 

Regulation Best Interest also explicitly requires that disclosures be “full and fair,” and 

thus that a broker-dealer must provide sufficient information to enable a retail customer to make 

an informed decision with regard to a recommendation.1204  Broker-dealers may disclose, for 

example, certain conflicts of interest associated with their recommendations under the baseline.  

However, under existing federal securities laws and SRO rules, they are not expressly required to 

provide full and fair disclosure in the manner required under Regulation Best Interest.  As a 

result, existing disclosure practices may not be designed to specifically help retail customers 

make informed decisions about the recommendations they receive.  By explicitly requiring that 

broker-dealers provide sufficient information to enable retail investors to make an informed 

decision with regard to a recommendation, Regulation Best Interest imposes a minimum 

standard on disclosures that may increase the consistency of disclosure practices across broker-

dealers relative to the baseline.  This may also cause such disclosures to be more useful to retail 

                                                                                                                                                             

 

1204  See discussion at supra footnotes 463-469. 



536 

 

customers in evaluating the advice they receive, thereby enabling them to make more informed 

decisions about the recommendations they receive.  To the extent that disclosure obligations 

under the baseline already result in broker-dealers providing sufficient information to enable a 

retail customer to make an informed decision with regard to a recommendation, the magnitude of 

the benefits from this component of the Disclosure Obligation is likely to be correspondingly 

reduced.1205 

Regulation Best Interest’s Disclosure Obligation also establishes a standard for the form 

and timing of disclosures by requiring that they be made in writing prior to or at the time of a 

recommendation.  While broker-dealers may already disclose information on the fees they 

charge, the type and scope of services they provide, and any conflicts of interest associated with 

their recommendations under the baseline, federal securities laws and SRO rules may not 

explicitly specify the form and timing of such disclosures.  In cases where these requirements are 

explicit, they may not require delivery at or prior to a retail customer’s evaluation of the 

recommendations they receive and any corresponding investment decision.  In contrast, while 

broker-dealers will have some flexibility regarding the form and timing of their disclosures under 

Regulation Best Interest, retail customers will receive standardized disclosures about the fees and 

costs, as well as any conflicts of interest, associated with a recommendation prior to or at the 

time of receiving the recommendation.  The Disclosure Obligation should increase the 
                                                                                                                                                             

 

1205  See supra footnote 1191 for more on disclosure obligations and requirements under the 
baseline.  



537 

 

consistency of disclosure practices across broker-dealers and across different types of 

information relative to the baseline, thereby increasing the likelihood that retail customers have 

the information they need to make a more informed and efficient investment decision at the time 

they receive a recommendation.   

As noted above, we are permitting oral disclosure prior to or at the time of a 

recommendation and written disclosure after a recommendation has been made under the 

circumstances outlined in Section II.C.1, Oral Disclosure or Disclosure After a 

Recommendation.1206  Because oral disclosure is permitted in cases where written disclosure 

prior to or at the time of recommendation is not feasible or practical, investors may benefit by 

receiving information that otherwise may not have been available to them at the time they make 

an investment decision.  In contrast, because written disclosure is permitted in instances where 

existing regulations permit disclosure after a recommendation, the benefits associated with the 

form and timing of disclosures under Regulation Best Interest may be reduced if the information 

in such disclosures would have been useful to investors in making an investment decision.  

However, for both oral disclosure prior to or at the time of a recommendation and written 

disclosure after a recommendation has been made as permitted under the circumstances outlined 

in Section II.C.1, Oral Disclosure or Disclosure After a Recommendation, retail customers will 

still receive disclosures in writing prior to a recommendation regarding the circumstances under 

                                                                                                                                                             

 

1206  See supra footnote 1193. 



538 

 

which oral disclosure or disclosure after a recommendation will occur and the material facts that 

will be disclosed under these circumstances.1207 

Several commenters stated that there are limits to the effectiveness of disclosure and cited 

a number of studies suggesting that disclosure alone is unlikely to solve the issues surrounding, 

for example, the conflicts of interest between a broker-dealer or the associated person of a 

broker-dealer and a retail customer.1208  Another commenter cited the 2008 RAND Study, 

concluding that investors do not have the education or background to understand financial 

disclosures and do not read long, formulaic documents.1209  Other commenters claimed that 

numerous academic studies demonstrate that disclosing conflicts of interest does not adequately 

address the potential harm they cause to investors.1210  Another commenter provided studies 

showing that disclosure can encourage better behavior by broker-dealers, improving investor 

welfare.1211 

As discussed above, we acknowledge studies showing disclosure can vary in its 

effectiveness depending on the issue it is intended to address, its intended audience, and the 

                                                                                                                                                             

 

1207  See discussion following supra footnote 301. 
1208  See Morningstar Letter; EPI Letter; Better Markets August 2018 Letter; St. John’s U. 

Letter; Letter from Tom C.W. Lin, Professor of Law, Temple University Beasley School 
of Law (Jul. 11, 2018) (“Lin Letter”). 

1209  See Galvin Letter and discussion of 2008 RAND Study. 
1210  See State Treasurers Letter; Better Markets August 2018 Letter; PIABA Letter. 
1211  See Morningstar Letter. 



539 

 

format in which it is delivered.1212  To the extent some retail customers are not able to 

understand the information disclosed by a broker-dealer regarding the scope of services it 

provides and the conflicts of interest associated with the recommendations it makes, the benefits 

of the Disclosure Obligation will not directly affect those investors, and may not increase the 

efficiency of their investment decisions.  However, Regulation Best Interest is not limited to 

disclosure; rather, the Disclosure Obligation is just one component of Regulation Best Interest 

that as a whole will enhance the efficiency of recommendations that broker-dealers provide to 

retail customers, help retail customers evaluate the recommendations received, and improve 

retail customer protection when receiving recommendations from broker-dealers.  In particular, 

in addition to the Disclosure Obligation, both the Care Obligation and the Conflict of Interest 

Obligation, discussed below, are designed to promote more efficient investment decisions by 

imposing affirmative obligations on the broker-dealer that cannot be fulfilled through disclosure 

alone, regardless of whether the retail customer fully incorporates disclosed information into its 

investment decisions.   

Additionally, to the extent that the information disclosed by broker-dealers as a result of 

Regulation Best Interest increases the comparability of the securities and services offered by 

different broker-dealers, it may foster competition between broker-dealers that benefits even 

those retail customers who are not able to understand the information disclosed by broker-

                                                                                                                                                             

 

1212  See supra Section III.B.4.c. 



540 

 

dealers.1213  For example, if an increase in comparability promotes competition on the basis of 

recommendation quality, it may cause broker-dealers to mitigate or eliminate conflicts even in 

cases where the Conflict of Interest Obligation does not expressly require policies and 

procedures to mitigate or eliminate such conflicts.  Because the Disclosure Obligation provides 

broker-dealers with some flexibility as to the form and timing of their disclosures, the magnitude 

of this benefit will depend on the extent to which these disclosures are comparable across broker-

dealers or to which the disclosures made by one broker-dealer draw attention to practices at other 

broker-dealers that may not be in the best interest of retail customers. 

The magnitude of the Disclosure Obligation’s benefits will depend on a number of 

factors, including which facts about the scope and terms of their relationship with retail 

customers are material, the extent to which broker-dealers already disclose information in a 

manner that is consistent with the Disclosure Obligation under the baseline, the manner in which 

they choose to disclose this information, the extent to which retail customers understand such 

disclosures and would use them in making investment decisions, and the extent to which such 

disclosures would improve the efficiency of retail customers’ investment decisions, which varies 

with the specific circumstances of each retail customer.   

                                                                                                                                                             

 

1213  See Relationship Summary Adopting Release at footnote 1035 for similar discussion of 
the potential benefits comparability can have on competition.541 

 

b. Costs 

We expect broker-dealers and their financial professionals to incur costs as a result of 

Regulation Best Interest’s Disclosure Obligation, and retail customers may incur indirect costs as 

well. In this section, we analyze these costs in terms of how Regulation Best Interest changes 

disclosure requirements for broker-dealers relative to the baseline. 

The requirement that broker-dealers or their associated persons disclose the capacity in 

which they or their associated persons are acting prior to or at the time of making a 

recommendation may be fulfilled by delivering the Relationship Summary, depending on the 

facts and circumstances.1214  For example, a standalone broker-dealer may satisfy this 

requirement of the Disclosure Obligation by delivering the Relationship Summary to the retail 

customer, as required pursuant to Form CRS.  In contrast, for broker-dealers who are dually 

registered, and 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, delivering 

the Relationship Summary will not be sufficient to disclose the capacity in which they are acting.  

Thus, while standalone broker-dealers that deliver the Relationship Summary generally will not 

incur additional costs to comply with this requirement of the Disclosure Obligation, dual-

registrants will incur additional costs, which could include the creation of disclosure materials as 

well as policies and procedures to assist their associated persons in determining when they are 

                                                                                                                                                             

 

1214  See supra footnotes 320-321 and surrounding discussion. 



542 

 

acting in a broker-dealer capacity.  However, dual-registrants and their associated persons will 

have some flexibility with respect to the form, timing, or method of satisfying this requirement 

of the Disclosure Obligation when they or their associated persons make recommendations 

acting as brokers, dealers, or associated persons of a broker or dealer.1215 

The presumption that the use of the titles “adviser” and “advisor” would violate the 

capacity disclosure requirement may impose costs on certain broker-dealers and their financial 

professionals, investors, and other affected parties.  Broker-dealers and their associated persons 

currently using names and titles containing the terms “adviser” and “advisor” will incur direct 

costs, including those associated with changing firm names, written and/or electronic marketing 

materials, advertisements, and personal communication tools that use these titles, among other 

items, as well as any costs associated with voluntary outreach to customers to inform them of 

these changes.1216  While commenters did not provide specific estimates of these costs, they 

                                                                                                                                                             

 

1215  See supra footnote 306. 
1216  See e.g., HD Vest Letter (stating that “[t]he term ‘Advisor’ permeates nearly every HD 

Vest disclosure, representative agreement, selling agreement, client agreement, client 
communication, marketing piece, and website” and noting that broker-dealers would need 
to develop compliance policies to ensure oversight of the names and titles used by their 
financial professionals); LPL August 2018 Letter (stating that “legal entities with so-
called ‘doing business as’ (d/b/a) names containing the term ‘advisor’ or ‘adviser’—
through which many securities professionals operate their business practices—will be 
required to rename their businesses and incur significant costs and disruption in updating 
all marketing materials with the prior name.”); SIFMA August 2018 Letter; Morgan 
Stanley Letter. 



543 

 

described them as “very real costs,”1217 “significant costs and disruption,”1218 and “burdensome 

and costly.”1219  To the extent that a broker-dealer’s company name that includes “adviser” or 

“advisor” is recognized as a brand in the market and therefore represents a valuable intangible 

asset to the broker-dealer, the broker-dealer may also incur indirect costs if some of its “brand 

value” is lost following a company name change.1220  Additionally to the extent that investors 

who have a preference for receiving advice from a broker-dealer or an associated person of a 

broker-dealer search exclusively for such advice using the terms “adviser” or “advisor,” they 

may experience a reduction in the choice of service providers available to them (e.g., they might 

only find dual-registrants).1221  Finally, organizations that award credentials or certifications to 

broker-dealers and financial professionals that include the terms “adviser” or “advisor” may lose 

revenues associated with a reduction in future demand for these credentials and certifications, or 
                                                                                                                                                             

 

1217  See HD Vest Letter. 
1218  See LPL August 2018 Letter.  See also NAIFA Letter (noting the “significant costs to 

update all materials, marketing, signage, legally-required disclosure documents, etc.…”); 
SIFMA August 2018 Letter (noting the “significant costs and burdens” that would be 
involved with “[e]xtensive repapering.”).  

1219  See Morgan Stanley Letter.  

1220  Academic evidence suggest corporate brands are valuable intangible assets to firms.  See, 
e.g., Mary E. Barth et al., Brand Values and Capital Market Valuation, 3 REV. ACCT. 
STUD. 41 (1998).  

1221 The extent of this potential cost depends on how likely it is that investors rely on the titles 
“adviser” and “advisor” in finding a broker-dealer.  For example, one survey suggests 
that 40-50% of investors find their financial professionals through personal 
recommendations, not via searches for these titles (see supra footnote 946 and discussion 
in Relationship Summary Adopting Release at Section IV.B.2.a). 



544 

 

lose revenues associated with the maintenance of current credentials or certifications by 

awardees.1222  Relatedly, affected financial professionals may experience a loss associated with 

any value they currently derive from the use of these credentials or certifications.1223  Rather than 

incur any of the costs associated with changing names and titles discussed above, some broker-

dealers may choose to register as investment advisers if they determine it will be less costly, in 

which case these broker-dealers will incur any costs associated with dual registration.  The 

potential costs associated with the presumption apply for the approximately 100 broker-dealers, 

as of December 2018, with retail customers that are not also investment advisers and use either 

“adviser” or “advisor” in their firm names, and for the approximately 16% of all registered 

representatives that use these titles and might be affected by the presumption.1224 

The requirement that broker-dealers disclose material facts relating to the material fees 

and costs that apply to a retail customer’s transactions, holdings, and accounts may also be 

partially fulfilled by delivering the Relationship Summary.  Form CRS will require broker-

dealers to provide retail investors a high-level summary of principal fees and costs, including 

transaction-based fees, as well as a narrative discussion of other fees that retail investors will pay 

                                                                                                                                                             

 

1222  See IWI Letter (noting that “Title Restrictions, as proposed, have a potential to impact the 
long-term growth of two of the Institute’s registered marks.”).  This commenter did not 
provide specific data or estimates on the potential magnitude of this effect. 

1223  See NAIFA Letter.  This commenter did not provide specific data or estimates on the 
potential magnitude of this effect. 

1224  See supra footnote 1200. 



545 

 

directly or indirectly.  However, while providing such high-level summaries partially complies 

with the Disclosure Obligation, the Relationship Summary is unlikely to provide retail customers 

with all of the material facts about the fees and costs that apply to a particular 

recommendation.1225  As a result, Regulation Best Interest will impose costs on broker-dealers 

associated with assessing whether facts about the fees and costs that apply to a retail customer’s 

transactions, holdings, and accounts are material and delivering those material facts to retail 

customers.   

Broker-dealers will have some flexibility in how they comply with this requirement, 

which will allow them to tailor these disclosures to the needs of their retail customers and to 

implement them in a manner that is as cost efficient as possible, given their business models. In 

addition, the Disclosure Obligation may be satisfied by providing documents that broker-dealers 

are already required to produce or voluntarily produce under the baseline, such as prospectuses, 

in which case they may only incur costs associated with determining the timing and method by 

which they deliver these disclosures.1226  For example, under the baseline, broker-dealers may 

currently deliver prospectuses to retail customers after the completion of a transaction under the 

baseline, but would need to deliver them prior to or at the time of a recommendation under 

Regulation Best Interest, unless made under the circumstances outlined in Section II.C.1, Oral 

                                                                                                                                                             

 

1225  See the discussion following supra footnote 368. 
1226  See discussion at supra footnotes 495-496. 



546 

 

Disclosure or Disclosure After a Recommendation, allowing them to rely on delivery of 

information after the fact.  In cases where required disclosures are already produced under the 

baseline, broker-dealers and their associated persons may still incur costs associated with 

delivering these disclosures prior to or at the time of a recommendation if they are not delivered 

by that time under the baseline. 

Broker-dealers may also incur costs as a result of Regulation Best Interest’s requirement 

that they disclose material facts about the type and scope of services provided to a retail 

customer, including any material limitations on the securities or investment strategies involving 

securities that may be recommended to the retail customer.  As discussed above, some broker-

dealers may be able to fulfill their obligation to disclose these material facts, such as those 

related to account monitoring, account minimums, or material limitations on the securities or 

investment strategies that may be recommended, by complying with Form CRS or by using 

disclosures included in account opening agreements or other customer disclosures.1227  For these 

broker-dealers, this requirement of the Disclosure Obligation should not cause them to incur 

additional costs beyond an initial assessment of whether they can comply with the Disclosure 

Obligation using Form CRS or pre-existing disclosures.  In cases where a broker-dealer is not 

able to disclose all material facts relating to the type and scope of services they provide by 

complying with Form CRS or in combination with existing disclosures, broker-dealers will incur 

                                                                                                                                                             

 

1227  See supra footnote 1203. 



547 

 

costs associated with assessing which facts about the type and scope of services provided to 

retail customers are material and delivering written disclosure of those material facts to retail 

customers.  As discussed above, broker-dealers will have some flexibility in how they comply 

with this requirement, allowing them to tailor these disclosures to the needs of their retail 

customers and to their business models and to implement these disclosures in a cost efficient 

manner. 

While the Proposing Release’s Disclosure Obligation did not explicitly require broker-

dealers or their associated persons to disclose particular types of material facts relating to the 

scope and terms of their relationship with a retail customer, Regulation Best Interest explicitly 

requires that these material facts include the capacity in which the broker-dealer or its associated 

person is acting; material fees and costs; the type and scope of services provided, including 

material limitations on the securities or investment strategies that may be recommended; and all 

material facts relating to conflicts of interest that are associated with a recommendation.  To the 

extent that broker-dealers are not disclosing this information or are not disclosing it by the time 

of a recommendation, broker-dealers may incur higher costs associated with disclosing these 

material facts under Regulation Best Interest compared to the baseline. 

In general, for any material facts relating to the scope and terms of its relationship with 

retail customers, a broker-dealer may have to determine how to disclose those facts in a manner 

that is “full and fair,” as required by Regulation Best Interest, which will cause it to incur costs.  

Similarly, the requirement that broker-dealers disclose all material facts in writing prior to or at 

the time of a recommendation may also impose costs on broker-dealers.  For example, even if a 

broker-dealer currently discloses some information about its fees under the baseline, it may not 

currently disclose that information prior to the time of a recommendation, and may incur costs 



548 

 

updating systems and processes to ensure the information is disclosed in a manner that complies 

with Regulation Best Interest’s requirements, including any costs associated with delivery of the 

information to retail customers.  

Broker-dealers may incur costs associated with the full and fair disclosure of all material 

facts relating to conflicts of interest that are associated with a recommendation.  As discussed 

below in our analysis of the Conflict of Interest Obligation, broker-dealers currently have 

obligations to disclose certain material conflicts of interest under the baseline.1228  To the extent 

that broker-dealers will be required to disclose material facts about conflicts of interest that they 

do not currently disclose to retail customers under the baseline, broker-dealers will incur costs 

associated with assessing whether facts about these conflicts are material and delivering those 

facts to retail customers.  They also may incur costs associated with identifying particular 

conflicts of interest to disclose.1229 

As discussed above, there are circumstances where broker-dealers and their associated 

persons may make oral disclosures or written disclosures after the time of a recommendation 

under the circumstances outlined in Section II.C.1, Oral Disclosure or Disclosure After a 

Recommendation.  Where oral disclosures are made, broker-dealers and their associated persons 

may incur costs associated with subsequently documenting such disclosures.  These costs may 

                                                                                                                                                             

 

1228  See infra footnote 1261.  See also supra footnotes 985-988. 
1229  See infra Section III.C.4 for a discussion of costs associated with identifying conflicts of 

interest as part of the Conflict of Interest Obligation. 



549 

 

include the time spent documenting such disclosures, the development of systems and processes 

necessary to document such disclosures, training associated persons to use these systems and 

processes, and supervising the compliance by associated persons with this obligation.  For both 

oral disclosures and written disclosures made after a recommendation, broker-dealers and their 

associated persons may incur costs associated with developing initial disclosures about the 

material facts subject to oral disclosures and written disclosures after a recommendation, the 

circumstances under which such disclosures will be made, as well as costs associated with 

training financial professionals to make such disclosures in a manner that complies with 

Regulation Best Interest. 

While most of the costs associated with preparing and delivering disclosures are likely to 

be incurred by broker-dealers, their associated persons may incur costs as well.  For example, 

when a financial professional is aware that the broker-dealer’s disclosure is insufficient to 

describe “all material facts,” the associated person must supplement that disclosure, and may 

incur costs in developing such disclosure on their own to ensure they are in compliance with the 

Disclosure Obligation.1230  The magnitude of this cost will depend on the extent to which the 

financial professional cannot rely on the disclosure made by the broker-dealer.   

                                                                                                                                                             

 

1230  See discussion following supra footnote 307 for an example of a case where an 
associated person of a broker-dealer may be required to provide her own disclosures in 
order to comply with the Disclosure Obligation. 



550 

 

As discussed above, while we are unable to quantify the full costs of Regulation Best 

Interest, including the Disclosure Obligation, we are able to estimate some of the costs associated 

with the Disclosure Obligation, specifically the costs related to information collection 

requirements as defined by the Paperwork Reduction Act.  As discussed further below in Section 

IV.B.1, the Commission estimates that the preparation and delivery of standardized language, fee 

schedules, and standardized conflict disclosures that broker-dealers are required to provide to 

retail customers to comply with the Disclosure Obligation will impose on broker-dealers an 

initial aggregate burden of 6,216,125 hours and an additional initial aggregate cost of $42.84 

million as well as an ongoing aggregate burden of 2,101,493 hours.1231 Thus, the Disclosure 

                                                                                                                                                             

 

1231  The estimate of the initial aggregate burden is based on the following calculation: 5,630 
hours + 7,560 hours + 40,200 hours + 2,040,000 hours + 3,780 hours + 20,100 hours + 
2,040,000 hours + 3,780 hours + 15,075 hours + 2,040,000 hours = 6,216,125 hours. As 
discussed in more detail in infra Section IV.B.1, 5,630, 7,560, and 40,200 hours are 
estimates of the initial aggregate burden for the preparation of disclosure of capacity, 
type, and scope, for dual-registrants and small and large broker-dealers, respectively. 
2,040,000 hours is the estimate of the initial aggregate burden for the delivery of the 
disclosure of capacity, type, and scope to retail customers. 3,780 and 20,100 hours are 
estimates of the initial aggregate burden for the preparation of disclosure of fees for small 
and large broker-dealers, respectively. 2,040,000 hours is the estimate of the initial 
aggregate burden for the delivery of the disclosure of fees to retail customers. 3,780 and 
15,075 hours are estimates of the initial aggregate burden for the preparation of 
disclosure of material conflicts of interest for small and large broker-dealers, 
respectively. 2,040,000 hours is the estimate of the initial aggregate burden for the 
delivery of the disclosure of material conflicts of interest to retail customers. The estimate 
of the initial aggregate cost is based on the following calculation: $2.80 million + $3.80 
million + $15.00 million + $1.88 million + $9.99 million + $1.88 million + $7.49 million 
= $42.84 million. As discussed in more detail in supra Section V.D, $2.80 million, $3.80 
million, and $15.00 million are estimates of the initial aggregate cost for the preparation 

 

 



551 

 

Obligation will impose an estimated initial aggregate cost of at least $1,508.88 million and an 

ongoing aggregate annual cost of at least $499.59 million on broker-dealers.1232  We note that 

these estimates assume broker-dealers are not currently producing and delivering documents 

                                                                                                                                                             

 

of disclosure of capacity, type, and scope, for dual-registrants and small and large broker-
dealers, respectively. $1.88 million and $9.99 million are estimates of the initial 
aggregate cost for the preparation of disclosure of fees for small and large broker-dealers, 
respectively. $1.88 million and $7.49 million are estimates of the initial aggregate cost 
for the preparation of disclosure of material conflicts of interest for small and large 
broker-dealers, respectively. The estimate of the ongoing aggregate burden is based on 
the following calculation: 3,941 hours + 3,024 hours + 40,200 hours + 408,000 hours + 
1,512 hours + 8,040 hours + 816,000 hours + 756 hours + 4,020 hours + 816,000 hours = 
2,101,493 hours. As discussed in more detail in supra Section V.D, 3,941, 3,024, and 
40,200 hours are estimates of the ongoing aggregate burden for the preparation of 
disclosure of capacity, type, and scope, for dual-registrants and small and large broker-
dealers, respectively. 408,000 hours is the estimate of the ongoing aggregate burden for 
the delivery of the disclosure of capacity, type, and scope to retail customers. 1,512 and 
8,040 hours are estimates of the ongoing aggregate burden for the preparation of 
disclosure of fees for small and large broker-dealers, respectively. 816,000 hours is the 
estimate of the ongoing aggregate burden for the delivery of the disclosure of fees to 
retail customers. 756 and 4,020 hours are estimates of the ongoing aggregate burden for 
the preparation of disclosure of material conflicts of interest for small and large broker-
dealers, respectively. 816,000 hours is the estimate of the ongoing aggregate burden for 
the delivery of the disclosure of material conflicts of interest to retail customers.  

1232  These estimates are calculated as follows: (96,125 hours of in-house legal counsel) x 
($415.72/hour for in-house counsel) + (6,120,000 hours for delivery for each customer 
account) x ($233.02/hour for registered representative)  + (90,763 hours for outside legal 
counsel) x ($497/hour for outside legal counsel) = $1,508.88 million, and (35,056 hours 
of in-house legal counsel) x ($415.72/hour for in-house counsel) + (2,040,000 hours for 
delivery for each customer account) x ($233.02/hour for registered representative)  + 
(26,437 hours for in-house compliance counsel) x ($365.39/hour for outside legal 
counsel) = $499.59 million. The hourly wages for in-house legal and compliance counsel 
and registered representatives are obtained from SIFMA. The hourly rates for outside 
legal counsel are discussed in supra Section V.D.  



552 

 

associated with the Disclosure Obligation.  To the extent that broker-dealers are already doing so, 

these estimates may overstate the costs associated with the information collection requirements 

as defined by the Paperwork Reduction Act. 

Several commenters stated that we underestimated the compliance costs of Regulation 

Best Interest in the Proposing Release, particularly with respect to the potential transaction-based 

nature of the Disclosure Obligation and the resultant record-making and recordkeeping 

requirements.1233  One commenter stated that if the Disclosure Obligation is a transaction-based 

requirement, its costs were significantly underestimated in the Proposing Release, citing an 

estimate that an earlier proposal of a point-of-sale disclosure requirement would cost between $1 

million and $1.2 million per firm.1234  We first note that, given that there are approximately 

2,766 broker-dealers with retail-facing operations, the commenter’s cited estimate implies initial 

costs of approximately $1.4 billion and ongoing costs of approximately $1.4 billion,1235 so the 

commenter’s implied estimate of $1.4 billion in initial costs associated with the Disclosure 
                                                                                                                                                             

 

1233  See Schwab Letter; ICI Letter; Angel Letter; Vanguard Letter; LPL August 2018 Letter; 
NSCP Letter. 

1234  See Schwab Letter, citing April 12, 2004 comment letter from George Kramer of the 
Securities Industry Association (“SIA”).  This estimate is based on a point-of-sale 
disclosure requirement in proposed rule 15c2-3, for which SIA estimated that 
implementation costs would be in the order of $500,000 per firm, as would annual costs 
associated with maintaining and updated necessary systems and procedures.  See also 
SIFMA August 2018 Letter at footnote 38 referencing the same estimate. 

1235  These estimates are calculated as follows: (2766 retail-facing broker-dealers) x ($500,000 
per firm in initial costs) = $1.383 billion.  Implied ongoing costs are calculated the same 
way. 



553 

 

Obligation is consistent with our estimate of initial costs above.1236 Second, we note that, as 

discussed in more detail above in Section II.C.1.d, the Disclosure Obligation only requires that 

certain disclosures be made prior to or at the time of a recommendation, and broker-dealers may 

use standardized disclosures at an earlier point than the time of a recommendation to the extent 

such disclosures satisfy the Disclosure Obligation.  In this regard, while the commenter’s 

estimate may be indicative for some firms, the cost per firm will vary widely depending on the 

scope and business model of each broker-dealer.  Because Regulation Best Interest provides 

broker-dealers with some flexibility regarding both the form and timing of the Disclosure 

Obligation, its costs are likely to be lower than a pure point-of-sale requirement.1237   

Beyond the estimates provided above for that are derived from estimates developed for 

purposes of the Paperwork Reduction Act in Section IV.B.1, the Commission is unable to fully 

quantify the costs of the Disclosure Obligation because the magnitude of these costs depend on 

firm-specific factors that are inherently difficult to quantify given the principles-based nature of 

Regulation Best Interest.1238  These factors include the extent to which current disclosure 

practices under the baseline are different from the requirements of the Disclosure Obligation, the 

manner in which broker-dealers choose to comply with the Disclosure Obligation given the 
                                                                                                                                                             

 

1236  See supra footnote 1232. 
1237  See supra footnotes 531-533 for a discussion of layered disclosure and footnotes 541-542 

for a discussion of the Disclosure Obligation’s requirements with respect to timing of 
disclosures. 

1238  See supra Section III.C.1. 



554 

 

flexibility it provides, how broker-dealers assess whether facts relating to the scope and terms of 

their relationship with a retail customer are material, how they determine whether their 

disclosure of such material facts is full and fair, or the extent to which they will satisfy the 

Disclosure Obligation’s requirements by delivering the Relationship Summary or pre-existing 

documents. 

3. Care Obligation 

Under the baseline, broker-dealers are subject to suitability obligations and requirements 

under the anti-fraud provisions of the federal securities laws and the Suitability Rule when 

making recommendations to retail customers.  The Care Obligation incorporates and adds to 

existing suitability requirements applicable to broker-dealers, thereby reducing the incidence of 

inefficient recommendations to retail customers. 

FINRA rules require broker-dealers making recommendations to have, based on a 

particular customer’s investment profile, a reasonable basis to believe that the recommendation 

is suitable for that customer.  In addition, FINRA guidance and Commission opinions interpret 

suitability as prohibiting a broker-dealer from placing its interests ahead of the customer’s 

interest and requiring the recommendations to be consistent with the customer’s best interest.1239  

However, this obligation is not explicitly required by FINRA’s rule (or its supplementary 

material).  Under the baseline, a recommendation by a broker-dealer or its associated persons 

                                                                                                                                                             

 

1239  See supra footnote 570 and 913 Study at footnote 270. 



555 

 

may be consistent with a retail customer’s best interest but broker-dealers and their associated 

persons are not required to make recommendations in the best interest of these customers, as will 

be required under Regulation Best Interest.  Relative to the baseline, the Care Obligation will 

change how broker-dealers and their associated persons make recommendations to retail 

customers in several ways, some of which differ from the Proposing Release. 

First, the Care Obligation explicitly includes cost as a factor for consideration when 

determining whether a recommendation is in a retail customer’s best interest.  In contrast, the 

Proposing Release emphasized cost as an important factor to consider and stated that broker-

dealers may be required to consider cost as a factor when making recommendations, but did not  

explicitly require its consideration when making a recommendation.1240  In addition, we clarify 

above in Section II.C.2 that, when determining whether a recommendation is in a retail 

customer’s best interest with respect to cost or other relevant factors, broker-dealers and their 

associated persons should consider reasonably available alternatives.  Conversely, under FINRA 

suitability obligations, broker-dealers and their associated persons are not required to consider 

reasonably available alternatives when determining whether a recommendation is suitable for a 

retail customer.1241  

                                                                                                                                                             

 

1240  See supra footnote 572 and preceding text. 
1241  See id. 



556 

 

Second, under the baseline, FINRA rules require that a broker-dealer or associated person 

who has actual or de facto control over a customer’s account must have a reasonable basis for 

believing that a series of recommended transactions, even if suitable when viewed in isolation, is 

not excessive and unsuitable for the customer when taken together in light of the customer’s 

investment profile.  In contrast, the Care Obligation requires that a broker-dealer or its associated 

person has a reasonable basis to believe that a series of recommended transactions is not 

excessive and is in that retail customer’s best interest.  This is the case at all times—when the 

broker-dealer or associated person has actual or de facto control over a customer’s account as 

well as when no control exists (whether actual or de facto).   

Finally, FINRA’s suitability standard applies to recommendations of rollover decisions 

that involve securities transactions, but not necessarily in the absence of a securities 

transaction.1242  In addition, FINRA’s suitability standard does not explicitly apply to 

recommendations of account types and implicit hold recommendations resulting from agreed 

upon account monitoring.1243  In contrast, Regulation Best Interest explicitly applies to account 

recommendations as an “investment strategy involving securities,” including recommendations 

of securities account types, as well as rollovers or transfers of assets from one account to another.  

In addition, under Regulation Best Interest, implicit hold recommendations resulting from agreed 

                                                                                                                                                             

 

1242  See FINRA Regulatory Notice 13-45 and supra footnote 172. 
1243  See supra footnote 170. 



557 

 

upon account monitoring constitute recommendations of “any securities transaction or 

investment strategy involving securities,” and are therefore within the scope of Regulation Best 

Interest.  Moreover, recommendations to open an IRA or to roll over assets into an IRA are 

subject to Regulation Best Interest, including the Care Obligation, thereby requiring a broker-

dealer or its associated persons 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, 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 retail customer’s 

existing 401(k) or other retirement account.  We focus our discussion of both the benefits and 

costs of the Care Obligation under Regulation Best Interest on these changes relative to the 

baseline.  

Regulation Best Interest’s Care Obligation differs from the Proposing Release’s Care 

Obligation in two ways that respond to commenter concerns but that we do not expect to have 

significant economic effects.1244  First, the general best interest standard of conduct from the 

Proposing Release is incorporated into Regulation Best Interest’s Care Obligation, which, as 

adopted, also requires that a broker-dealer or its associated persons have a reasonable basis to 

believe that a recommendation, or series of recommendations, does not place the financial or 

other interest of the broker-dealer or its associated persons ahead of the interest of the particular 

                                                                                                                                                             

 

1244  See discussion at supra footnotes 147, 606, and 577-584. 



558 

 

retail customer.  Broker-dealers and their associated persons can comply with Regulation Best 

Interest as a whole by complying with its four component obligations, which now explicitly 

include the Proposing Release’s general best interest standard in elements of the Care Obligation.  

This change to the Care Obligation, as compared to the Proposing Release, is intended 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 interest; however, we do not believe there will be significant economic effects 

associated with this change from the Proposing Release.1245  Second, Regulation Best Interest, as 

adopted, does not explicitly require broker-dealers or their associated persons to exercise 

“prudence” in making recommendations.  Instead they must exercise reasonable diligence, care, 

and skill in making such recommendations.  While we removed the term “prudence” to address 

commenter concerns that it might create legal confusion and uncertainty, this does not change 

the requirements or obligations under the Care Obligation as compared to the Proposing 

Release.1246  Therefore, we do not expect this change to have a significant economic effect, as 

compared to the Proposing Release. 

                                                                                                                                                             

 

1245  If anything, to the extent that broker-dealers or their associated persons might have 
misunderstood the Proposing Release with respect to their obligation to provide 
recommendations that are in the best interest of retail customers, Regulation Best Interest, 
as adopted, emphasizes the importance of determining that each recommendation is in the 
best interest of the retail customer will benefit retail customers. 

1246  See supra footnotes 579-585 and surrounding discussion. 



559 

 

a. Benefits 

As described in the Proposing Release, the Care Obligation did not explicitly require 

broker-dealers and their associated persons to consider the costs associated with a 

recommendation when determining whether it was in a retail customer’s best interest, though the 

Proposing Release discussed cost as a relevant factor in making this determination, and noted 

that broker-dealers might be required to consider cost as a factor when making recommendations 

under the baseline.1247  The Care Obligation under Regulation Best Interest includes an explicit 

requirement to consider the cost of a recommendation.  If this causes broker-dealers and their 

associated persons to more carefully consider cost in relation to other factors, compared to the 

baseline, it should reduce the incidence of recommendations of higher cost investments from a 

set of reasonably available alternatives that achieve the retail customer’s objective.  If the 

explicit requirement to consider the cost of a recommendation encourages broker-dealers and 

their associated persons to more carefully consider cost, compared to the baseline, the final rule 

makes it less likely that a broker-dealer or its associated persons could have a reasonable basis to 

believe such investments are in the retail customer’s best interest because it would be difficult to 

have such a belief for investments that are identical beyond their costs.  Therefore, including cost 

                                                                                                                                                             

 

1247  See supra footnote 572. 



560 

 

as a required factor in Regulation Best Interest should enhance the efficiency of 

recommendations to retail customers relative to the baseline.1248   

As discussed above, while a “quantitative suitability” requirement applies to series of 

recommended transactions under the baseline, it only applies in cases where a broker-dealer has 

“control” over a customer account.  Relative to the baseline, broker-dealers and their associated 

persons will be required to have a reasonable basis to believe that any series of recommended 

transactions is in the retail customer’s best interest, not just series of recommended transactions 

that occur in an account they control.  This change relative to the baseline should enhance 

investor protection by reducing the incidence of cases where a broker-dealer or its associated 

persons recommend an excessively high rate of portfolio turnover, or “churn,” for accounts that 

they do not control.  In addition, the discussion above regarding the potential benefits from the 

increased standard of conduct required by the Care Obligation in the context of individual 

recommendations also applies to series of recommended transactions.  Enhancing the standard of 

conduct that applies to series of recommended transactions and reducing the incidence of 

recommendations that result in excess portfolio turnover should result in more efficient 

recommendations, benefiting retail customers.  We are unable to specifically quantify these 

potential benefits because, in addition to the reasons cited above, we do not have and cannot 

reasonably obtain comprehensive data on how often broker-dealers, for accounts they do not 

                                                                                                                                                             

 

1248  See discussion surrounding supra footnotes 563-565.561 

 

control, recommend series of transactions that result in excessive portfolio turnover and are 

therefore not in the best interest of their retail customers.    

Regulation Best Interest applies to account recommendations, including 

recommendations to open an IRA or to participate in an IRA rollover.  Accordingly, these types 

of recommendations are subject to the Care Obligation (as well as the other components of 

Regulation Best Interest).  Several commenters highlighted the heightened risk of harm 

associated with IRA and IRA rollover recommendations because the amount of assets associated 

with such recommendations can be a significant portion of a retail customer’s net worth, and one 

commenter cited academic and industry studies that identify activities that are particularly prone 

to conflicts of interest, including IRA rollovers.1249  We acknowledge the heightened effect that 

recommendations to open an IRA or to participate in an IRA rollover can have on the financial 

well-being of retail customers.1250  While FINRA’s suitability standard under the baseline 

applies to rollover recommendations involving securities transactions, the suitability standard 

does not necessarily apply to a rollover recommendation if that recommendation does not 

involve a securities transaction.1251  To the extent that broker-dealers and their associated persons 

currently make recommendations to open an IRA or to participate in an IRA rollover that do not 

                                                                                                                                                             

 

1249  See CFA August 2018 Letter; AARP August 2018 Letter; Morningstar Letter; CFA 
Institute Letter. 

1250  See supra footnotes 191-192.  See also Fiduciary Benchmarks Letter. 
1251  See supra footnote 1242. 



562 

 

involve securities transactions under the baseline, Regulation Best Interest should result in IRA 

and IRA rollover recommendations to retail customers that are more efficient because they will 

be in the retail customer’s best interest regardless of whether or not they involve securities 

transactions.  

Regulation Best Interest also applies to other account type recommendations.  Broker-

dealers may offer different types of brokerage accounts that include different levels of services 

and costs.  The choice of account type can have a significant effect on the financial wellbeing of 

a retail customer.  For example, a recommendation to open an advisory over a brokerage account, 

or vice versa, can have a substantial long-term effect on a retail customer’s assets.  This effect 

may depend on the costs the retail customer incurs through the particular account as well as the 

retail customer’s investment profile.1252  Regulation Best Interest should result in 

recommendations regarding account type that are in the best interest of the retail customer, 

particularly with respect to cost, increasing the efficiency of the account type recommendations 

retail customers receive relative to the baseline. 

Finally, by clarifying that implicit hold recommendations resulting from agreed-upon 

account monitoring services constitute recommendations of “any securities transaction or 

investment strategy involving securities,” the Care Obligation will apply at the point in time at 

which their broker-dealer or associated person performs the agreed-upon monitoring, regardless 

                                                                                                                                                             

 

1252  See supra footnote 191. 



563 

 

of whether the broker-dealer or an associated person communicates any recommendation.  This 

should increase the efficiency of the implicit hold recommendations retail customers receive 

relative to the baseline. 

b. Costs 

We expect broker-dealers and their associated persons to incur costs as a result of the 

Care Obligation, and, to the extent broker-dealers pass these costs on to retail customers, these 

customers may incur costs as well.  In this section, we analyze these costs in terms of how 

Regulation Best Interest, as adopted, changes the required standard of care broker-dealers owe 

their retail customers relative to the baseline.  We also highlight any changes in our assessment 

of these costs as compared to the Proposing Release.  We discuss the costs of complying with the 

Care Obligation, such as those associated with training employees or developing policies and 

procedures, in Section III.C.5.    

To comply with the Care Obligation, some broker-dealers may stop offering certain 

securities to retail customers, or their associated persons may stop recommending certain 

securities to retail customers.  These decisions may be based on determinations that offering or 

recommending those securities typically would not satisfy the Care Obligation.  To the extent 

that they earn revenue from offering and recommending such securities, broker-dealers and their 

associated persons may incur costs associated with the determination to cease offering or 

recommending these products.   



564 

 

Commenters stated that our analysis should not consider lost revenue as a cost of 

complying with Regulation Best Interest, except to the extent that the lost revenue is passed on to 

investors in the form of higher fees, because these types of costs are a direct result of policies 

that make investors better off.1253  As discussed above, our economic analysis must consider the 

costs Regulation Best Interest may impose on all affected parties, including broker-dealers.  

However, we believe that any loss of revenues associated with recommendations that would not 

satisfy the Care Obligation is compensated by the corresponding benefit to retail customers—

namely the provision of more efficient recommendations by their financial professionals.1254  In 

addition, even if broker-dealers or their associated persons have a reasonable basis to believe that 

a certain investment could be in the best interest of some retail customers, they may forgo 

offering or recommending the investment if, for example, they think that it may increase their 

exposure to regulatory enforcement risk over their compliance with Regulation Best Interest.1255  

This could result in costs to both the broker-dealer and any retail customers for whom the 

investment would be an efficient investment choice.  

Because the Care Obligation holds broker-dealers and their associated persons to an 

enhanced standard of conduct, they may incur costs associated with increased legal exposure if, 

for example, Regulation Best Interest results in increased retail customer arbitrations or litigation.  
                                                                                                                                                             

 

1253  See supra footnote 1164. 
1254  See supra Section III.A.2 for a more detailed discussion of efficient recommendations. 
1255  See, e.g., Iowa Insurance Commissioner Letter. 



565 

 

For example, one commenter stated that the lack of clarity in how to weight various factors 

associated with the potential risks and rewards of a recommendation could lead to arbitrary 

claims regarding other alternative recommendations that, ex-post, would have performed 

better.1256  Similarly, because the Care Obligation also requires that a series of recommended 

transactions be in the best interest of a retail customer, regardless of whether a broker-dealer or 

an associated person controls the retail customer’s account, a broker-dealer could incur the same 

types of costs associated with increased arbitration or litigation risk relative to the baseline.  We 

cannot anticipate the extent to which Regulation Best Interest will increase retail customer 

claims, but many retail customer arbitrations are already predicated in whole or in part on facts 

alleging that a broker-dealer breached a fiduciary duty or its suitability obligations.  Additionally, 

the clarity in the rule text and this release regarding the Care Obligation, as well as the other 

aspects of Regulation Best Interest that bring enhanced conduct and clarity (e.g., the policies and 

procedures requirement and that Regulation Best Interest applies only at the time a 

recommendation is made) should mitigate against an increase in the likelihood and cost of such 

claims.  

The Care Obligation explicitly requires that cost be considered as a factor when 

determining whether a recommendation is in the best interest of a retail customer.  Several 

commenters stated that the Proposing Release’s guidance emphasizing cost as a specific factor in 

                                                                                                                                                             

 

1256  See CCMC Letters. 



566 

 

the Care Obligation could create uncertainty around how the cost of a recommendation should be 

weighed with other factors.1257  As discussed above, the inclusion of cost as a factor in the Care 

Obligation does not require that the “least expensive” recommendation be made by a broker-

dealer or its associated person; cost is one factor, but not the only relevant factor.  Nonetheless, 

to the extent that the inclusion of cost as a factor in the Care Obligation increases the arbitration 

or litigation risk to which broker-dealers or their associated persons are exposed, this change 

could impose additional costs on broker-dealers.  

Regulation Best Interest also expressly applies to account recommendations, including 

recommendations of securities account types, as well as rollovers or transfers of assets from one 

account to another. We also clarify above that implicit hold recommendations resulting from 

agreed-upon account monitoring are within the scope of Regulation Best Interest and are 

therefore subject to the Care Obligation.  Should they choose to discontinue offering certain 

services, as a result of Regulation Best Interest, broker-dealers could lose revenue associated 

with making recommendations for account types (including IRAs).  They may also decide to 

cease offering monitoring services on retail customer accounts.  However, as we discussed above 

with respect to recommendations more generally, we believe that any loss of revenues associated 

with recommendations that would not satisfy the Care Obligation is compensated by the 

                                                                                                                                                             

 

1257  See ICI Letter; CCMC Letters; LPL August 2018 Letter. 



567 

 

corresponding benefits to retail customers associated with more efficient account 

recommendations. 

The Commission is unable to fully quantify the costs that the Care Obligation will impose 

on broker-dealers, their associated persons, or their retail customers because the magnitude of 

these costs depends on firm-specific factors that are inherently difficult to quantify given the 

principles-based nature of Regulation Best Interest.1258  These factors include the extent to which 

broker-dealers and their associated persons currently engage in practices under the baseline that 

would satisfy the Care Obligation, either of their own volition or as a result of complying with 

other regulations; the extent to which broker-dealers and their associated persons will cease 

recommending certain securities or investment strategies; the likelihood that retail customers file 

more arbitration or litigation claims; and the extent to which broker-dealers pass on any cost 

increases to their retail customers.1259 

4. Conflict of Interest Obligation 

The Conflict of Interest Obligation under Regulation Best Interest is intended to reduce 

the agency costs that arise when a broker-dealer and its associated persons provide a 

recommendation to a retail customer by addressing the effect of the associated person’s or 

broker-dealer’s conflicts of interest on the recommendation.  

                                                                                                                                                             

 

1258  See also supra Section III.C.1.a.  
1259  See discussion following infra footnote 1330 for discussion of factors affecting whether 

broker-dealers pass on costs to their retail customers and the resultant competitive effects. 



568 

 

The Conflict of Interest Obligation would require that broker-dealers establish, maintain, 

and enforce written policies and procedures that are reasonably designed to address the effect of 

the broker-dealer’s and the associated persons’ conflicts of interest on a recommendation. At a 

minimum, a broker-dealer is required to address the effect of conflicts of interest on a 

recommendation.  At a minimum, a broker-dealer is required to address the effect of an 

identified conflict on a recommendation by disclosing the material facts associated with that 

conflict and by disclosing material limitations of the menu of securities when the conflict stems 

from such limitations.  In certain cases, a broker-dealer is required to address the effect of an 

identified conflict by either mitigating the conflict, or, in certain cases, by eliminating certain 

sales practices.  

The Conflict of Interest Obligation is intended to reduce the information asymmetry 

between a retail customer and a broker-dealer and its associated persons with respect to the 

broker-dealer’s conflicts of interest or those of its associated persons that may have an effect on 

the recommendations provided to the retail customer. This disclosure may help the retail 

customer form a better assessment of the efficiency of the recommendation received.  Moreover, 

reducing this information asymmetry may discourage broker-dealers from acting on incentives 

that differ from retail customer objectives. 

Similarly, by addressing the effect of certain conflicts of interest through mitigation, the 

Conflict of Interest Obligation is intended to reduce the effect incentives created by those 

conflicts may have on a recommendation provided to the retail customer. Depending on how 

effective the mitigation method is in reducing these incentives, the efficiency of the 

recommendation provided to the retail customer may increase.  



569 

 

Similarly, by addressing the effect of certain conflicts of interest through elimination, the 

Conflict of Interest Obligation is intended to neutralize the effect of incentives created by those 

conflicts may have on a recommendation provided to the retail customer.  In this case, the 

efficiency of the recommendations provided to the retail customer may increase. 

 The conflicts of interest that the broker-dealer or its associated persons have, and the 

incentives that these conflicts create, arise from, among other things, the manner in which 

broker-dealers generate revenue and the manner in which broker-dealers compensate their 

associated persons with respect to their dealings with retail customers. 

The compensation arrangement between a broker-dealer and its associated persons may 

reflect the amount of revenues that the associated persons generate for the broker-dealer from 

activities performed, including providing recommendations to retail customers. Such 

arrangements between the broker-dealer and its associated persons may create incentives for the 

associated person to take actions consistent with maximizing the broker-dealer’s objectives (e.g., 

expected profits). For instance, if an associated person’s compensation from providing 

recommendations to retail customers is tied to the amount of revenues that the associated person 

generates for the broker-dealer, the associated person may have an incentive to recommend 

securities or investment strategies that would bring more revenue to the broker-dealer, relative to 

other comparable securities or investment strategies. Furthermore, even if the compensation 

arrangement does not create an explicit incentive for the associated person, the broker-dealer 

may direct the attention of the associated person to certain securities. For instance, even if the 

revenues that the broker-dealer receives when its associated persons provide recommendations to 

retail customers are not passed on to the associated persons, the broker-dealer’s receipt of 



570 

 

compensation from some securities or their sponsors may lead the broker-dealer to emphasize to 

its associated persons the securities that are the source of such compensation.  

The revenues that a broker-dealer receives when a retail customer acts on an investment 

recommendation may depend on the broker-dealer’s compensation arrangement with the product 

sponsor. The broker-dealer may receive different compensation from different product sponsors 

for distributing comparable securities or investment strategies. If the objectives of the broker-

dealer are tied to the amount of revenues it receives from recommended securities or investment 

strategies, the broker-dealer may have an incentive to advise only, or predominantly, on  

securities or investment strategies that come with attractive compensation arrangements and less 

so, or not at all, on other comparable securities or investment strategies.  Accordingly, the 

incentives created by the compensation arrangements with the product sponsors may cause a 

broker-dealer to limit the menu of securities from which the broker-dealer or its associated 

persons make recommendations.  

 The conflicts of interest that can arise from the compensation arrangement between the 

broker-dealer and its associated persons, and from the compensation arrangement between the 

broker-dealer and the product sponsors, can create incentives that may affect the broker-dealer’s 

or its associated persons’ recommendations to retail customers. In certain circumstances, a 



571 

 

broker-dealer’s conflicts of interest, or its associated persons’ conflicts of interest, may result in 

recommendations that are not in the best interest of the retail customer.1260   

As discussed above, in Section III.B.2, broker-dealers are currently subject to 

Commission and SRO regulations and rules that govern their business conduct.  For example, 

with respect to the provision of advice, courts have found broker-dealers liable under the 

antifraud provisions of the federal securities laws for not giving “honest and complete 

information” or for not disclosing “material adverse facts of which it is aware” with regard to 

certain conflicts of interest, in certain circumstances.1261  Furthermore, broker-dealers are 

generally prohibited from making an unsuitable recommendation to a customer.1262   

In addition, broker-dealers may be liable under the Exchange Act for failure to supervise 

their associated persons when providing advice to retail customers.1263 Broker-dealers are 

generally required to establish policies and procedures that are reasonably designed to prevent 

and detect violations of the federal securities laws and regulations, as well as applicable SRO 

rules. Broker-dealers are also required to establish and maintain systems for applying these 

                                                                                                                                                             

 

1260  See FINRA Conflicts Report. 
1261  See the Suitability Rule; see also 913 Study at 55 for a detailed discussion of the broker-

dealers’ disclosure obligations and liabilities under the current regulatory regime.  
1262  See FINRA Rule 2111.03 (Recommended Strategies). 
1263  See 913 Study at 74. 



572 

 

procedures (e.g., identifying and reviewing red flags with respect to the recommendations 

provided by their associated persons).1264 

As discussed above, a number of studies and papers provide evidence suggesting that 

despite the current regulatory regime and observations that agency costs to retail customers from 

broker-dealer relationships may be trending downward, the effect of conflicts of interest on the 

provision of advice remains a concern.1265 We also noted in Section III.A.2 above that, more 

generally, the conflicts of interest of the broker-dealer and its associated persons and the 

incentives that these conflicts create may result in agency costs for the retail customers that 

persist despite the current regulatory regime.  

The Conflict of Interest Obligation in Regulation Best Interest is intended to reduce the 

agency costs associated with the conflicts of interest of the broker-dealers and its associated 

persons when they provide recommendations on securities transactions and investment strategies 

to retail customers. Below we discuss the economic implications of different requirements of this 

obligation, including their benefits and costs relative to the current regulatory regime. 

 

                                                                                                                                                             

 

1264 Id. at 75. In addition, FINRA Rule 3010 requires broker-dealers to establish and maintain  
 a system to supervise the activities of their associated persons that is reasonably designed 
 to achieve compliance with the applicable securities laws and regulations and FINRA 
 rules. FINRA Rule 3120 requires broker-dealers to have a system of supervisory control 
 policies and procedures that tests and verifies supervisory procedures. 
1265  See supra Section III.B.3.c. 



573 

 

a. Overarching Obligation Related to Conflicts of Interest 

The overarching obligation of the Conflict of Interest Obligation states that broker-

dealers must establish, maintain, and enforce written policies and procedures reasonably 

designed to identify and at a minimum disclose, or eliminate, all conflicts of interest associated 

with recommendations to retail customers.  

The requirement to establish written policies and procedures reasonably designed to 

identify conflicts of interest is a new requirement relative to the current regulatory regime.  This 

requirement may impose costs on those broker-dealers that currently do not implement such 

policies and procedures voluntarily. These costs stem from the resources that a broker-dealer 

would have to expend to identify existing and potential conflicts of interest and to design policies 

and procedures that can reasonably identify and manage circumstances when a conflict of 

interest arises within the broker-dealer. These circumstances would have to take into account, 

among other things, how the broker-dealer generates revenue from providing recommendations 

to retail customers and how associated persons of the broker-dealer are compensated for 

providing recommendations. In addition, these circumstances would have to account for the 

limitations of themenu of securities from which broker-dealers provide recommendations. 

Furthermore, broker-dealers may incur costs of reviewing and updating such policies and 

procedures as new conflicts of interest arise or as new circumstances develop that may cause the 

broker-dealer to identify an existing conflict of interest. The Commission is providing below a 

quantitative estimate of the cost to broker-dealers associated with designing and updating such 

policies and procedures under certain assumptions 

The requirement to establish policies and procedures reasonably designed to identify 

conflicts of interest may also create benefits for retail customers.  As noted above, the policies 



574 

 

and procedures would require broker-dealers to: (1) identify existing conflicts of interest and 

new circumstances in which an existing conflict of interest may arise, and (2) new conflicts of 

interest and the circumstances in which they may arise. Having a process in place to identify and 

address the conflicts of interest associated with a recommendation at the time the 

recommendation is made to a retail customer would reduce the likelihood that a broker-dealer 

may fail to disclose material facts relating to conflicts of interest. Thus, the process a broker-

dealer develops as a result of complying with the Conflict of Interest Obligation may improve 

the quality of the content of the disclosure of conflicts of interest that may affect a 

recommendation. To the extent such disclosure helps retail customers make a better assessment 

of the efficiency of the recommendation they receive, the requirement may benefit the retail 

customers.    

The Commission continues to believe that it is not possible to meaningfully quantify the 

potential costs and benefits of the Conflict of Interest Obligations because such analysis would 

depend on many contingent factors that render any estimate insufficiently precise to inform our 

policy choices.1266  For example, such an analysis of the Conflict of Interest Obligation would 

require strong assumptions about the circumstances under which a broker-dealer may fail to 

                                                                                                                                                             

 

1266  See discussion following supra footnote 1156 for a general discussion of these factors.  
See also infra Section III.C.7, where we have endeavored to quantify some of the 
potential benefits of Regulation Best Interest based on many assumptions. 



575 

 

identify a given conflict of interest, and also about the extent to which the disclosure of the 

conflicts of interest may enhance decision making for retail customers.     

The requirement to establish policies and procedures reasonably designed to, at a 

minimum, disclose identified conflicts of interest may help a retail customer evaluate the 

efficiency of the recommendation provided by a broker-dealer and its associated persons, and 

may affect the retail customer’s decision of whether, and how, to act on the recommendation.  As 

noted in Section III.A.2 above, reducing the information asymmetry between a retail customer 

and a broker-dealer and its associated persons may help the retail customer form a better 

assessment of the efficiency of the received recommendation.  

Disclosure requirements generally are intended to reduce information asymmetries 

between transacting parties. Whether such a reduction is likely to occur depends largely on the 

effectiveness of the disclosure. If the disclosure provides new information, transacting parties 

may make more informed decisions than they would without this new information, and, from this 

perspective, the disclosure may be effective. However, disclosure can be effective even if no new 

information is provided, to the extent the form and manner in which a disclosure requirement 

reaches the transacting parties facilitates a more informed decision. There is extensive academic 

literature on the factors that contribute to disclosure effectiveness.1267 Among these factors, those 

                                                                                                                                                             

 

1267  See supra Section III.B.4.c for a detailed discussion of the academic literature on 
disclosure effectiveness. 



576 

 

associated with bounded rationality, including financial literacy, are generally important.1268 In 

particular, disclosure effectiveness generally increases with the level of financial literacy of the 

transacting party.1269  It is also possible that if a broker-dealer’s retail customers have different 

degrees of financial literacy, the potential anticipated reaction of the retail customers that are 

financially literate to the disclosure of conflicts of interest may cause the broker-dealer to choose 

to eliminate certain conflicts, which, in turn, would benefit the population of retail customers that 

are less financially literate.  Specifically, the requirement to establish policies and procedures 

reasonably designed to, at a minimum, disclose identified conflicts of interest may have a 

deterrent effect on some broker-dealers to the extent that they anticipate that disclosing material 

facts about certain conflicts of interest may be effective in dissuading certain retail customers 

from seeking or accepting recommendations from their associated persons in the future. As noted 

above, such broker-dealers may choose to eliminate those conflicts instead.  

i. Disclosing Conflicts of Interest 

The requirement under the Conflict of Interest Obligation to develop reasonably designed 

policies and procedures to, at a minimum, disclose identified conflicts of interest would obligate 

a broker-dealer to provide information (e.g., material facts) about its conflicts of interest and 

those that its associated persons have when making a recommendation to a retail customer. As 

                                                                                                                                                             

 

1268  Id. 
1269  Id. 



577 

 

discussed above, this information may already be disclosed under the regulatory baseline and by 

broker-dealers that adopt best practices. However, it is currently not clear in what form and what 

manner this disclosure reaches the retail customer.1270 Under Regulation Best Interest, the 

Conflict of Interest Obligation is intended to require that such disclosure reach the retail 

customer more directly and in a more timely manner.1271 In addition, the material facts disclosed 

may increase the salience of the conflicts of interest to retail customers as being a potential factor 

contributing to an associated person’s recommendation. Salience detection is a key feature of 

human cognition allowing individuals to focus their limited mental resources on a subset of the 

available information and causing them to over-weight this information in their decision making 

processes.1272  Limited attention among individuals increases the importance of focusing on 

salient disclosure signals.  Research suggests that increasing signal salience is particularly 

helpful in reducing limited attention of consumers with lower education levels and financial 

literacy.1273  To the extent that this manner of disclosure and the associated increase in salience 

results in more informed decisions with respect to whether to act on a received recommendation, 
                                                                                                                                                             

 

1270  See e.g., 913 Study. 
1271  Broker-dealers satisfy their current disclosure obligations in the account opening 

agreement, account statements, and information made public on their websites.  
1272  See Daniel Kahneman, THINKING, FAST AND SLOW (2013);   Susan T. Fiske & Shelley E. 

Taylor, SOCIAL COGNITION: FROM BRAINS TO CULTURE (3rd ed. 2017). 
1273  See, e.g., Victor Stango & Jonathan Zinman, Limited and Varying Consumer Attention: 

Evidence from Shocks to the Salience of Bank Overdraft Fees, 27 REV. FIN. STUD. 990 
(2014). 



578 

 

the disclosure requirement resulting from the Conflict of Interest Obligation will benefit retail 

customers. 

It is also possible that the disclosure of material facts about a broker-dealer’s conflicts of 

interest or those of its associated persons related to a recommendation may not benefit the retail 

customer receiving that recommendation. As noted by one commenter, the academic literature on 

disclosure effectiveness notes that in certain circumstances, disclosure of financial information 

may induce a “panhandler effect”, whereby disclosure increases the pressure to comply with the 

advice if the advisee (e.g., the retail customer) feels obliged to satisfy the financial interest of the 

advice provider (e.g., the associated person).1274    

ii. Elimination of Conflicts of Interest 

 The policies and procedures that broker-dealers will need to maintain and implement to 

comply with the Conflict of Interest Obligation will also give them the option of addressing 

conflicts of interest associated with recommendations by eliminating such conflicts entirely, 
                                                                                                                                                             

 

1274  See, e.g., EPI Letter at 11, noting that “[a]s the SEC itself noted in its analysis of one of 
the proposed regulations, disclosure may even induce a ‘panhandler effect,’ whereby 
clients may go through with a transaction in response to social pressure to meet the 
professional's financial interests.” The Commenter also notes that generally disclosure 
may not incentivize a financial professional to change her behavior:  “The SEC also 
noted that disclosure could have an effect on the behavior of financial professionals 
through ‘moral licensing’—the belief that they have already fulfilled their moral 
obligations through disclosure, and ‘strategic biasing’—the desire to compensate for an 
anticipated loss of profit from disclosure.” As discussed above, Regulation Best Interest 
recognizes that certain conflicts of interest cannot be reasonably addressed with 
disclosure alone. See also supra Section III.B.4.c, which discusses in more detail these 
effects. 



579 

 

rather than just disclosing them to the retail customer. Depending on the effectiveness of the 

policies and procedures that a broker-dealer implements to comply with the Conflict of Interest 

Obligation, conflicts of interest that are not required to be eliminated and that remain may still 

have a significant effect on an associated person’s recommendation. If a broker-dealer considers 

that the effect of a conflict of interest on the recommendations of its associated persons cannot be 

adequately addressed by the broker-dealer, as required by the Conflict of Interest Obligation 

(discussed further below), the broker-dealer may consider modifying its practices to eliminate 

that conflict. By eliminating a conflict, the broker-dealer would neutralize the effect of this 

conflict on the recommendations provided by the broker-dealer or its associated persons to retail 

customers. The absence of this conflict of interest when the associated person is considering 

reasonably available alternatives for a recommendation to a retail customer, as noted above in 

the discussion of the Care Obligation, would likely result in an increase in the efficiency of the  

customers. As discussed above in Section III.A.2, this outcome would be consistent with the 

goals of Regulation Best Interest by reducing the agency costs associated with an associated 

person’s incentives created by these conflicts of interest, which would benefit the retail customer. 

Furthermore, the option to address conflicts of interest through elimination allows broker-

dealers to reduce the compliance costs associated with managing conflicts of interest. For 

example, if a broker-dealer determines it is too costly to just disclose a conflict of interest as 

required under the Conflict of Interest Obligation, the broker-dealer could choose to eliminate 

the conflict. On the other hand, by eliminating a conflict of interest, a broker-dealer may forgo 

the potential revenues associated with that conflict of interest.    

 



580 

 

b. Mitigation of Certain Incentives to the Associated Persons 

The requirement to establish, maintain, and enforce written policies and procedures 

reasonably designed to identify and mitigate conflicts of interest that create an incentive for the 

associated person of the broker-dealer to place the interest of the broker-dealer or the associated 

person ahead of the interest of the retail customer will likely affect the relationship between the 

broker-dealer and its associated persons, the  menu of securities that the broker-dealer makes 

available to its associated persons, and the recommendations that the broker-dealer and its 

associated persons provide to retail customers. In the employment relationship between a broker-

dealer and its associated persons, the broker-dealer generally hires and compensates associated 

persons to perform certain services (e.g., providing recommendations on securities transactions 

and investment strategies to retail customers) using the broker-dealer’s framework (e.g., policies 

and procedures to ensure compliance with applicable laws and rules, supervisory systems that 

monitor for potential violations of policies and procedures, etc.). The compensation that the 

associated person receives from the broker-dealer may reflect the level of effort that the broker-

dealer expects the associated person to exert when performing a service, given the broker-

dealer’s infrastructure. As noted above, the broker-dealer may also structure the associated 

person’s compensation to create incentives that are consistent with maximizing the broker-

dealer’s objectives.   

The requirement to establish, maintain, and enforce written policies and procedures 

reasonably designed to identify and mitigate conflicts of interest that create an incentive for the 

associated person of the broker-dealer to put the interest of the broker-dealer or the associated 

person ahead of the interest of the retail customer may affect the employment relationship 

between the broker-dealer and the associated person in several ways. First, the requirement may581 

 

change a broker-dealer’s existing policies and procedures that are designed to achieve 

compliance with the regulatory baseline as well as the supervisory systems that allow the broker-

dealer to monitor for potential violations by the associated persons of these policies and 

procedures.  To this end, broker-dealers will need to consider the amount of time and level of 

resources to devote to design and establish policies and procedures that seek to reduce the 

likelihood of an associated person placing its interest or the interest of the broker-dealer ahead of 

the interests of a retail customer when providing recommendations to retail customers.  

Another way that this requirement may affect the employment relationship between the 

broker-dealer and the associated person is by changing the level of effort that the associated 

person would have to exert to ensure that all recommendations supplied to retail customers are 

compliant with the Conflict of Interest Obligation. As a corollary, this requirement may also 

affect the level of effort that a supervisor would have to exert to ensure that the recommendations 

supplied by its associated persons to a retail customer comply with the obligations of Regulation 

Best Interest.  

As discussed above in the context of the Care Obligation, an associated person would 

have to not only consider a number of factors when making a recommendation to a retail 

customer, but also ensure that the recommendation is in the best interest of the retail customer. 

The determination that a recommendation is in the retail customer’s best interest may depend on 

the conflicts of interest that exist at the time the associated person makes the recommendation, 

and, importantly, on how the broker-dealer complies with the requirement to establish, maintain, 

and enforce policies and procedures reasonably designed to identify and mitigate or eliminate 

conflicts of interest that create an incentive for the associated person to put the interest of the 

broker-dealer or the associated person ahead of the interest of the retail customer. It is possible 



582 

 

that more effective policies and procedures may lower the level of effort an associated person 

would have to exert to have a reasonable basis to believe that recommendations are compliant 

with Regulation Best Interest, in the sense that a supervisor or the broker-dealer would determine 

whether the effect of the associated person’s or the broker-dealer’s conflicts of interest is reduced 

to the point where the incentives created by these conflicts do not have a negative effect on the 

recommendations.  However, the potential increase in the supervisor’s level of effort may 

substitute for the potential decrease in the associated person’s level of effort.  

One commenter had concerns about the discussion in the Proposing Release about the 

effect of the compensation arrangements between the broker-dealer and the associated person on 

the effort exerted by the associated person when providing a recommendation. 1275 This 

commenter stated that if the compensation leads to lower effort, the associated person would not 

make recommendations that are in the retail customer’s best interest. As discussed above, the 

Commission notes that the relationship between the effort exerted to make a recommendation 

and the efficiency of the recommendation is complex, and that lower effort may not necessarily 

be inconsistent with increasing the efficiency of the recommendation. 

Finally, the Conflict of Interest Obligation may affect the compensation arrangement 

between the broker-dealer and its associated persons. Certain compensation arrangements may 

create incentives for an associated person to place his or her interest of the interest of the broker-

                                                                                                                                                             

 

1275  See AARP August 2018 Letter. 



583 

 

dealer ahead of the interest of the customer, and therefore create conflicts of interest for the 

broker-dealer’s associated persons. For example, as discussed above in Section III.B.1.f, broker-

dealers commonly compensate their associated persons based on commissions and performance-

based awards. These compensation arrangements create incentives for associated persons to 

recommend securities or investment strategies that generate more commissions to the broker-

dealer and potentially themselves over other securities or investment strategies.  

The Conflict of Interest Obligation requires a broker-dealer to have policies and 

procedures that are reasonably designed to identify and disclose and mitigate, or eliminate, any 

conflicts of interest associated with recommendations that create an incentive for the associated 

person or the firm to place the interest of the associated person or the firm ahead of the interest 

of the retail customer, including conflicts of interest that arise from compensation arrangements 

between broker-dealers and their associated persons.  Depending on how a broker-dealer 

complies with the Conflict of Interest Obligation, compensation arrangements between broker-

dealers and their associated persons may change as a result of establishing these policies and 

procedures. For example, as discussed above in Section III.B.2.e, in response to the DOL 

Fiduciary Rule, which among other things, was designed to restrict broker-dealer activities and 

reduce the conflicts of interest of a broker-dealer and those of its associated persons, some 

broker-dealers altered the compensation for their associated persons. Specifically, some broker-

dealers chose to equalize commissions and deferred sales charges charged across similar 



584 

 

securities or investment strategies. Others chose to restrict or eliminate sales quotas, contests, 

special awards, and bonuses, including deferred bonuses as part of the recruitment efforts.1276 It 

is possible that some broker-dealers may choose to comply with the Conflict of Interest 

Obligation by establishing policies and procedures that would address conflicts using these or 

similar methods. It is also possible that some broker-dealers may rely on existing policies and 

procedures that address conflicts through methods such as compliance and supervisory systems 

that are consistent with the Conflict of Interest Obligation.  

Some of these methods may reduce the overall compensation of the associated person 

from providing recommendations (e.g., altering certain bonuses).  The same methods or others 

(e.g., altering deferred recruiting bonuses) may complicate a broker-dealer’s hiring of new 

associated persons.  However, to the extent that these methods address the conflicts of interest of 

a broker-dealer or those of its associated persons in an effective manner, these methods may 

enhance the efficiency of the recommendations provided by a broker-dealer and its associated 

persons, and, therefore benefit retail customers.     

                                                                                                                                                             

 

1276  However, we understand that following the decision by the Fifth Circuit to vacate the 
DOL Fiduciary Rule, some broker-dealers may have reverted back to compensation 
arrangements that they had in place prior to the DOL Fiduciary Rule. For instance, as 
discussed in Section III.B.2.e.ii, supra, some broker-dealers reinstated their deferred 
recruiting bonuses.   

 



585 

 

In general, if a broker-dealer implements policies and procedures pursuant to the Conflict 

of Interest Obligation that may result in a significant reduction in the overall compensation that 

an associated person receives from providing recommendations, the associated person may have 

an incentive to register as an investment adviser, if not already registered as one, and provide 

advice mostly or only in an investment adviser capacity.   

To the extent broker-dealers establish, maintain, and enforce policies and procedures that 

are effective at reducing the incentives of an associated person to put the interest of the broker-

dealer or the associated person ahead of the interest of the retail customer, the Conflict of Interest 

Obligation would reduce the effect of these conflicts on the recommendations provided by 

associated persons to retail customers. In this way, complying with the Conflict of Interest 

Obligation would increase the efficiency of the recommendations for retail customers, relative to 

the regulatory baseline. This, in turn, would reduce the agency costs associated with the broker-

dealer’s and its associated persons’ incentives that are created by their conflicts of interest. 

Lower agency costs at these broker-dealers would benefit retail customers. 

One commenter noted that the size of these benefits of Regulation Best Interest should be 

quantified relative to the baseline that includes the current regulatory regime as well as current 

practices.1277 The Commission agrees with the commenter and notes that, as discussed in Section 

III.B, broker-dealers may already have compliance and supervisory systems in place that are 

                                                                                                                                                             

 

1277  See CFA August 2018 Letter. 



586 

 

effective at reducing to a reasonable extent the effect of an associated person’s conflicts of 

interest on the recommendations provided to retail customers.1278 Therefore, for the retail 

customers of these broker-dealers, the potential benefits above may be small. In contrast, for the 

retail customers of the broker-dealers that are not currently addressing conflicts of interest in a 

manner consistent with Regulation Best Interest, the potential benefits above may be large. 

This commenter further stated that the economic analysis in the Proposing Release did 

not provide a thorough discussion of the relationship between the broker-dealer and its 

associated persons with a focus on the incentives of the associated persons.1279 The Commission 

notes that the analysis above about the incentives of the associated persons expands the analysis 

in the Proposing Release and establishes a clear link between compensation and incentives.  

As noted in the economic analysis of the Proposing Release,1280 broker-dealers may also 

adjust their menus of securities in response to the requirement to establish, maintain, and enforce 

written policies and procedures reasonably designed to identify and mitigate conflicts of interest 

that create an incentive for the associated person to place his or her interest or the interest of the 

broker-dealer ahead of the interest of the retail customer. It is possible that some broker-dealers 

may decide to expand their offerings to better comply with the process required pursuant to the 

Conflict of Interest Obligation. For instance, broker-dealers that currently offer advice only on a 
                                                                                                                                                             

 

1278  See FINRA Conflicts Report. 
1279  See CFA August 2018 Letter. 
1280  See Proposing Release at 21658. 



587 

 

limited set of securities (e.g., proprietary securities) would have to disclose and evaluate their 

menu of securities to ensure that their policies and procedures regarding their limited menus of 

securities and the disclosures of any conflicts associated with such limitations do not result in 

recommendations that place the interest of the broker-dealer or its associated persons ahead of 

the retail customer’s interest.  

Broker-dealers may also manage conflicts of interest by limiting their menu of securities 

on which they offer recommendations. Broker-dealers may prefer a limited menu of securities to 

better mitigate the potential costs associated with compliance of Regulation Best Interest.  For 

instance, a limited menu of securities may result in more homogenous product fees across 

comparable securities or investment strategies, which would help reduce the effect of certain 

conflicts of interest on the recommendations provided to retail customers. Broker-dealers may 

also respond by limiting their menus of securities because they may have conflicts of interest due 

to variation in the compensation they receive from product sponsors, as discussed above.   

It is possible that complying with the Conflict of Interest Obligation in this manner may 

result in securities menus that limit an associated person’s choices of investments when 

providing a recommendation to a retail customer.1281  However, as discussed below, the 

requirements of the Conflict of Interest Obligation and the Care Obligation are intended to 

                                                                                                                                                             

 

1281  See supra Section II.C.2. 



588 

 

reduce the likelihood that limitations on securities menus result in recommendations that are not 

in the best interest of the retail customer.1282  

It is also possible that broker-dealers that limit their menus of securities in response to the 

Conflict of Interest Obligation may eliminate securities or investment strategies that are inferior 

relative to other securities or investment strategies in terms of performance and costs. 

Recommendations based on menus of securities that do not contain inferior securities or 

investment strategies are more likely to be efficient for the retail customer. To the extent broker-

dealers eliminate inferior investments from their securities menus as a result of complying with 

the Conflict of Interest Obligation, Regulation Best Interest would provide a benefit for the retail 

customers of these broker-dealers.   

Broker-dealers may pass on some of the compliance costs to their retail customers. For 

instance, broker-dealers may increase their fees on the services that they provide to retail 

customers as part of the relationship, or may adopt new fees. Alternatively, broker-dealers may 

seek to renegotiate their compensation arrangements with the product sponsors in the hopes of 

extracting greater compensation (e.g., more attractive revenue-sharing agreements), relative to 

current practices. The likelihood of a favorable outcome for the broker-dealers may depend on 

whether product sponsors can charge their retail customers higher fees. However, it is likely that 

                                                                                                                                                             

 

1282  For example, if none of the securities on the menu would be in the best interest of the 
retail customer in a given set of circumstances, the associated person may not recommend 
any of the securities on the menu to the retail customer.  



589 

 

product sponsors are already charging fees that are privately optimal (e.g., maximize their 

revenue net of costs), and thus any deviations from these fees would lead to a suboptimal 

outcome for the product sponsors. In other words, product sponsors may not have an incentive to 

increase their fees. 

A number of commenters stated that policies and procedures that address how broker-

dealers manage conflicts of interest relating to limited menus of securities could impose costs on 

a retail customer when all securities on the menu have high fees or create a benefit for retail 

customers if securities with high fees are eliminated.1283 As noted in the Proposing Release and 

above, the Commission acknowledges the benefits to the retail customers of the broker-dealers 

that comply with Regulation Best Interest by eliminating inferior securities or investment 

strategies. The Commission also acknowledges the potential costs of limited menus of securities 

by expanding the Conflict of Interest Obligation to include requirements that would address 

specifically limited menus of securities and by providing a detailed analysis of the economic 

implications of these requirements, below.    

  

c. Material Limitations on Recommendations to Retail Customers 

The Conflict of Interest Obligation includes a requirement that specifically addresses 

material limitations on recommendations to retail customer (e.g., offering only proprietary or 
                                                                                                                                                             

 

1283  See, e.g., CFA August 2018 Letter; AARP August 2018 Letter; EPI Letter; Better 
Markets August 2018 Letter.  



590 

 

other limited range of securities). This provision requires broker-dealers to establish, maintain, 

and enforce written policies and procedures reasonably designed to identify and disclose any 

material limitations placed on securities or investment strategies that may be recommended to a 

retail investor and any conflicts of interest associated with such limitations in accordance with 

the Disclosure Obligation.  It further requires such policies and procedures to be reasonably 

designed to prevent such limitations and associated conflicts of interest from causing the broker-

dealer or its associated persons to make recommendations that place the interest of the broker-

dealer or associated persons ahead of the interest of the retail customer.  

As noted above, broker-dealers may limit their menus of securities in response to certain 

requirements of the Conflict of Interest Obligation. The requirements that address limited menus 

of securities are designed to help ensure that these limitations and associated conflicts of interest 

do not create incentives for the broker-dealer or its associated persons to make recommendations 

that are not in the best interest of the retail customer. The second aspect of the requirement 

would seek to ensure that the  menu of securities is not limited to the point where it restricts a 

broker-dealer and its associated persons from complying with the Care Obligation, and in 

particular with the requirement to provide recommendations that are in the customer’s best 

interest.1284 To the extent these requirements reduce the effect of the limitations of the menu of 

securities and the associated conflicts of interest on the recommendations provided by a broker-
                                                                                                                                                             

 

1284  Broker-dealers that offer a limited menu of securities may not be able to offer 
recommendations to certain clients. See also supra footnote 1282. 



591 

 

dealer or its associated persons, the Conflict of Interest Obligation would result in 

recommendations that are more likely to be efficient, relative to the baseline.  

 The requirements that address limitations of the menu of securities may have additional 

implications for certain product markets, and ultimately, retail customers. To better understand 

these implications we focus the discussion on the market for mutual funds.   

As discussed in Section III.B.3, academic literature has noted that in certain product 

markets, such as mutual funds, the different distribution channels that product sponsors use to 

reach the retail customer may cause these markets to fragment. In the market for mutual fund 

products, some products are sold to retail customers only through broker-dealers—the so-called 

“broker-sold” distribution channel—while other products are sold directly to retail customers—

the so-called “direct-sold” distribution channel.1285 The products that are sold through the 

broker-sold channel usually carry higher fees relative to comparable products that are sold 

through the direct-sold channel.1286 Higher fees on the broker-sold products reflect broker-

dealers’ compensation for distributing the product. In general, all transactions linked to the 

                                                                                                                                                             

 

1285  In this discussion, the broker-sold distribution channel includes sales that are the result of 
a recommendation provided by the broker-dealer but may also include sales that are 
solicited by the retail customer where no advice or recommendation was provided by the 
broker-dealer (i.e., unadvised sales). The direct-sold distribution channel includes 
unadvised sales through broker-dealer open platforms as well as sales that the retail 
customer solicits directly from the product sponsor. Investment advisers may also access 
products through the direct-sold distribution channel. 

1286  See, e.g., Del Guercio & Reuter (2014). 



592 

 

broker-sold distribution channel are triggered by a recommendation provided by an associated 

person of the broker-dealer. Most product sponsors currently rely on one of the two channels to 

distribute their products, but not on both.1287 

A retail customer that has an account with a broker-dealer that provides advice is not 

necessarily constrained to accessing products only through the broker-sold channel. A retail 

customer could access products from the direct-sold channel to transact on his or her own (for 

example, if the broker-dealer may not provide recommendations on a particular product).1288  A 

retail customer who has access to products from both distribution channels and who understands 

the effect of fees on a product’s performance may prefer to access a product through the broker-

sold channel if, for example, the combined cost of identifying (e.g., search costs) and accessing 

comparable direct-sold products (e.g., product fee) is higher than the total cost of the broker-sold 

product recommended by the associated person of the broker-dealer.1289 As more direct-sold 

                                                                                                                                                             

 

1287  See, e.g., Del Guercio & Reuter (2014), supra footnote 1081, and Reuter (2015), supra 
footnote 1095. 

1288  A retail customer could also access securities through financial professionals that are not 
broker-dealers, including investment advisers. 

1289  Some broker-dealers may offer securities to retail customers through both distribution 
channels, but these broker-dealers provide recommendations only on securities offered 
through the broker-sold channel. For example, some broker-dealers with open platforms 
may only provide recommendations on proprietary securities. 



593 

 

products enter the market,1290 the retail customer’s cost of identifying1291 direct-sold products 

that are comparable alternatives to a broker-sold product recommended by an associated person 

of the broker-dealer may become lower.1292  In turn, the retail customer’s demand for broker-sold 

products may decline.1293  

According to economic first principles, when enough retail customers exhibit a 

preference for direct-sold products over broker-sold products, the aggregate demand for broker-

                                                                                                                                                             

 

1290  See, e.g., ICI Letter, which shows an increasing trend in the number of mutual funds with 
no 12b-1 fees over the past 10 years. These funds are available through the direct-sold 
channel. 

1291  Broker-dealers with open platforms that allow retail customers to access securities on this 
platform without a recommendation from the broker-dealer and its associated persons 
generally provide extensive research and analytical tools. The Commission has recently 
adopted rule amendments that address research reports that broker-dealers make available 
to their retail customers. See Covered Investment Fund Research Reports, Release 33-
10580 (Nov 30, 2018); 83 FR 64180 (Dec. 13, 2018).  

1292  See, e.g., Ali Hortacsu & Chad Sylverson, Product Differentiation, Search Costs, and 
Competition in the Mutual Fund Industry: A Case Study of S&P 500 Index Funds, 119 Q. 
J. ECON. 403 (2004), who estimate an investor’s search costs for S&P500 index funds 
and show that, as the number of S&P500 index funds increased over their sample period 
spanning 1995 to 2000, the investor’s search costs generally declined. The authors further 
show that this downward trend was driven by funds that are in lower end of the search 
cost distribution and that these funds were mostly no-load funds. These no-load funds are 
usually available through the direct-sold channel.       

1293  However, a retail customer may value the services provided by a broker-dealer that 
extend beyond the provision of recommendations on securities transactions and 
investment strategies and continue to maintain an account with the broker-dealer. To 
counter the potential decline in the demand for broker-sold products, a broker-dealer may 
respond by offering more services and increasing the fee for the package of services or by 
trying to shift the retail customer to a potentially more profitable advisory account (to the 
extent that the broker-dealer offers this type of accounts).        



594 

 

sold products should decline. To remain competitive, product sponsors that rely on the broker-

sold channel to distribute their products would have to lower the fees on their products. Lower 

fees on broker-sold products may result in lower compensation for broker-dealers and their 

associated persons from providing recommendations on these products. Lower fees on broker-

sold products would benefit retail customers who access mutual fund products through the 

broker-sold channel. 

This market mechanism would allow retail customers’ demand to affect how product 

sponsors compensate broker-dealers for recommending broker-sold products. While this 

mechanism is currently available to retail customers and is considered generally effective, it is 

not clear how effective this mechanism is in all aspects of the market, particularly in the short 

run.1294 As noted by one commenter, the expense ratio for domestic equity mutual funds declined 

                                                                                                                                                             

 

1294  Recent academic research questions the effectiveness of the market mechanism, at least 
in the short run. See. e.g., Yang Sun, Does Competition Protect Retail Investors? Role of 
Financial Advice (Working Paper, Apr. 2017), available at 
https://coller.tau.ac.il/sites/coller-
english.tau.ac.il/files/media_server/Recanati/management/conferences/finance/2017/61.p
df. This research shows that the sudden entry of several low-cost index funds caused 
direct-sold actively managed funds with similar investment objectives to cut their fees by 
6.4 basis points. In contrast, broker-sold actively managed funds with similar investment 
objectives as the new entrant funds increased their fees by 12.2 basis points. The study 
further shows that while some of the fee increase in the broker-sold funds is accompanied 
by increased levels of active management, most of the fee increase (more than 60%) was 
passed on to broker-dealers. The author argues that the broker-sold actively managed 
funds are able to increase their fees only to the extent that they can signal to the market 
that they are not employing strategies that mimic index funds. 



595 

 

from 0.86 percent in 2007 to 0.59 percent in 2017, a 31% reduction over the ten year period.1295 

This commenter further notes that this downward trend in expense ratios reflects, among other 

things, a “long-running shift by investors toward lower-cost funds.” Because the number of low-

cost funds that enter the market over the period 2007-2017 has increased substantially, the 

assessment of this commenter would appear to be consistent with the market mechanism being 

effective in the long run.1296 

As noted above, the effectiveness of the market mechanism may depend on a number of 

factors, including the retail customer’s ability to understand the effect of fees on the performance 

of a product and willingness to shop around for comparable products, the product sponsor’s 

ability to signal how its broker-sold products stand out among comparable products, and the 

broker-dealer’s menu and the disclosure about potential limitations of this menu.1297  

The Conflict of Interest Obligation may improve the effectiveness of this market 

mechanism through the requirement that broker-dealers establish, maintain, and implement 

written policies and procedures reasonably designed to identify and disclose all material 

limitations of products that may be recommended and any associated conflicts of interest. This 

                                                                                                                                                             

 

1295  See ICI Letter. 
1296  Id. at 42. 
1297  As noted in supra footnote 1292, the effectiveness of this market mechanism may also 

depend on whether broker-dealers offer advisory accounts and whether these broker-
dealers can convince retail customers to switch to an advisory account rather than to a 
self-directed account. 



596 

 

requirement would result in disclosures that, while not necessarily new relative to the regulatory 

baseline, may increase the salience of the limitations of product menus and the associated 

conflicts of interest for the retail customers.1298 The added focus on these limitations may cause 

some retail customers to question whether the recommendations that they are receiving are 

taking into consideration a reasonable set of alternatives. Thus, this disclosure may encourage 

retail customers to shop for comparable products that they may prefer (e.g., based on cost 

factors) over the broker-sold products that are being recommended to them.   

As an example, a broker-dealer that is providing recommendations only for proprietary 

products would have to disclose, the material limitation that the products on the menu are all 

proprietary, and the material fact of the conflict of interest that the broker-dealer and its 

associated persons are being compensated for selling these products. As discussed above in 

Section II.C.3.f, there are a number of other potential conflicts of interest associated with 

proprietary products. While broker-dealers may disclose this information under the regulatory 

baseline, it is not clear the manner in which this disclosure currently reaches the retail 

customer.1299 The new required disclosure with respect to conflicts of interest (under the 

Disclosure Obligation) is intended to be more comprehensive and more specific, and is also 

intended to reach the retail customer more directly. From this perspective, the disclosure of the 

                                                                                                                                                             

 

1298  See supra footnote 1272 and accompanying text. 
1299  See, e.g., 913 Study. 



597 

 

limitations of the product menu and its associated conflict of interest may better inform retail 

customers’ choices and, therefore, may be more effective, compared to current disclosure forms 

of the same information.  While, generally, the effectiveness of disclosure depends on many 

factors that are well known in the academic literature, the disclosure requirement of the Conflict 

of Interest Obligation may also depend on the range of material facts that the broker-dealer 

deems necessary to disclose in order to be in compliance with the obligation.1300  

The Conflict of Interest Obligation addresses limited product menus by requiring that 

broker-dealers take measures through reasonably designed written policies and procedures to 

evaluate and prevent the limitations and the associated conflicts of interest from causing 

associated persons of the broker-dealer to make recommendations that are inconsistent with the 

requirements of Regulation Best Interest. The requirement seeks to address specific firm-level 

conflicts—namely, the conflicts associated with the establishment of a product menu—which are 

likely to affect recommendations made to retail customers and may result in recommendations 

that place the interest of the broker-dealer or its associated persons ahead of the interest of the 

retail customer.  

This requirement may have a direct effect on the relationship between broker-dealers and 

product sponsors.  To the extent that enough broker-dealers decide to no longer offer 

recommendations on certain types of products that carry higher fees (i.e., exclude them from the 
                                                                                                                                                             

 

1300  See supra Section III.B.4.c for a detailed discussion of the academic literature on 
disclosure effectiveness.  



598 

 

menus), the aggregate demand for such products may decline. Product sponsors that face 

declining demand for some of their products may respond by lowering the fees on these products 

or by repackaging these products into new and more competitive products that may again draw 

the interest of the broker-dealers. 

 

d. Elimination of Certain Sales Practices 

As part of the Conflict of Interest Obligation in Regulation Best Interest, broker-dealers 

are required to establish, maintain, and enforce 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 sales of specific securities or specific types of securities 

within a limited period of time. The Commission believes that the conflicts of interest associated 

with these practices that may create high-pressure situations for the associated persons of the 

broker-dealer to recommend a specific security over another cannot be reasonably addressed 

through disclosure and mitigation and should be addressed through elimination in order to 

comply with the requirements of Regulation Best Interest.1301  

Relative to the regulatory baseline, this requirement would provide benefits to retail 

customers. Conflicts of interest that create incentives for the associated persons to recommend a 

specific security (or specific types of securities) over another are likely to have a significant 

                                                                                                                                                             

 

1301  See also the discussion in Section II.C.3.g, supra. 



599 

 

effect on an associated person’s recommendation, even if such conflicts were disclosed and 

mitigated via policies and procedures established, maintained and enforced by the broker-dealer. 

By explicitly requiring policies and procedures reasonably designed to eliminate sales practices 

that may result in such conflicts, the requirement should neutralize the effect of these conflicts on 

the recommendations provided by associated persons to retail customers. The absence of these 

conflicts when the associated person is considering reasonably available alternatives for a 

recommendation to a retail customer, as noted in the discussion of the Care Obligation, may 

increase the efficiency of the recommendation for their retail customers. As discussed above in 

Section III.A.2, this outcome is consistent with Regulation Best Interest reducing the agency 

costs associated with a broker-dealer’s incentives or the incentives of its associated persons 

created by these conflicts of interest, which, in turn, would benefit the retail customer. 

The requirement to establish policies and procedures reasonably designed to eliminate 

certain sales practices may reduce the total compensation that a broker-dealer and its associated 

person receives from providing recommendations to retail customers. As discussed above, to the 

extent that the reduction in an associated person’s total compensation is sufficiently large, the 

associated person may have an incentive to register as an investment adviser and provide 

investment advice only in his or her advisory capacity.  Furthermore, the potential decline in the 

total compensation of an associated person of the broker-dealer due to this requirement may 

dissuade financial professionals from providing advice in the capacity of a broker-dealer, and as 

a result, broker-dealers may find it more difficult to hire new associated persons, relative to the 

baseline.  

In addition, the types of sales practices that this requirement is meant to address generally 

create incentives for associated persons to recommend certain types of securities or investment 



600 

 

strategies over certain time periods over other types of securities or investment strategies. By 

requiring broker-dealers to establish policies and procedures reasonably designed to eliminate 

certain sales practices that create these types of incentives, broker-dealers may experience a 

reduction in the revenue stream associated with certain securities or investment strategies. Thus, 

through this requirement, Regulation Best Interest may impose a cost on the broker-dealers that 

currently rely on these types of practices in order to incentivize sales. On the other hand, retail 

customers who have born costs associated with such practices will benefit from the cessation of 

these sales practices. 

As discussed above, while we are unable to quantify the full costs of Regulation Best 

Interest, including the Conflict of Interest Obligation, we are able to estimate some of the costs 

associated with the Conflict of Interest Obligation, specifically the costs related to information 

collection requirements as defined by the Paperwork Reduction Act.  As discussed further in 

Section IV.B.1, the Commission believes that broker-dealers would update their policies and 

procedures to comply with this requirement and would incur an initial aggregate burden of 

approximately 128,160 hours and an additional initial aggregate cost of approximately $25 

million, as well as an ongoing aggregate annualized burden of approximately 27,900 hours, and 

an ongoing aggregate annualized cost of approximately $2.91 million.1302 Furthermore, the 

                                                                                                                                                             

 

1302  These estimates are based on the following calculations: 120,600 hours + 7,560 hours = 
128,160 hours; $10 million + $15 million = $25 million; and 24,120 hours + 3,780 hours 
= 27,900 hours. As discussed in more detail in infra Section V.D, 120,600 hours and601 

 

Commission believes that in order to identify conflicts of interest and determine whether the 

conflicts are material, broker-dealers would incur an initial aggregate burden of approximately 

69,150 hours and an additional initial aggregate cost of approximately $15.71 million as well as 

an ongoing aggregate annualized burden of approximately 27,660 hours.1303 Thus, we estimate 

the Conflict of Interest Obligation of proposed Regulation Best Interest would impose an initial 

aggregate cost of at least $110.73 million and an ongoing aggregate annual cost of at least $20.44 

million on broker-dealers.1304 

                                                                                                                                                             

 

7,560 hours are preliminary estimates for the initial aggregate burdens for large and small 
broker-dealers, respectively, $10 million and $15 million are preliminary estimates for 
the initial aggregate costs for large and small broker-dealers, respectively, and 24,120 
hours and 3,780 hours are preliminary estimates for the ongoing aggregate burdens for 
large and small broker-dealers, respectively.  

1303  The estimate of the initial aggregate burden is based on the following calculations: 
13,830 hours + 55,320 hours = 69,150 hours, where, as discussed in more detail in 
Section V.D, 13,830 hours and 55,320 hours are estimates for the initial aggregate 
burdens for identifying conflicts of interest and determining whether the conflicts are 
material for all broker-dealers, respectively. 

1304  These estimates are calculated as follows: (90,450 hours of in-house legal counsel) x 
($415.72/hour for in-house counsel) + (27,660 hours for in-house compliance counsel) x 
($365.39/hour for in-house compliance counsel)  + (27,660 hours for identifying conflicts 
of interest) x ($229.74/hour for business line personnel) + (51,540 hours for review of 
policies and procedures) x ($309.60/hour for in-house compliance manager) + (50,302 
hours for outside legal counsel) x ($497/hour for outside legal counsel)  + (55,317 hours 
for modifying existing technology) x ($284/hour for outside senior programmer) = 
$110.73 million, and (8,040 hours of in-house legal counsel) x ($415.72/hour for in-
house counsel)  + (21,870 hours for in-house compliance counsel) x ($365.39/hour for in-
house compliance counsel)  + (21,870 hours for identifying conflicts of interest) x 
($229.74/hour for business line personnel) + (3,780 hours for review of policies and 
procedures) x ($309.60/hour for compliance manager) + (3,783 hours for outside legal 

 

 



602 

 

 

5. Compliance Obligation 

The Compliance Obligation of Regulation Best Interest requires broker-dealers to 

establish, maintain, and enforce written policies and procedures reasonably designed to achieve 

compliance with Regulation Best Interest.1305  This obligation creates an affirmative obligation 

under the Exchange Act with respect to Regulation Best Interest as a whole, while providing 

sufficient flexibility to allow broker-dealers to establish compliance policies and procedures that 

accommodate a broad range of business models.1306 

The Compliance Obligation is designed to ensure that broker-dealers have internal 

controls in place to prevent violations of Regulation Best Interest.  The policies and procedures 

required to comply with this obligation would allow the Commission to identify and address 

potential compliance deficiencies or failures (such as inadequate or inaccurate policies and 

                                                                                                                                                             

 

counsel) x ($497/hour for outside legal counsel)  + (3,773 hours for outside compliance 
services) x ($273/hour for outside compliance services) = $20.44 million. The hourly 
wages for in-house legal and compliance counsel, registered representatives, senior 
business analyst, compliance manager, and business-line personnel are obtained from 
SIFMA. The hourly rates for outside legal counsel, outside senior programmer, systems 
analyst or programmer and outside compliance services are discussed in infra Section 
V.D.  

1305  These policies and procedures are in addition to the policies and procedures required 
under the Conflict of Interest Obligation. 

1306  See supra Section II.C.4. 



603 

 

procedures, or failure to follow the policies and procedures) early on, reducing the chance of 

retail customer harm.1307     

As discussed above in Section III.B.2.d, under the regulatory baseline, broker-dealers are 

subject to supervisory obligations that, among other things, require them to establish policies and 

procedures reasonably designed to prevent and detect violations of, and achieve compliance 

with, the federal securities laws and regulations,1308 as well as applicable SRO rules.1309 Broker-

dealers would have the ability to update these policies and procedures to comply with the 

Compliance Obligation, rather than create new policies and procedures. 

The obligation indirectly benefits retail customers by ensuring that broker-dealers have 

sufficient internal controls in place to support compliance with Regulation Best Interest.  

The obligation will impose compliance costs on broker-dealers. However, these costs are 

likely to be smaller for those broker-dealers that already have effective compliance systems in 

place, including effective policies and procedures.   

Broker-dealers may incur operational costs related to training their associated persons 

and developing policies and procedures to ensure compliance with the Care Obligation.  For 

example, broker-dealers may have to provide training to their employees and other associated 

persons on how to make recommendations that do not place the interest of the broker-dealer or 
                                                                                                                                                             

 

1307  See supra Section II.C.4. 
1308  See Section 15(b)(4)(E) of the Exchange Act. 
1309  See FINRA Rule 3110 (Supervision). 



604 

 

their associated persons ahead of the interest of the retail customer.  In the Proposing Release, 

these training costs were discussed as part of a separate general best interest obligation, and our 

assessment of those costs has not changed.1310  Broker-dealers also may incur costs related to 

training their associated persons on how to determine that they have a reasonable basis to believe 

that a recommendation is in a retail customer’s best interest.  This may include training on how 

to evaluate the potential risks, rewards, and costs associated with a recommendation as well as 

how a retail customer’s investment profile affects this determination.  Additionally, broker-

dealers may incur costs related to training their associated persons on any relevant factors 

specific to making recommendations regarding IRAs, IRA rollovers, or other account types, as 

well as implicit hold recommendations resulting from agreed-upon account monitoring.  These 

training costs will be lower for broker-dealers that already operate in a manner that is consistent 

with the requirements of the Care Obligation and higher for those that do not.  Firms may already 

comply with the requirements of the Care Obligation, to varying degrees, either of their own 

volition or because they are already subject to and comply with similar obligations.  

As discussed above, while we are unable to quantify the full costs of Regulation Best 

Interest, including the Compliance Obligation, we are able to estimate some of the costs 

associated with the Compliance Obligation, specifically the costs related to information 

collection requirements as defined by the Paperwork Reduction Act.  As discussed further in 

                                                                                                                                                             

 

1310  See Proposing Release at Section IV.C.2.a. 



605 

 

Section IV.B.1, the Commission believes that broker-dealers would update their policies and 

procedures to comply with this requirement.  We estimate that broker-dealers would incur an 

initial aggregate burden of 524,404 hours and an additional initial aggregate cost of 

approximately $76.3 million, as well as an ongoing aggregate annualized burden of 452,524 

hours, and an ongoing aggregate annualized cost of approximately $2.91 million.1311 Thus, the 

Compliance Obligation of Regulation Best Interest would impose an initial aggregate cost of at 

least $214.66 million and an ongoing aggregate annual cost of at least $110.86 million on 

broker-dealers.1312 

                                                                                                                                                             

 

1311  These estimates are based on the following calculations: 80,400 hours + 4,536 hours + 
11,064 hours + 428,404 hours= 524,404 hours; $6 million + $7.5 million + $62.8 million 
= $76.3 million; and 24,120 hours + 428,404 hours = 452,524 hours. As discussed in 
more detail in infra Section V.D, 80,400 hours, 4,536 hours, 11,064 hours and 428,404 
hours are estimates for the initial aggregate burdens for large and small broker-dealers, 
updating training module, and training, respectively. In addition, $6 million, $7.5 million, 
and $62.8 million are estimates for the initial aggregate costs for large and small broker-
dealers and updating training modules, respectively. Furthermore, 24,120 hours and 
428,404 hours are estimates for the ongoing aggregate burdens for large broker-dealers 
and training, respectively. Finally, $2.91 million is the estimate of the ongoing aggregate 
cost for small broker-dealers. 

1312  These estimates are calculated as follows: (65,832 hours of in-house legal counsel) x 
($415.72/hour for in-house counsel) + (4,536 hours for in-house compliance counsel) x 
($365.39/hour for in-house compliance counsel)  + (10,050 hours for reviewing policies 
and procedures) x ($446.04/hour for in-house general counsel) + (15,582 hours for 
reviewing policies and procedures and update existing training systems) x ($309.60/hour 
for in-house compliance manager) + (428,404 hours for training) x ($233.02/hour for 
registered representative) + (27,163 hours for outside legal counsel) x ($497/hour for 
outside legal counsel) + (221,127 hours for updating training module) x ($284/hour for 
outside senior programmer or systems analyst)= $214.66 million, and (8,040 hours of in-
house legal counsel) x ($415.72/hour for in-house counsel)  + (8,040 hours for in-house 

 

 



606 

 

 

6. Record-Making and Recordkeeping 

Regulation Best Interest will also impose record-making and recordkeeping requirements 

on broker-dealers with respect to certain information collected from, or provided to, retail 

customers.  The Commission is amending Rules 17a-3 and 17a-4 of the Exchange Act, which 

specify minimum requirements with respect to the records that broker-dealers must make, and 

how long those records and other documents must be kept, respectively.  We are amending Rule 

17a-3 by adding a new paragraph (a)(35) that requires a record of all information collected from, 

and provided to, the retail customer pursuant to Regulation Best Interest, as well as the identity 

of each natural person who is an associated person of a broker or dealer, if any, responsible for 

the account.  This requirement applies to each retail customer to whom a recommendation of any 

securities transaction or investment strategy involving securities is provided.  The neglect, 

refusal, or inability of a retail customer to provide or update any information about the customer 

                                                                                                                                                             

 

compliance counsel) x ($365.39/hour for in-house compliance counsel)  + (8,040 hours 
for updating policies and procedures) x ($229.74/hour for business line personnel) + 
(8,040 hours for reviewing policies and procedures) x ($309.60/hour for compliance 
manager) + (3,783 hours for outside legal counsel) x ($497/hour for outside legal 
counsel)  + (3,773 hours for outside compliance services) x ($273/hour for outside 
compliance services) + (428,404 hours of training) x ($233.02/hour for registered 
representative) = $110.86 million. The hourly wages for in-house legal and compliance 
counsel, registered representatives, senior business analyst, compliance manager, and 
business-line personnel are obtained from SIFMA. The hourly rates for outside legal 
counsel, outside senior programmer, systems analyst or programmer and outside 
compliance services are discussed in infra Section V.D.  



607 

 

investment profile will, however, excuse the broker-dealer from obtaining that information.  Rule 

17a-4(e)(5) will be amended to require that broker-dealers retain all records of the information 

collected from or provided to each retail customer pursuant to Regulation Best Interest for at 

least six years after the earlier of the date the account was closed or the date on which the 

information was last replaced or updated.     

The requirement to create certain written records of information collected from or 

provided to a retail customer under the Disclosure Obligation will trigger a record-making 

obligation under paragraph (a)(35) of Rule 17a-3 and a recordkeeping obligation under Rule 17a-

4(e)(5) that may impose additional compliance costs on broker-dealers.  In cases where broker-

dealers choose to meet part of the Disclosure Obligation orally under the circumstances outlined 

above in Section II.C.1, Oral Disclosure or Disclosure After a Recommendation, the requirement 

to maintain a record of the fact that oral disclosure was provided to the retail customer will 

trigger a record-making obligation under paragraph (a)(35) of Rule 17a-3 and a recordkeeping 

obligation under Rule 17a-4(e)(5) that may impose additional compliance costs on broker-

dealers.  Furthermore, the Care Obligation may require creating new documents or modifying 

existing documents to reflect standardized questionnaires seeking customer investment profile 

information.  These requirements will also trigger a record-making obligation under paragraph 

(a)(35) of Rule 17a-3 and a recordkeeping obligation under Rule 17a-4(e)(5) that will impose 

additional compliance costs on broker-dealers. Currently, under Rule 17a-3(a)(17), broker-

dealers that make recommendations for accounts with a natural person as customer or owner are 

required to create, and periodically update, specified customer account information.  However, 

the information collection requirements of Rule 17a-3(a)(17) do not cover all aspects of the 



608 

 

“customer investment profile” that broker-dealers may attempt to obtain to make a customer-

specific suitability determination under the Suitability Rule.   

As noted above, the Conflict of Interest Obligation requires broker-dealers to establish 

policies and procedures that are reasonably designed to address conflicts of interest, including 

disclosing material facts associated with the conflicts.  The disclosures will be made pursuant to 

the Disclosure Obligation and are not expected to trigger record-making or recordkeeping 

obligations outside the Disclosure Obligation.  

The Commission is providing estimates of the initial and ongoing burden hours 

associated with the record-making and recordkeeping obligations of the Disclosure, Care, and 

Conflict of Interest Obligations, under certain assumptions.  These estimates are discussed in 

Section IV.B.5.  Based on these burden hours estimates, the Commission expects that the record-

making and recordkeeping obligations of Regulation Best Interest will impose an initial 

aggregate burden of 17,684,020 hours and an additional initial aggregate cost of $375,732 as 

well as an ongoing aggregate annualized burden of 5,520,800 hours on broker-dealers.1313 After 

                                                                                                                                                             

 

1313  These estimates are based on the Commission’s estimates, discussed in Section IV.B.5, 
with respect to the initial and ongoing aggregate costs and burdens imposed on broker-
dealers by the record-making obligation of proposed Rule 17a-3(a)(35) and the 
recordkeeping obligation of the proposed amendment to Rule 17a-4(e)(5) associated with 
all component obligations of Regulation Best Interest. The estimate of the initial 
aggregate burden is based on the following calculation: 4,020 hours + 4,080,000 hours + 
13,600,000 hours = 17,684,020 hours, where, as discussed in more detail in Section 
IV.B.5, 4,020 hours is the estimate of amending the account disclosure agreement by 
large broker-dealers, 4,080,000 hours is the estimate of the burden associated with filling 

 

 



609 

 

monetizing the burden hours, the record-making and recordkeeping obligations will impose an 

initial aggregate cost of at least $4,121.73 million and an ongoing aggregate annual cost of at 

least $1,736.52 million on broker-dealers.1314  

7. Approaches to Quantifying the Potential Benefits 

As discussed above, several commenters suggested that we quantify the existing harm to 

investors under the baseline and the corresponding benefit resulting from Regulation Best 

Interest.  We continue to believe that it is not possible to quantify, with meaningful precision, 

                                                                                                                                                             

 

out the information disclosed pursuant to Regulation Best Interest in the account 
disclosure agreement, and 13,600,000 hours is the estimate of the burden to broker-
dealers for adding new documents or modifying existing documents to the broker-
dealer’s existing retention system. $375,732 is the estimate of amending the account 
disclosure agreement by small broker-dealers pursuant to the record-making obligation of 
Rule 17a-3(a)(35). The estimate of the ongoing annual burden is 3,400,00 hours + 
1,060,000 hours + 1,060,000 hours = 5,520,800 hours where 3,400,00 hours is the 
estimate of complying with the recordkeeping obligation of the amendment to Rule 17a-
4(e)(5) and 1,060,000 hours are estimates of both the record-making and recordkeeping 
obligations associated with oral disclosure. 

1314  These estimates are calculated as follows: (2,010 hours of in-house legal counsel) x 
($415.72/hour for in-house counsel) + (17,680,000 hours for entering and adding new or 
modifying existing documents in each customer account) x ($233.02/hour for registered 
representative) + (2,010 hours for in-house compliance counsel) x ($365.39/hour for in-
house compliance counsel)  + (756 hours for outside legal counsel) x ($497/hour for 
outside legal counsel) = $4,121.73 million, and (3,400,000 hours for recordkeeping) x 
($365.39/hour for in-house compliance counsel) + (1,060,000 hours for record-making 
associated with oral disclosure) x ($233.02/hour for registered representative) + 
(1,060,000 hours for record-keeping associated with oral disclosure) x ($233.02/hour for 
registered representative) = $1,736.52 million. The hourly wages for in-house legal and 
compliance counsel and registered representatives are obtained from SIFMA. The hourly 
rates for outside legal counsel are discussed in infra Section IV.B.5.  



610 

 

either the existing harm or the specific benefits we expect to flow from Regulation Best Interest.  

Such an analysis, including one that would produce ranges, depends on many contingent factors 

that render any estimate insufficiently precise to inform our policy choices.1315  Nonetheless, the 

Commission has endeavored to estimate some of the potential benefits that may result from 

Regulation Best Interest using a variety of methodologies, which are explained below in more 

detail along with certain caveats and the principal assumptions relied on.  Specifically, we have 

attempted to estimate the benefit that may result from a reduction in fees due to increased 

competition; we also consider the potential benefit arising from a reduction in the relative 

performance differences of broker-sold and direct-sold mutual funds. 

The quantification exercise below provides an estimate for some of the potential benefits 

associated with Regulation Best Interest.  For example, as discussed in more detail below, a 

potential reduction in fees can benefit retail customers in other ways beyond reducing the total 

dollar amount paid for investment services.  Furthermore, as discussed elsewhere in this 

economic analysis, the rule is expected to generate other benefits for retail customers that we are 

not able to meaningfully quantify. 

                                                                                                                                                             

 

1315  See supra footnote 1156 and subsequent text for a discussion of these factors.  For these 
reasons and because we believe that quantification of the costs and benefits of the 
alternatives discussed in infra Section III.E would require still further assumptions, lead 
to additional imprecision, and yield less meaningful results, we have not included 
quantified estimates of the economic effects of these alternatives. 



611 

 

a. Benefit to Investors Due to a Potential Reduction in Fees 

As discussed above, Regulation Best Interest may reduce the attractiveness of certain 

products to broker-dealers due to the Care Obligation (e.g., the emphasis on the need to consider 

cost, among other things) and the Conflict of Interest Obligation (e.g., addressing conflicts of 

interest, including product menu limitations) and/or may reduce retail customers’ aggregate 

demand for certain products due to the Disclosure Obligation (e.g., due to a reduction in any 

information asymmetry with respect to fees).  To the extent that Regulation Best Interest 

produces these effects on certain products, the affected product sponsors may react by lowering 

the fees that they charge retail customers on these products to be more competitive, or by 

repackaging these products into new products that are more competitively priced. The increased 

competition generated by the lower fees for affected products may further incentivize other 

product sponsors (i.e., those not directly affected by Regulation Best Interest) to lower their fees 

as well.1316  Alternatively, a product sponsor may preempt the potential decline in the aggregate 

demand for its products by lowering the fees before other sponsors do. 

For the purposes of calculation, we assume that this potential competition in prices results 

in a new long-run equilibrium in this product market, in which product sponsors charge fees that 

are close to or equal to their marginal costs.  Lower fees translate into direct savings to retail 
                                                                                                                                                             

 

1316  A product sponsor that does not lower its fees on a given product may risk experiencing 
low retail customer aggregate demand or low demand from broker-dealers as a result of 
Regulation Best Interest.  To stay competitive this product sponsor may have to lower the 
fees on its product. 



612 

 

customers.  If a portion of fees collected from retail customers serves to compensate broker-

dealers for selling certain investment products, then lowering those fees could also translate into 

less severe conflicts of interest.  Thus, a reduction in fees may improve the efficiency of the 

recommendations that broker-dealers make to retail customers.  This potential increase in the 

efficiency of the recommendations received also benefits retail customers.1317  

The market for mutual fund products may illustrate the potential for attaining such a new 

long-run equilibrium as a result of Regulation Best Interest.  We focus on mutual funds for this 

analysis because of the available data for mutual funds, but we expect the same or similar 

dynamics could apply to other financial products.  As this market transitions toward this new 

long-run equilibrium, total fund expenses (i.e., distribution expenses and management fees) that 

are in excess of the marginal cost of distributing and operating the fund may be reduced in a 

number of ways, including by lowering fees, reliance on alternative distribution channels, or 

exiting the market in whole or in part (i.e., by limitations on offerings).  Below we attempt to 

quantify the benefits associated with this potential long-run equilibrium in the market for mutual 
                                                                                                                                                             

 

1317  For purposes of this analysis, we assume that product sponsors respond to competitive 
pressures by lowering their fees.  However, competition may affect quality in addition to 
price.  For example, product sponsors may choose to offer higher quality products which 
may be costlier to produce (e.g., because they must hire more skilled managers or apply 
more costly technology) and as such require higher fees.  Alternatively, product sponsors 
may lower fees by reducing the quality of their product (e.g., hiring fewer skilled 
managers) and, as a result, offering lower fee products that may produce lower average 
returns. Competition along both of these dimensions may allow retail customers to 
choose different combinations of quality and price, depending on their individual 
preferences. 



613 

 

fund products as a result of such reduction in fees, relative to the baseline, assuming all funds 

reduced fees to marginal costs. To this end, we start with the current distribution of fees of funds 

within each Center for Research in Security Prices (CRSP) objective class.1318 We focus on 

funds that have reported this information in 2018 in CRSP.  We perform the analysis using total 

fees (i.e., fund expense ratios).  As an alternative, we also perform the analysis using the 

component of the total fees that are allocated toward distribution and marketing expenses, and 

that we can observe, namely 12b-1 fees.1319   

We estimate the marginal cost of distributing and operating a non-index fund in a given 

CRSP objective class (i.e., strategy) as the minimum total fee of the funds in that class, after 

excluding index funds. Similarly, we estimate the marginal cost of operating an index fund in a 

given CRSP objective class as the minimum total fee of the index funds in that class. We then 

calculate the maximum “excess fee” for a fund (index or non-index) as the difference between 

                                                                                                                                                             

 

1318  Calculated based on data from the Center for Research in Security Prices (CRSP), 
University of Chicago Booth School of Business.  Funds with different objectives may 
incur different marginal costs due to the frequency of trading in the markets that are 
reflective of the objective of the fund, advertising to reach a certain clientele, distribution 
costs, etc. The CRSP Mutual Fund dataset includes a breakdown of mutual funds by their 
objective types. 

1319  12b-1 fees are paid out of fund assets to cover the costs of marketing and selling fund 
shares. "Distribution fees" include fees to compensate brokers and others who sell fund 
shares, and to pay for advertising and printing and mailing prospectuses to new investors. 
"Shareholder service fees" are fees that cover the cost of responding to investor inquiries 
and providing investors with information.  This analysis excludes loads because, unlike 
12b-1 fees, loads cannot be separately broken out.    



614 

 

the actual total fee of the fund and the marginal cost of the CRSP objective class that contains the 

fund.  By construction, the excess fee cannot be negative.  

We obtain an aggregate amount of reduced fees of approximatively $22.2 billion for non-

index funds and $1.4 billion for index funds annually at the new potential equilibrium.1320 The 

aggregate amount of saved fees across index and non-index funds becomes approximatively 

$23.6 billion. Similarly, if we focus on 12b-1 fees only, the aggregate amount of saved fees are 

$9.13 billion for non-index funds and $0.32 billion for index funds, or $9.45 billion across both 

index and non-index funds. 

Using certain assumptions to calculate the present value of this potential fee 

reduction,1321 we calculate the net benefit of the new equilibrium as the difference between the 

                                                                                                                                                             

 

1320  We calculate the dollar value associated with these excess fees by multiplying the excess 
fees of a fund with total net assets (TNA) of the fund and then aggregating across funds. 
This amount represents the capital that would be reallocated towards more efficient funds 
and can be thought of as “fees saved” by retail customer as this product market shifts 
from the baseline equilibrium to the new equilibrium. 

1321  First, we note that expense ratios for equity mutual funds have declined at a rate of about 
3% per year since 2000.  This rate doubles to 6% if we focus on the period following 
FINRA’s adoption of the Suitability Rule in 2011. We assume that under the current 
equilibrium, or “baseline equilibrium,” excess fees—as defined above—would continue 
to decline at the rate of 3% per year. This rate of decay corresponds to a half-life of 
approximatively 23 years.  We further assume that as the product market shifts towards 
the new equilibrium, excess fees decline at a rate that is at least as high as the post-2011 
rate.  Because Regulation Best Interest enhances the broker-dealer standard of conduct 
established by the Suitability Rule—particularly with respect to the disclosure, mitigation, 
or elimination of conflicts of interest, which is not addressed by the Suitability Rule—and 
the federal securities laws, we believe that a rate of decay that is at least as large as the 
one observed in the post-2011 period is not unreasonable.  Under this assumption, we 

 

 



615 

 

two present values of declining perpetuities that pay the dollar value associated with excess fees 

under the baseline equilibrium and the new equilibrium, respectively, for each of the three 

scenarios. When using the total fees, we obtain an expected net benefit of $35.21 billion in the 

moderate decay scenario, $59.15 billion in the accelerated decay scenario, and $76.49 billion in 

the rapid decay scenario. Similarly, when using 12b-1 fees only, we obtain an expected net 

benefit of $14.10 billion in moderate decay scenario, $23.69 billion in the accelerated decay 

scenario, and $30.63 billion in the rapid decay scenario. 

b. Benefits to Investors Due to a Potential Reduction in the Relative 
Underperformance of Broker-versus Direct Sold Mutual Funds 

Another way to estimate the potential benefits of Regulation Best Interest is to use 

aspects of the approach used in the CEA Study and the DOL RIA, as suggested by several 

commenters.1322  Specifically, we rely on academic literature claiming that, to varying degrees, 

broker-sold mutual funds underperform direct-sold mutual funds and assume that 

underperformance reflects agency costs associated with the conflicts of interest that may be 

                                                                                                                                                             

 

consider three scenarios: (1) moderate decay at 6%; (2) accelerated decay at 9%; and (3) 
rapid decay at 12%.  The half-life for each of these scenarios is 11.5 years, 7.7 years, and 
5.8 years, respectively.  Finally, we assume that the opportunity cost of the excess fees is 
equal to the expected rate of return on the value-weighted market portfolio, as defined in 
CRSP, as these fees encumber capital that would have otherwise been invested in 
efficient funds. To estimate the expected return on the market portfolio, we assume that 
the discount rate is the geometric average of the annual rate of return on the market 
portfolio over the period 1927-2018, namely 9.76%. 

1322  See supra footnote 1167. 



616 

 

present in recommendations provided by broker-dealers.  Although this literature addresses only 

a portion of the AUM affected by Regulation Best Interest, we use methods from these studies to 

estimate the monetary effect the final rule might produce by reducing the effect that conflicts of 

interest have on the recommendations provided by broker-dealers.  

Total AUM of load and no-load long-term mutual funds in the U.S. as of the end of 2018 

are approximately $12.4 trillion, with $10.4 trillion attributable to no-load funds and $2.1 trillion 

attributable to load funds.1323  To estimate the monetary effect of potential conflicts of interest as 

they pertain to mutual funds, we use estimates of the difference in net returns (gross returns on a 

fund’s performance less fees and other expenses associated with the fund) between broker-sold 

funds and funds that are direct-sold from Reuter (2015).1324  We then apply this difference to the 

aggregate market capitalization of load funds, which we assume are sold with a recommendation 

from a broker-dealer because we cannot identify the channel through which mutual funds are 

sold or whether each sale through the broker-sold channel involves a recommendation.  To the 

extent that no-load funds are also sold by broker-dealers, this assumption may cause us to 

underestimate the portion of mutual fund AUM that are sold with a recommendation from a 

                                                                                                                                                             

 

1323  See Investment Company Institute 2019 Fact Book, Figure 6.12. 
1324  See Reuter (2015), supra footnote 1095.  In contrast to the DOL RIA, we do not base our 

analysis on excess loads, as estimated in Christoffersen et al. (2013), supra footnote 
1081.  Prior commenters noted that the average excess load, by definition, is zero and 
would likely yield a much lower estimate of aggregate harm, than the estimate published 
by the CEA and include in the DOL RIA.  See, e.g., Lewis (2017), supra footnote 1099.  
See also supra footnotes 1169 and 1170.   



617 

 

broker-dealer.1325  Because the data in Reuter (2015) ends in 2012, for the purposes of this 

approach we assume that the relative underperformance of broker-sold funds, and hence our 

application of this underperformance to load funds as a proxy for funds sold with a 

recommendation from a broker-dealer, remains unchanged from 2012.1326  

Reuter (2015) employs a variety of methods in computing the difference in net returns 

between broker-sold and direct-sold actively managed funds, including different ways of 

computing net returns (e.g., net return, net return plus 12b-1 fees, net alphas, and ordinary least-

squares and weighted least-squares regression methods), different samples (e.g. “non-specialized 

domestic equity”), and different weighting schemes (e.g. equally weighted or value weighted 

returns).  Reuter concludes by noting that the performance difference between broker-sold and 

direct-sold actively managed mutual funds is likely to fall between 0.20% and 0.47%, depending 

whether or not 12b-1 fees are included in the estimation.  Given that the underperformance only 

affects broker-sold funds, and applying these underperformance estimates to load funds, the 

estimated monetized underperformance of broker-sold funds ranges from $4.1 billion per year to 

$9.7 billion per year.   

                                                                                                                                                             

 

1325   Brokers may still be compensated for selling no-load funds by 12b-1 fees, revenue 
sharing, or other arrangements. 

1326  See supra footnote 1102 for discussion of how trends in the relative performance of load 
funds may have changed in more recent years. 



618 

 

As discussed elsewhere in this release, we expect Regulation Best Interest will reduce the 

severity of conflicts of interest that may contribute to the underperformance between broker-sold 

and direct-sold mutual funds.  However, the range noted above most likely overestimates the 

expected reduction in harm associated with broker-sold mutual funds due to Regulation Best 

Interest for a number of reasons. First, as discussed by Bergstresser et al. (2009), broker-sold 

funds can be sold by both broker-dealers and investment advisers (e.g., dually registered 

investment advisers), and the data these studies relied upon is not sufficiently granular to identify 

the fraction of broker-sold funds sold by each type of financial professional.1327  Because 

Regulation Best Interest applies to registered broker-dealers, this range would need to be 

narrowed to reflect the proportion of broker-sold funds sold by registered broker-dealers.  

Second, the estimated range fully attributes the differences between direct-sold funds and 

broker-sold funds to conflicts of interest between retail customers and broker-dealers.  This 

might over-estimate the benefits of Regulation Best Interest because there might be other 

unobservable systematic differences between investors who choose direct-sold funds versus 

those who choose to employ a financial professional.  For example, retail customers that buy 

broker-sold funds might be willing to pay more for those funds if they receive intangible benefits 

from a broker-dealer’s recommendation that are not reflected in the relative performance 

between funds sold through these two channels.  Furthermore, not all sales in the broker-sold 

                                                                                                                                                             

 

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



619 

 

channel are triggered by recommendations provided by broker-dealers or their associated persons.  

For example, customer-directed transactions may not involve a recommendation at all.  

Third, measuring a fund’s performance using its net return relative to a benchmark might 

not be the most accurate measure of a fund manager’s skill or the value created by a fund to an 

investor.1328  Therefore, estimating investor harm assuming this definition of the value created by 

a fund might potentially overstate or understate this harm.  

Taking into account these caveats,1329 to the extent that Regulation Best Interest mitigates, 

and in the limit, eliminates the adverse effects of conflicts of interest on broker-dealers’ 

recommendations, we estimate that the benefits attributable to Regulation Best Interest could be 

as large as $4.1 billion per year to $9.7 billion per year when estimated assuming that the relative 

underperformance of broker-sold mutual funds estimated in the academic literature reflects 

conflicts of interest that will eventually be eliminated. 

As with our other estimates of the benefits above, we assume that there is already a 

decreasing trend in the underperformance gap under the baseline that is consistent with the 

decreasing trend in mutual fund expense ratios of 3%, and that Regulation Best Interest will 

accelerate this trend to a decay rate under three scenarios: 1) moderate decay at 6%; 2) 

                                                                                                                                                             

 

1328  See supra footnote 1176. 
1329  See supra footnotes 1172–1178 for further discussion of the limitations that apply in 

using the relative underperformance of broker-sold mutual funds as an estimate of 
investor harm and, therefore, the benefits of Regulation Best Interest. 



620 

 

accelerated decay at 9%; and 3) rapid decay at 12%.  Similarly, we assume a discount rate of 

9.76% as above to value these cash flows.  Under these assumptions, the present value of the 

potential benefits of Regulation Best Interest in the mutual fund sector, relative to the baseline, 

from limiting or eliminating the adverse effects of conflicts of interest could be as large as 

approximately $6.8 to $16 billion in the moderate decay scenario, $11.4 to $26.7 billion in the 

accelerated decay scenario, and $14.7 to $34.5 billion in the rapid decay scenario. 

Finally, we can obtain an approximate estimate of the present value of the costs 

associated with Regulation Best Interest using the costs estimated in Section IV for purposes of 

the Paperwork Reduction Act, which imply aggregate initial costs of approximately $5.96 billion 

and ongoing costs of $2.37 billion.  Assuming the initial costs are incurred one year from the 

rule’s enactment, and using a discount rate of 9.76% as above, the present value of these costs is 

approximately $27.5 billion.  Note that this cost estimate cannot be directly compared with the 

benefit estimates above as the benefits estimates are with respect to mutual funds only. 

D. Efficiency, Competition, and Capital Formation 

As discussed above, Regulation Best Interest is designed to address the agency costs that 

arise when an associated person of the broker-dealer provides a recommendation to a retail 

customer that may not be fully addressed by the regulatory baseline. Regulation Best Interest is 

intended to reduce agency costs and other costs by enhancing the standard of conduct of broker-

dealers, increasing the effectiveness of disclosure to allow retail customers to make a more 

informed decision with respect to the recommendation they receive and by requiring broker-

dealers to implement policies and procedures reasonably designed to reduce the effect of 

conflicts of interest on recommendations to retail customers.  Specifically, the Disclosure 

Obligation and Conflict of Interest Obligation require broker-dealers to disclose information that,621 

 

while not necessarily new in all instances, will reach retail customers more directly and more 

timely than under the regulatory baseline. In addition, the disclosed information would raise a 

retail customer’s salience of fees, scope of the relationship, conflicts of interest, and limitations 

of the menu of securities from which the retail customer receives recommendations as potential 

factors affecting the recommendations of a broker-dealer or its associated persons. The content 

and form of disclosure may help some retail customers make more informed decisions with 

regards to whether to act on a recommendation provided by an associated person of the broker-

dealer. Regulation Best Interest may also reduce the agency costs faced by these retail customers.  

The Conflict of Interest Obligation also requires broker-dealers to implement policies and 

procedures to reduce the effect of conflicts of interest and securities menu limitations on 

recommendations to retail customers. For broker-dealers that implement more effective policies 

and procedures, the obligation may increase the efficiency of the recommendations for their 

retail customers. As a result, Regulation Best Interest may reduce the agency costs faced by these 

retail customers.  

The Care Obligation requires a broker-dealer and its associated persons to have a 

reasonable basis to believe that a recommendation provided to a retail customer is in the 

customer’s best interest. This reasonable basis should include factors similar to those identified 

by the Suitability Rule of the current regulatory regime as well as additional factors. For example, 

relative to the regulatory baseline, the Care Obligation requires that a broker-dealer and its 

associated persons consider costs, among other factors, and establish a direct link between the 

attributes of a security or investment strategy and the retail customer’s best interest. By requiring 

consideration of costs and by including an explicit link between the investment-related factors 

and the best interest, the obligation may increase the efficiency of the recommendations for the 



622 

 

retail customer. As a result, Regulation Best Interest may reduce the agency costs faced by these 

retail customers. 

Through these effects, as discussed below, Regulation Best Interest may have an effect 

on competition, capital formation, and efficiency. 

1. Competition 

Regulation Best Interest may have competitive effects for the market for investment 

advice and may affect how broker-dealers compete with each for retail customers. As discussed 

in Section III.C, the brokerage industry currently recognizes that broker-dealers and their 

associated persons may have conflicts of interest that create incentives for broker-dealers or their 

associated persons to make recommendations that, while suitable for their retail customers, may 

not be in the best interest of (and may not be the most efficient recommendations for) such 

customers. As noted above in Section III.B.2.c, a FINRA survey suggested that broker-dealers 

currently employ different methods for managing conflicts of interest, with some methods being 

more effective than others at reducing the effect of conflicts of interest on recommendations. 

These methods generally depend on the size and complexity of a broker-dealer’s business model. 

Against this backdrop, the cost of complying with Regulation Best Interest, scaled by the size 

and complexity of a broker-dealer’s business activities, may be higher for broker-dealers that 

currently employ less effective methods for managing conflicts of interest.  



623 

 

Relative to broker-dealers that face lower compliance costs, broker-dealers that face 

higher compliance costs may be at a disadvantage when competing for retail customers and may 

not be able to fully pass on these costs to their retail customers.  For example, the presumption 

related to the titles “adviser” and “advisor” may impose higher costs on broker-dealers that use 

these terms  in their names or titles, but that are not dual-registrants.1330  The extent to which 

broker-dealers are able to pass on costs to their retail customers depends on a number of factors 

that include the availability of close substitutes for the services provided by broker-dealers and 

the cost to retail customers of switching accounts to a competing broker-dealer, investment 

adviser, or other financial services provider.  If broker-dealers are unable to pass costs through to 

customers, it is possible that some of the broker-dealers that face high compliance costs may 

decide to exit the market for investment advice in the capacity of a broker-dealer. 

 The potential competitive effects associated with compliance costs could be further 

exacerbated by how broker-dealers choose to comply with the component obligations of 

Regulation Best Interest. As discussed in Section III.C.4, broker-dealers are given flexibility 

when addressing conflicts of interest through policies and procedures. Because Regulation Best 

Interest and the component obligations are generally principles-based, a broker-dealer would 

have to determine what constitutes effective means of addressing a given conflict of interest, and 

how it should relate to the size and complexity of a broker-dealer’s business model. For a broker-

                                                                                                                                                             

 

1330  See supra footnotes 1216-1220. 



624 

 

dealer that is dually registered or for a broker-dealer that is affiliated with an investment adviser, 

the overall costs of complying with Regulation Best Interest may encourage the broker-dealer to 

exit the market for providing investment advice in the capacity of a broker-dealer and, instead, 

provide advice only in the capacity of an investment adviser. Whereas broker-dealers have 

explicit requirements to establish written policies and procedures reasonably designed to disclose, 

mitigate or eliminate identified conflicts of interest that create an incentive for the associated 

persons to place their interest ahead of the retail customer, the fiduciary standard for investment 

advisers relies on full and fair disclosure and informed consent to address conflicts of 

interest.1331  Investment advisers must also adopt and implement written policies and procedures 

reasonably designed to prevent violations of the Advisers Act, including violations related to 

undisclosed conflicts of interest.1332  More generally, compliance costs may drive such firms to 

no longer offer advice in the capacity of a broker-dealer if firms anticipate the profitability of 

their broker-dealer business under Regulation Best Interest to be lower than the profitability of 

their advisory business.   

                                                                                                                                                             

 

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

1332 See Advisers Act Rule 206(4)-7. 



625 

 

 Similar concern over costs of complying with Regulation Best Interest may deter some 

broker-dealers from entering the market for investment advice. Higher entry costs may have 

long-run competitive effects on prices paid by retail customers, as incumbents adjust their 

strategic behavior to reflect a lower threat of competition from new entrants, relative to the 

baseline.1333 Regulation Best Interest may also encourage competition for retail customers to the 

extent that the Disclosure Obligation increases the retail customers’ salience to variables such as 

fees and conflicts of interest that would facilitate comparability across broker-dealers. For 

example, retail customers may form preferences over some or all of the disclosed variables, such 

as fees, securities or service offerings, and range of conflicts of interest, and may choose one 

broker-dealer over another or over an investment adviser based on these preferences. In turn, if 

firms anticipate that there is a possibility that retail customers may use the disclosed variables for 

comparability purposes, broker-dealers may compete over some or all of these variables to attract 

more retail customers. This potential competition may result in greater securities or service 

offerings, or lower fees for retail customers.  

Regulation Best Interest may also affect how broker-dealers compete with each other 

when negotiating with investment sponsors for access to securities. The findings of the 

aforementioned FINRA survey suggest that broker-dealers may face different degrees of 

                                                                                                                                                             

 

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

 



626 

 

competition when negotiating with product sponsors for access to certain securities. For instance, 

the survey observed that some product sponsors rate the broker-dealers that are interested in 

distributing their securities based on criteria such as product expertise and experience, the quality 

of the control environment, and the strength of their sales practices. Broker-dealers that have 

higher ratings, based on these criteria may be given access to a broader range of securities, 

including more complex securities. In contrast, broker-dealers that have lower ratings may be 

given access to a narrower range of securities. To the extent Regulation Best Interest has the 

effect of increasing and homogenizing the product expertise and experience (e.g., the Care 

Obligation) and the quality of the control environment (e.g., the Conflict of Interest Obligation) 

across the complying broker-dealers, the final rule may increase the competition across firms 

when negotiating with product sponsors. This increased competition may allow product sponsors 

to economize on the distribution costs, and may result in lower fees for retail customers. 

 Regulation Best Interest may also have competitive effects for the market for investment 

advice, more generally. Regulation Best Interest may affect how broker-dealers compete with 

firms that provide advice in a capacity other than as a broker-dealer, such as an investment 

adviser. Under the regulatory baseline, investment advisers owe a fiduciary duty to their clients. 



627 

 

Some commenters describe this standard of conduct as a “higher” standard compared to the 

standard of conduct applies to broker-dealers under the regulatory baseline.1334   

For some retail customers the duty owed to them by their firm or financial professional 

may be a determining factor when deciding which type of firm or financial professional they 

want to use.  As previously noted, key elements of the standard of conduct that applies to broker-

dealers, at the time a recommendation is made, under Regulation Best Interest will be 

substantially similar to key elements of the standard of conduct that applies to investment 

advisers pursuant to their fiduciary duty under the Advisers Act.  As such, the standard of 

conduct under Regulation Best Interest may make broker-dealers more attractive to certain retail 

customers who seek recommendations for securities transactions or investment strategies in a 

more cost effective manner, but worry about the duties owed to them by their financial 

professional. As a result, Regulation Best Interest may increase the competition between broker-

dealers and investment advisers for retail customers interested in obtaining investment advice.  In 

competing for business, broker-dealers and investment advisers may lower their fees, resulting in 

retail customers paying less for obtaining investment advice. To the extent that this potential 

lower cost causes an increase in the demand for investment advice in the capacity of a broker-

dealer, this positive competitive effect may offset some of the negative potential competitive 

                                                                                                                                                             

 

1334  See Letter from Ken Fisher, Fisher Investments (Jul. 31, 2018) (“Fisher Letter”); PIABA 
Letter; FPC Letter; NASAA August 2018 Letter; U. of Miami Letter; Rhoades August 
2018 Letter. 



628 

 

effects of Regulation Best Interest, such as higher cost of entry in the market for investment 

advice in the capacity of a broker-dealer relative to the baseline, as discussed above. 

The Disclosure Obligation may also encourage competition for retail customers across 

broker-dealers and investment advisers. As noted above, the Disclosure Obligation would require 

broker-dealers to make full and fair disclosure of all material facts relating to the scope and terms 

of the relationship with the retail customer and all material facts relating to conflicts of interest 

that are associated with a recommendation. Investment advisers are also required to provide full 

and fair disclosure of material facts about similar elements under the current regulatory regime. 

To the extent that the Disclosure Obligation raises the salience of variables that may facilitate 

comparison across broker-dealers and investment advisers, Regulation Best Interest may 

encourage competition between broker-dealers and investment advisers.  

Regulation Best Interest may also have competitive effects for financial professionals that 

offer investment advice in a capacity other than that of a broker-dealer (e.g., investment advisers 

and other financial professionals that are not registered with the Commission, such as insurance 

companies, banks, and trust companies). As discussed above in Section III.C.4, depending on the 

effectiveness of disclosure and the effectiveness of policies and procedures that address 

securities menu limitations (e.g., the Disclosure Obligation and Conflict of Interest Obligation), 

Regulation Best Interest may reduce the retail customers’ aggregate demand for certain securities 

that are distributed by broker-dealers and securities on which broker-dealers or their associated 

persons provide recommendations. Instead, retail customers may access some of these or 

comparable securities from other financial professionals. For example, a retail customer may 

access certain securities offered by broker-dealers through corporate fiduciaries such as 

commercial banks or trust companies. Alternatively, a retail customer may open an advisory 



629 

 

account and access securities that are comparable to those offered by the broker-dealer. To the 

extent that Regulation Best Interest causes a potential reduction in the retail customers’ 

aggregate demand for securities offered by broker-dealers, retail customers’ aggregate demand 

may increase for securities offered by non-broker-dealers.  Regulation Best Interest may also 

affect how product sponsors compete for flows from retail customers. As discussed above in 

Section III.C.4, depending on the effectiveness of disclosure and the effectiveness of policies and 

procedures that address limitations of the menu of securities (e.g., Disclosure and Conflict of 

Interest Obligations), Regulation Best Interest may reduce the aggregate demand for certain 

sponsors’ securities. To remain competitive, product sponsors that face decreased demand as a 

result of Regulation Best Interest may reprice their securities (e.g., by offering different share 

classes), lower their fees, or seek alternative distribution channels that are not affected by 

Regulation Best Interest.  For example, product sponsors may choose to distribute their securities 

through investment advisers or through commercial banks to the extent that the banks can engage 

in limited broker-dealer activity, subject to certain conditions, without having to register as 

broker-dealers.1335 Finally, product sponsors may choose to distribute their securities directly to 

retail investors rather than indirectly, through broker-dealers. The potential competitive effect of 

                                                                                                                                                             

 

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

 



630 

 

Regulation Best Interest on product sponsors may manifest itself in lower product fees for retail 

customers. 

2. Capital Formation and Efficiency 

Regulation Best Interest is designed to reduce the agency and other costs to retail 

customers associated with obtaining recommendations from broker-dealers. As discussed above, 

to reduce these costs, Regulation Best Interest would impose obligations on broker-dealers that 

are designed to increase the efficiency of the recommendations to retail customers relative to the 

recommendations that broker-dealers and their associated persons provide to retail customers 

under the regulatory baseline. 

To the extent retail customers receive recommendations that are more efficient relative to 

the baseline, Regulation Best Interest would increase the efficiency of the portfolio allocation 

that a retail customer makes as a result of the recommendation received. As discussed above in 

Sections III.A.2 and III.C, this would occur when a retail customer increases the allocative 

efficiency of his or her portfolio when the recommendation leads to a reallocation of resources 

across time and market and economic conditions that generate a higher net benefit to the retail 

customer, relative to the baseline. Thus, to the extent that Regulation Best Interest increases the 

efficiency of the associated persons’ recommendations to retail customers, the final rule would 

have a positive effect on the retail customers’ allocative efficiency. 

Regulation Best Interest may also increase the efficiency of the recommendations 

involving rollovers or transfers of assets from retirement accounts to other taxable or non-taxable 

accounts, relative to the baseline. As noted above, the incentives associated with this type of 

recommendation are particularly acute because of the size of the transaction and the importance 

to the retail customer (e.g., given that the amount of assets associated with such 



631 

 

recommendations can be a significant portion of a retail customer’s net worth). The potential 

increase in the efficiency of this type of recommendation may improve the allocative efficiency 

of assets held in retirement accounts, and may encourage retail customers to consider a rollover 

or transfer of assets recommendation to potentially increase the efficiency of their retirement 

asset allocation. 

Similarly, Regulation Best Interest may increase the efficiency of the recommendations 

regarding account types. As discussed above, currently, a dual-registrant may have an incentive 

to recommend the account type that benefits the dual-registrant at the expense of the retail 

customer. The potential increase in the efficiency of this type of recommendation under 

Regulation Best Interest relative to a similar recommendation that the dual-registrant may 

provide under the baseline may improve the allocative efficiency of the retail customer’s assets 

held in this account.  

The possibility that Regulation Best Interest may increase the efficiency of the 

recommendations provided by the associated persons of the broker-dealer may enhance the 

attractiveness of broker-dealer services for those investors who currently do not invest through 

broker-dealers. Although there are costs associated with these requirements, the protections 

deriving from these requirements may benefit investors, issuers, and intermediaries by helping to 

create a marketplace where a higher number of retail customers invest through broker-dealers, 

relative to the current regulatory regime. If retail customers are more willing to participate in the 

securities markets through broker-dealers, Regulation Best Interest would have a positive effect 

on capital formation. 

 



632 

 

E. Reasonable Alternatives 

Regulation Best Interest establishes a new standard of conduct for broker-dealers under 

the Exchange Act that is intended to address the agency costs that retail customers face when 

obtaining recommendations of securities transactions and investment strategies from broker-

dealers and their associated persons.  This new standard is intended to enhance investor 

protection, while preserving, to the extent possible, retail investor access (in terms of choice and 

cost) to differing types of investment services and securities.  As noted above, the Commission 

considered several reasonable alternative policy choices, including (1) applying the fiduciary 

standard under the Advisers Act to broker-dealers, and (2) adopting a “new” uniform fiduciary 

standard of conduct applicable to both broker-dealers and investment advisers, such as that 

recommended by the staff in the 913 Study.  The Commission also considered adopting similar 

standards to those the DOL had provided under its fiduciary rule to broker-dealers and 

investment advisers.1336  We examine the effects of these primary alternatives, as well as several 

other alternatives that we considered both in the Proposing Release and in response to comments.   

 

                                                                                                                                                             

 

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

 



633 

 

1. Fiduciary Standard for Broker-Dealers 

As discussed in the Proposing Release and as raised by commenters, instead of adopting 

our approach in Regulation Best Interest, the Commission could have alternatively imposed a 

form of fiduciary standard on broker-dealers providing recommendations to retail customers. The 

Commission recognized that fiduciary standards vary among investment advisers, banks acting 

as trustees or fiduciaries, or ERISA plan providers, but fiduciaries are generally required to act in 

the best interest of their clients.1337   

Under any of the options considered, the Commission would have to craft a mechanism 

to apply a uniform standard of conduct to all financial professionals regardless of how they 

engage with their retail customers.  This approach was advocated by certain commenters, many 

of whom asserted that it would reduce retail investor confusion as it would ensure that investors 

are provided the same standard of care and loyalty regardless of what type of financial 

professional they engage.1338  As discussed above and in detail further below we believe, in 

practice, that such uniformity would be difficult to implement and disruptive to pursue as a result 

of various factors, including the key differences in the ways broker-dealers and investment 

                                                                                                                                                             

 

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

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



634 

 

advisers engage with retail clients.  Achieving such uniformity could require narrowing the type 

and scope of services permitted to be provided by various types of financial professionals.  If we 

were to pursue such an approach, it could reduce retail customers’ confusion with respect to the 

duties owed to them by the broker-dealers and investment advisers and could reduce potential 

costs to some investors associated with choosing a type of relationship that is not well suited to 

them, because under a uniform standard, retail customers of each type of financial professional 

would be subject to the same standard of conduct. 

However, this uniformity could come at a cost to both investors and financial service 

providers. Such an approach could result in a standard of conduct for broker-dealers that is not 

appropriately tailored to the structure and characteristics of the broker-dealer model (i.e., 

transaction specific recommendations and compensation), and might not properly take into 

account, or build upon, existing obligations that apply to broker-dealers, including under FINRA 

rules.1339 A potential implication of this paradigm shift would be that broker-dealers would face 

significant compliance costs, at least in the short run, relative to the regulatory baseline. 

Potentially higher compliance costs could increase the incentive to offer investment advice in the 

capacity of investment adviser and could decrease the incentive to offer investment advice in the 

capacity of broker-dealer. To the extent broker-dealers act on the increased incentives and decide 

to participate in the market for investment advice only in the capacity of investment advisers, 

                                                                                                                                                             

 

1339  See also 913 Study at 139-143. 



635 

 

retail customers could experience an increase in the cost of obtaining investment advice, relative 

to the baseline. Furthermore, as noted above, the potential exit of broker-dealers from the market 

for investment advice in the broker-dealer capacity could limit how retail customers would 

access certain securities or investment strategies and how they would pay for investment advice, 

which, in turn, could increase their costs of obtaining investment advice, relative to the 

baseline.1340  To the extent broker-dealers decide to continue to participate in the market for 

investment advice in the capacity of broker-dealers, they could pass on increased compliance 

costs, in full or in part, to their retail customers.  As a result, retail customers could experience an 

increase in the cost of obtaining investment advice, relative to the baseline. The potential 

increase in the cost of accessing investment advice could push some retail customers outside the 

market for investment advice from Commission-registered broker-dealers and investment 

advisers.1341 

We discuss each of the three options for applying a uniform fiduciary standard in more 

detail below. We compare each of the three alternatives against the regulatory baseline, which is 

the current broker-dealer regulatory regime.  In addition, we briefly discuss the differences 

between the standard of conduct imposed by Regulation Best Interest and the fiduciary standard 

under the Advisers Act. As discussed above in Section I, we believe that our approach in 

                                                                                                                                                             

 

1340  See supra Section III.D.1. 
1341  See supra Section I.A for a discussion of access to investment advice in the context of the 

DOL Fiduciary Rule. 



636 

 

adopting Regulation Best Interest will best achieve the Commission’s important goals of 

enhancing retail investor protection and decision making, while preserving, to the extent possible, 

retail investor access (in terms of choice and cost) to differing types of investment services and 

securities. 

 

a. Fiduciary Standard under the Advisers Act Applied to Broker-Dealers 

A number of commenters discussed the viability of this alternative and stated that it 

would provide superior investor protection benefits relative to the standard that the Commission 

proposed.1342  At the outset, we note that, at the time a recommendation is made, key elements of 

the standard of conduct that applies to broker-dealers under Regulation Best Interest will be 

substantially similar to key elements of the standard of conduct that applies to investment 

advisers pursuant to their fiduciary duty under the Advisers Act.  Both standards of conduct 

require that, when making a recommendation or providing advice, firms and financial 

professionals act in the best interest of the retail investor and not place the financial professionals’ 

interests ahead of the retail investor.1343  Both standards provide methods for addressing conflicts 

                                                                                                                                                             

 

1342  See Betterment Letter; Warren Letter; Fein Letter; State Treasurers Letter; AARP August 
2018 Letter; ACLI Letter; Schwab Letter. 

1343  See supra Section I.A. 



637 

 

of interest, although the mechanics of those methods and their outcomes may be different,1344 

and both standards require full and fair disclosure of material facts that affect the relationship, 

including costs.  Both standards allow each type of financial professional to agree to provide 

account monitoring services to retail investor accounts, although continuous monitoring is 

embedded in the regulatory regime and market practices for investment advisers, whereas a 

broker-dealer may agree to provide account monitoring services only to the extent that it is solely 

incidental to the primary brokerage business.1345  

We recognize that there are certain notable differences between the Advisers Act 

fiduciary standard and the Regulation Best Interest standard we are adopting.  In particular, the 

investment adviser fiduciary duty is generally principles-based, in keeping with the regulatory 

tradition and market practices for advisers,1346 whereas Regulation Best Interest, while also 

largely principles-based, establishes minimum, obligations that are generally more prescriptive 

than the fiduciary obligations under Advisers Act.  Further, advisers are able to address conflicts 

                                                                                                                                                             

 

1344  Whereas, pursuant to Regulation Best Interest, broker-dealers are required to (i) to 
establish written policies and procedures reasonably designed to identify and at a 
minimum, disclose, or eliminate, all conflicts of interest; and (ii) to establish written 
policies and procedures reasonably designed to mitigate or eliminate identified conflicts 
of interest, the fiduciary standard for investment adviser relies on full and fair disclosure 
and informed consent.   

 
1345  See Solely Incidental Interpretation.  See also supra Section II.B.2.b. 
1346  See Fiduciary Interpretation. 



638 

 

of interest through full and fair disclosure and informed consent,1347 while broker-dealers must 

have policies and procedures that are reasonably designed to identify and disclose and mitigate, 

or eliminate, any conflicts of interest associated with recommendations that create an incentive 

for the broker-dealer or its associated persons to place the interest of the broker-dealer or its 

associated persons ahead of the interest of the retail customer.  With regard to the substance of 

both standards, the investment adviser fiduciary duty generally is broader and applies to the 

entire relationship between adviser and client, including providing non-securities advice,1348 

whereas Regulation Best Interest only applies at the time of a recommendation of any securities 

transaction or investment strategy by a broker-dealer to its retail customers.1349  Where 

application of the Advisers Act fiduciary standard to broker-dealers would impose on broker-

dealers obligations similar to those of Regulation Best Interest, we anticipate similar economic 

                                                                                                                                                             

 

1347  See id. 
1348  For example, an investment adviser may consider both securities annuity products (e.g., 

variable annuities) and non-securities annuity products (e.g., fixed annuities) when 
providing advice on annuity products to a client with an advisory retirement account. 

1349  However, under the current legal and regulatory regime, broker-dealers are subject to 
other rules that apply outside the context of a recommendation, including rules regarding 
how broker-dealers market securities and services (communications with the public), how 
they execute trades (best execution), and the fees that they charge (fair and reasonable 
compensation obligations).  Moreover, broker-dealers always a have a duty of fair 
dealing with their retail customers under SRO rules.  In addition, broker-dealers are 
subject to a number of obligations that attach when a broker-dealer makes a 
recommendation to a customer, as well as general and specific requirements aimed at 
addressing certain conflicts of interest, including requirements to eliminate, mitigate, or 
disclose certain conflicts of interest.  See Proposing Release Section I.A.1. 



639 

 

effects; in contrast, where this alternative would result in different obligations, it would generate 

economic effects distinct from those of Regulation Best Interest.   

i. Fiduciary Standard under the Advisers Act Relative to the Baseline 

Relative to the regulatory baseline, the fiduciary standard of this alternative applied to 

broker-dealers could benefit retail customers in some circumstances by extending the obligations 

of all firms and financial professionals to act in the best interest of retail customers (and to not 

place the interest of the firm or the interest of the financial professionals ahead of those of the 

retail customers) to aspects of the relationship other than providing personalized investment 

advice through recommendations.  For example, retail customers might benefit if broker-dealers 

were required (as advisers are under their current fiduciary standard) to disclose any material 

conflicts related to their execution of trades for retail customers in the case when the broker-

dealer has not provided a recommendation regarding the transaction (e.g., self-directed trade). In 

addition, under the fiduciary standard that applies to investment advisers, if an investment 

adviser cannot fully and fairly disclose a material conflict of interest to a client such that the 

client could reasonably be expected to provide informed consent, the investment adviser would 

be expected to either eliminate the conflict or adequately mitigate (i.e., modify its practices to 

reduce) the conflict to the point where full and fair disclosure of the conflict to the client and  

informed consent is possible.1350 To the extent that this approach of addressing conflicts of 

                                                                                                                                                             

 

1350  See Fiduciary Interpretation. 



640 

 

interest would extend to the fiduciary standard in this alternative, a broker-dealer would also 

have to eliminate or modify a conflict of interest to the point where full and fair disclosure and 

informed consent is possible.  The potential reduction in the effect of conflicts of interest on 

recommendations and the potential reduction in the information asymmetry  between a retail 

customer and a broker-dealer would likely increase the efficiency of the recommendation 

provided by the firm to the retail customer, relative to the baseline.  Thus, this alternative may 

reduce the agency costs of the relationship between a broker-dealer and a retail customer, which 

would benefit retail customers, relative to the baseline.      

However, any such benefits would come at a cost.  As an initial matter, the fiduciary 

standard under this alternative is a principles-based regime and shaped by decades of case law 

specific to investment advisory model. In contrast, the standard of conduct that applies to broker-

dealers under the baseline is more prescriptive, and governed by detailed SRO rules.  Therefore, 

if this alternative were adopted, broker-dealers would face increased compliance costs resulting 

from having to conform their advice models to a regulatory regime that was not formed for a 

transaction-based model governed by detailed SRO rules. 

The potential increased compliance costs associated with applying the fiduciary standard 

in this alternative to broker-dealers would likely increase the broker-dealers’ incentives to offer 

investment advice in the capacity of investment adviser and may decrease their incentive to 

continue offering investment advice in the capacity of broker-dealer dealer (on a transaction-by-641 

 

transaction basis), relative to the baseline.1351  For example, if this alternative were to create 

situations where the compensation to a broker-dealer for providing a recommendation in a 

commission-based brokerage account would be less than the compensation under a fee-based 

                                                                                                                                                             

 

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



642 

 

advisory account and/or where the perceived regulatory burden for an investment adviser is 

lower, relative to the baseline, a broker-dealer’s incentive to offer advice in the capacity of 

investment adviser would likely increase, relative to the baseline.1352     

To the extent broker-dealers act on the increased incentives and decide to participate in 

the market for investment advice only in the capacity of investment advisers—for example, dual-

registrants may prefer to offer investment advice only in the capacity of investment adviser—

retail customers may experience an increase in the cost of obtaining investment advice, relative 

to the baseline. Furthermore, as noted above, the potential exit of broker-dealers from the market 

for investment advice in the capacity of broker-dealer may limit how retail customers can access 

certain securities or investment strategies and how they can pay for investment advice, which, in 

turn, may further increase the cost of obtaining investment advice, relative to the baseline.1353  

Alternatively, to the extent broker-dealers decide to continue to participate in the market for 

investment advice in the capacity of broker-dealers, they may pass on the increased compliance 

costs, in full or in part, to their retail customers in the form of higher prices for services rendered. 

In particular, retail customers may experience an increase in the cost of obtaining investment 

advice, relative to the baseline. 

                                                                                                                                                             

 

1352  Broker-dealers that choose to deregister would eliminate the costs of complying with 
FINRA rules, which are broader than retail customer sales practice obligations, and 
submitting to FINRA examinations as well as compliance with other specific rules, which 
do not apply to advisers. 

1353  See supra Section III.D.1.  



643 

 

It is also possible that the fiduciary standard of this alternative may result in a different 

menu of choices that allows retail customers to access investment advice in a more cost-efficient 

manner relative to the baseline. For example, if more financial professionals decide to participate 

in the market for investment advice in the capacity of investment advisers, competitive pressure 

may result in investment advisers providing better pricing and/or more choices of accessing 

investment advice for retail customers.   

To the extent that the cost of accessing investment advice increases under the fiduciary 

standard of this alternative, some retail customers may be pushed outside the market for 

investment advice. For example, currently, a retail customer that prefers to receive 

recommendations from a broker-dealer or its associated persons to implement a buy-and-hold 

strategy may find a brokerage account to be better suited to his or her needs compared to an 

advisory account.1354 Under the fiduciary standard in this alternative, this retail customer may 

                                                                                                                                                             

 

1354  For example, Del Guercio & Reuter (2014), supra footnote 1081, document (Table 1 on 
page 1682) that retail customers can access index funds through both broker-dealers (i.e., 
the broker-sold channel, as discussed above) and directly from the fund sponsor (i.e., the 
direct-sold channel). Furthermore, in their sample, the average expense ratio for an index 
fund is 0.86 if sold through the broker-sold channel and 0.44 if sold through the direct 
channel. Assuming that a retail customer is interested in implementing a buy-and-hold 
strategy using index funds that carry no loads, the cost to the retail customer of 
implementing this strategy through a broker-dealer would be on average 86 basis points 
of the assets invested per year. In contrast, the cost to the retail customer of implementing 
the same strategy through an investment adviser would be on average 44 basis points plus 
the investment adviser’s AUM-based fee per year. Assuming that in the investment 
adviser’s fee is 100 basis points of AUM per year, the cost to the retail customer of 

 

 



644 

 

have to pay more for the broker-dealer services that come with his or her account, including 

obtaining investment advice, relative to the baseline.  If this increase in the cost for broker-dealer 

services outweighs the benefits of the potential improved efficiency of the recommendations 

provided by the broker-dealer for this retail customer, as noted above, the retail customer may 

prefer to switch to a more-limited brokerage account that does not come with personalized 

investment advice (e.g., an execution-only brokerage account).1355  Alternatively, and as noted 

by one commenter, the retail customer may switch to a light version of an advisory account that 

implements automated investment strategies tailored around a retail customer’s goals.1356  

However, this type of advisory account may not offer the flexibility of personalized investment 

advice to the evolving needs of the customer and may not be as responsive to market movements 

not anticipated by the automated investment strategies.     

b. Uniform Fiduciary Standard under 913(g) 

Another alternative approach to the standard of conduct imposed by Regulation Best 

interest is a “new” uniform fiduciary standard of conduct applicable to both broker-dealers and 
                                                                                                                                                             

 

implementing his or her strategy with an investment adviser would be on average 144 
basis points.   

1355  Relative to a brokerage account that offers personalized investment advice, execution-
only brokerage accounts may also come with enhanced research tools, more investment 
choices, and, potentially, other forms of impersonal advice. 

1356  See, e.g., CFA August 2018 Letter at 79, noting that “[f]or example, Vanguard charges 
0.30% for its Personal Advisor Services, Schwab charges 0.28% for its Intelligent 
Advisory Services, and Betterment charges 0.25% for its Digital offering and 0.40% for 
its Premium offering.” 



645 

 

investment advisers, such as that recommended by the staff in the 913 Study.1357  The fiduciary 

standard under this alternative would require firms “to act in the best interest of the customer 

without regard to the financial or other interest of the broker, dealer, or investment adviser 

providing the advice.” Based on the Commission staff’s recommendations about ways in which 

the fiduciary standard proposed by the 913 study could be implemented, the fiduciary standard 

under this alternative could have imposed any or all of the following requirements: (1) eliminate 

or disclose conflicts of interest; (2) prohibit certain conflicts of interest by requiring firms to 

mitigate conflicts through specific action, or to impose specific disclosure and consent 

requirements; and (3) specify the basis a broker-dealer or investment adviser has in making a 

recommendation to a retail customer by referring to and expanding upon broker-dealers’ existing 

suitability requirements. 

                                                                                                                                                             

 

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



646 

 

Some of the benefits of the investment advisers’ fiduciary standard of the previous 

alternative would carry over to the new uniform standard of this alternative. In particular, relative 

to the baseline, the new fiduciary standard of this alternative applied to broker-dealers could 

benefit retail customers in some circumstances by extending the obligations of all firms and 

financial professionals to act in the best interest of retail customers (and to not place the interest 

of the firm or those of the financial professionals ahead of the interest of the retail customer) to 

aspects of the relationship other than providing personalized investment advice through 

recommendations.  

In addition, the new fiduciary standard of this alternative applied to broker-dealers may 

create additional benefits for their retail customers, relative to the baseline. For example, 

requirements (1) and (2) may enhance the obligations under the baseline by requiring broker-

dealers to disclose conflicts of interest and to take actions to mitigate or eliminate certain 

conflicts of interest.  To the extent that these requirements reduce of the effect of the conflicts of 

interest on the recommendation provided by a broker-dealer or its associated persons and reduce 

the information asymmetry between retail customers and broker-dealers, the new fiduciary 

standard of this alternative may increase, relative to the baseline, the efficiency of the 

recommendations made by broker-dealers and their associated persons.  Furthermore, 

requirement (3) may enhance the existing suitability requirements that apply to broker-dealers 

and, to the extent that this requirement results in recommendations that are better aligned with 

the objectives of the retail customers, the new fiduciary standard of conduct of this alternative 

may further increase, relative to the baseline, the efficiency of the recommendations provided by 

broker-dealers and their associated persons. The potential increase in the efficiency of the 



647 

 

recommendations provided by broker-dealers and their associated persons under the new 

fiduciary standard of this alternative would benefit retail customers, relative to the baseline. 

Similarly, the new fiduciary standard of this alternative applied to investment advisers 

may create benefits for their clients, relative to the baseline. Requirements (1) and (2) would 

enhance the obligations of the investment advisers under the current fiduciary standard that 

applies to investment advisers by requiring investment advisers to take actions to mitigate or 

eliminate certain conflicts of interest.  To the extent that these requirements reduce of the effect 

of the conflicts of interest on the recommendation provided by an investment adviser or its 

associated persons and reduce the information asymmetry between retail customers and 

investment advisers, the new fiduciary standard under this alternative may increase the efficiency 

of the recommendations made by investment advisers and their associated persons, relative to the 

baseline.  

The new fiduciary duty of this alternative may also result in increased competition across 

financial professionals for retail customers or clients, relative to the baseline. This potential 

increase in competition, relative to the baseline, may benefit retail customers of broker-dealers 

and clients of investment advisers in the form of lower prices for investment advice. 

Turning to the potential costs imposed by this alternative, we note that some of the costs 

of the investment advisers’ fiduciary standard of the previous alternative carry over to the new 

fiduciary standard of this alternative. As noted above, this alternative would impose a new 

regulatory paradigm on broker-dealers relative to the baseline. The fiduciary standard of this 

alternative would be principles-based and shaped by common law.  In contrast, the standard of 

conduct that applies to broker-dealers under the baseline is more prescriptive and governed by 

detailed SRO rules. A paradigm shift from the standards of conduct under the current baseline to 



648 

 

the uniform standard in this alternative may increase compliance costs relative to the 

baseline.1358  

Furthermore, the potential increased compliance costs associated with applying the 

fiduciary standard of this alternative to broker-dealers may increase, relative to the baseline, a 

broker-dealer’s incentives to offer investment advice in the capacity of an investment adviser and 

may decrease their incentive to offer investment advice in the capacity of broker-dealer. For 

example, if this alternative creates situations where the compensation to a broker-dealer for 

providing a recommendation in a commission-based brokerage account would be less than the 

compensation under a fee-based advisory account while the perceived regulatory burden is equal 

to that of an investment adviser, a broker-dealer’s incentive to offer advice in the capacity of 

investment adviser may increase, relative to the baseline.1359  

To the extent broker-dealers act on the increased incentives and decide to participate in 

the market for investment advice only in the capacity of investment advisers—for example, dual-

registrants may prefer to offer investment advice only in the capacity of investment adviser—

retail customers may experience an increase in the cost of obtaining investment advice, relative 

to the baseline. Alternatively, to the extent broker-dealers decide to continue to participate in the 

market for investment advice in the capacity of broker-dealers, they may pass on the increased 

                                                                                                                                                             

 

1358  See also 913 Study at 156-159. 
1359  See supra footnote 1352. 



649 

 

compliance costs, in full or in part, to their retail customers in the form of higher prices for 

services rendered, relative to the baseline. In particular, retail customers may experience an 

increase in the cost of obtaining investment advice, relative to the baseline.1360 

Similarly, the new fiduciary standard of this alternative may also impose additional 

compliance costs for investment advisers relative to the baseline.1361 For example, to the extent 

that investment advisers currently provide investment advice to their clients in a manner that is 

not fully consistent with the requirements (2) and (3), investment advisers may incur compliance 

costs in adhering to these potentially more stringent requirements. 

Investment advisers would likely pass on the potential increase in the costs of complying 

with the new fiduciary standard of this alternative to their clients. In turn, under the new 

fiduciary standard of this alternative, clients may experience an increase in the cost of obtaining 

investment advice, relative to the baseline.  

It is also possible that the new fiduciary standard of this alternative may result in a 

different menu of choices that allows retail customers and clients to access investment advice in 

a more cost-efficient manner relative to the baseline. For example, if more financial 

professionals decide to participate in the market for investment advice as investment advisers, 

                                                                                                                                                             

 

1360  See also 913 Study at 159-162. 
1361  See id. at 159. 



650 

 

competitive pressure may result in better pricing and/or greater choice in accessing investment 

advice for retail customers and clients that choose to use an investment adviser.   

However, to the extent that the cost of accessing investment advice increases under the 

new fiduciary standard of this alternative, some retail customers may be pushed outside the 

market for investment advice, relative to the baseline. For example, currently, a retail customer 

who prefers to receive recommendations from a broker-dealer or its associated persons to 

implement a buy-and-hold strategy may find a brokerage account to be better suited to his or her 

needs than an advisory account. Under the new fiduciary standard of this alternative, this retail 

customer may have to pay more for the broker-dealer services that come with his or her account, 

including obtaining investment advice, relative to the baseline. If, from the perspective of a retail 

customer, this increase in the cost for broker-dealer services outweighs the expected benefits of 

the potential improved efficiency of the recommendations provided by the broker-dealer, the 

retail customer may prefer to switch to a more limited brokerage account that does not come with 

personalized investment advice (e.g., an execution-only brokerage account).1362 

Alternatively, and as noted by one commenter, the retail customer may switch to an 

advisory account that implements automated investment strategies.1363  However, this type of 

                                                                                                                                                             

 

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

1363  See, e.g., CFA August 2018 Letter at 79, noting that “[f]or example, Vanguard charges 
0.30% for its Personal Advisor Services, Schwab charges 0.28% for its Intelligent 

 

 



651 

 

advisory account may not offer the flexibility of personalized investment advice to the evolving 

needs of the customer, the level of contact a retail customer seeks from a relationship with a 

financial professional, and may not be as responsive to market movements not anticipated by the 

automated investment strategies. 

Similarly, under the new fiduciary standard of this alternative, clients of investment 

advisers may experience an increase in the cost of obtaining investment advice.  Some of these 

clients may not be able to afford the additional cost and may be pushed outside the market for 

investment advice, relative to the baseline.  As noted above, the options available to these clients 

may not offer the flexibility of tailored investment advice that may benefit a client with evolving 

needs. 

c. Fiduciary Standard under the DOL Rule and BIC Exemption 

A third alternative approach to addressing the agency costs associated with obtaining 

advice from broker-dealers is a fiduciary standard coupled with a series of disclosures and other 

requirements akin to the full complement of conditions of the DOL’s BIC Exemption adopted in 

connection with the DOL Fiduciary Rule. This alternative would mirror the key conditions that 

apply to an “adviser” under the BIC Exemption.1364 This alternative approach would apply to 

                                                                                                                                                             

 

Advisory Services, and Betterment charges 0.25% for its Digital offering and 0.40% for 
its Premium offering.” 

1364  For a discussion of key conditions of the BIC Exemption, see Section I.A.2 of the 
Proposing Release at 21581. As discussed above, the DOL Fiduciary Rule—including the 
BIC Exemption—was vacated by the United States Court of Appeals for the Fifth Circuit 

 

 



652 

 

broker-dealers when providing recommendations to retail customer for all types of retail 

accounts rather than retirement accounts only. At least one commenter signaled support for this 

alternative.1365  

Unlike other alternatives considered in this section, or Regulation Best Interest, this 

alternative can be analyzed, at least in part, based upon its previous adoption by the DOL and 

partial implementation. Because this alternative was already partly implemented, the market for 

investment advice, the securities market, and, ultimately investors have had an opportunity to 

partially adjust to it. Section III.B.2.e.ii summarizes the evidence about the response of firms, 

investors and product markets in response to the DOL Fiduciary Rule.  

The requirements of the standard of conduct in this alternative would enhance the 

obligations under the baseline by requiring broker-dealers to adhere to the impartial conduct 

standard, which included requirements to act in their retail customers’ best interest, disclose 

material conflicts of interest and designate a person responsible for addressing material conflicts 

of interest and monitoring the adherence of the associated persons of the broker-dealer to the 

impartial conduct standard.  To the extent that these requirements reduce the effect of the 

conflicts of interest on the recommendation provided by a broker-dealer or its associated persons 

                                                                                                                                                             

 

on March 15, 2018, although some firms may continue to seek comply with certain of its 
conditions under a DOL temporary enforcement policy. See also supra Section III.B.2.e. 
See also supra footnote 32. 

1365  See Galvin Letter. 



653 

 

and reduce the information asymmetry between retail customers and broker-dealers, the new 

standard of conduct in this alternative would increase the efficiency of the recommendations 

made by broker-dealers and their associated persons, relative to the regulatory baseline.  

Furthermore, the requirement to act in the retail customers’ best interest would enhance the 

existing suitability standard that applies to broker-dealers and, to the extent that the new standard 

of conduct of this alternative would result in recommendations that are better aligned with the 

objectives of the retail customers, this new standard would further increase the efficiency of the 

recommendations provided by broker-dealers and their associated persons, relative to the 

regulatory baseline. The potential increase in the efficiency of the recommendations provided by 

broker-dealers and their associated persons under the new standard in this alternative would 

benefit retail customers, relative to the baseline.   

This alternative may also affect product markets. As discussed above in Section III.B.2.ii, 

certain product sponsors introduced new products in the market for mutual funds, such as clean 

and T shares that were designed to facilitate compliance with various anticipated regulations, 

including the DOL Fiduciary Rule. In certain circumstances, these products may come with 

lower fees for retail customers. To the extent that this alternative would enhance this trend in 

product innovation, retail customers may benefit from this trend.     

However this alternative would also impose costs on broker-dealers and retail customers.  

Compliance costs would include costs associated with the contract provision, and the disclosure, 

policies and procedure, and record-making and recordkeeping requirements.  It is possible that 

broker-dealers would pass on these direct compliance costs, in part or in full, to retail customers. 

In addition to these costs, this alternative would likely cause some broker-dealers to 

change their current practices, which, in turn, may impose further costs on them or their retail 



654 

 

customers.  As discussed above in Section III.B.2.e.ii some studies find evidence suggesting that 

firms have adjusted their practices, at least in the short-run, in response to the DOL fiduciary 

Rule. In particular, certain of these studies observe that in certain cases some broker-dealers have  

either eliminated or reduced access to brokerage advice services. Other studies observe that some 

broker-dealers migrated toward fee-based advisory services or limited brokerage services (i.e., 

no provision of advice) and, in the process, offered their retail customers the option to shift from 

commission-based brokerage accounts to fee-based accounts,  automated investment accounts or 

self-directed accounts. Some of their customers chose to not move to a fee-based account.  

Certain studies provide evidence suggesting that some broker-dealers adjusted the range 

of their offerings.1366 Specifically, according to these studies, some of the respondents reduced or 

eliminated access to certain assets or share classes, such as certain mutual funds or mutual fund 

share classes, and or annuity securities offered.   

Finally, there is some anecdotal evidence that suggests that certain firms changed the 

compensation structure for their associated persons.1367 Specifically, some firms equalize 

commissions and deferred sales charges across similar securities, while other firms banned sales 

quotas, contests, and certain bonuses.  

                                                                                                                                                             

 

1366  See supra Section III.B.2.e.ii. 
1367  See id. 



655 

 

To the extent that the fiduciary standard in this alternative would result in similar 

responses by broker-dealers, the alternative would impose cost on retail customers relative to the 

baseline. For example, switching a retail customer from a commission-based brokerage account 

to a different type of account, such as fee-based advisory account, may leave a customer worse 

off in certain circumstances. For instance, a retail customer who is a buy-and-hold investor may 

overpay for the advice typically associated with this type of investment strategy if the retail 

customer were to shift from a brokerage account to a fee-based account.1368 As another example, 

a retail customer would lose access to occasional personalized advice if he or she were to shift 

from his or her brokerage account to a self-directed account.      

The cost to retail customers from switching to a suboptimal account is particularly 

important in the context of IRA brokerage accounts, because of the larger size of these accounts 

and the importance of these accounts for retail investors to meet their retirement needs.  These 

costs may also be higher for IRA brokerage accounts than for other account types to the extent 

that these accounts include long-term, buy-and-hold investments.  As discussed in Section 

III.B.2.e.ii, one study provided an estimate for this potential cost.1369 However, as discussed 

above, the estimates provided by various studies, including this one, or by commenters are 

                                                                                                                                                             

 

1368  See supra footnote 1354. 
1369  See SIFMA Study. 



656 

 

generally subject to assumptions or methodological limitations which may affect the inferences 

based on such estimates.    

In addition to the evidence discussed above, there are other potential economic 

implications of this alternative. For instance, this alternative may exclude from the market for 

investment advice those retail customers that have account balances that are below the account 

minimum for typical advisory accounts. The investment advisory industry might adjust to a lack 

of supply by accommodating lower account balances. However, because investment advisers 

have a fiduciary duty to all their clients, and because they have limited time and resources, there 

is likely a limit to how much an investment adviser can lower his or her account minimum to 

accommodate more advisory clients. Similarly, the product market may adjust by innovating new 

products to accommodate retail customers with account balances that are below the typical 

advisory account minimum.  For example, hybrid products that implement automated investment 

strategies tailored to a retail customer’s goals may substitute for the services of an investment 

adviser for customers with lower account balances.    

2. Prescribed Format for Disclosure 

Although Regulation Best Interest specifies the required content of disclosure necessary 

to meet a broker-dealer’s Disclosure Obligation, it does not prescribe a specific format for that 



657 

 

disclosure.  As an alternative, and as suggested by commenters,1370 we considered requiring 

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

Because this alternative would still impose all the obligations of Regulation Best Interest, 

all the benefits and the costs identified in Regulation Best Interest would carry over to this 

alternative as well. However, by changing the way broker-dealers would meet the Disclosure 

Obligation, this alternative may create additional benefits and impose additional costs.  
                                                                                                                                                             

 

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



658 

 

The requirement to use a form similar to Form ADV to meet the Disclosure Obligation would 

put more structure on the disclosure of material facts relating to the scope and terms of the 

relationship with the retail customer and material facts relating to conflicts of interest that are 

associated with a recommendation. This added structure would facilitate retail customers’ 

comparison of multiple broker-dealers, which would benefit retail customers. For example, the 

evidence provided by the investor testing surveys suggests that retail customers form preference 

over various variables that are being disclosed.1371 On the backdrop of this evidence, the 

structured disclosure provided by a specific form may enhance a retail customer’s ability to 

select a broker-dealer in a manner consistent with his or her preferences. In addition, the 

structured disclosure provided by a form may allow a third party to collect the information 

disclosed by firms, process it, and present it to retail customers in a way that would make it 

easier for the retail customer to select a broker-dealer. To the extent the format of disclosure 

under this alternative would result in this potential outcome, the alternative would further benefit 

retail customers.  

However, the requirement to use a form similar to Form ADV to meet the Disclosure 

Obligation may also impose costs on broker-dealers, at least in the short run, to the extent that 

this form of disclosure is different from the form of disclosure that firms employ currently to 

satisfy their disclosure obligations and liabilities under the baseline. In general it may be difficult 
                                                                                                                                                             

 

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



659 

 

to design a form that, while comprehensive in terms of capturing the diversity of business 

practices that broker-dealers employ, remains easy to understand for retail customers.  In general, 

given that there is a wide variety of business models and practices, there is value in providing 

broker-dealers with flexibility to enable them to better tailor disclosure and information that their 

retail customers can understand and may be more likely to read at relevant points in time, rather 

than, for example, mandating a standardized all-inclusive (and likely lengthy) disclosure. 

Depending on the specific form that is eventually mandated, some firms may incur more costs 

than others. To the extent firms pass on those costs to retail customers, the alternative would 

impose a cost on retail customers.  

3. Disclosure-Only   

Another potential alternative to addressing the agency costs of obtaining advice from 

broker-dealers is a disclosure-only alternative, which would require that broker-dealers satisfy 

only the Disclosure Obligation of Regulation Best Interest. In other words, broker-dealers would 

be required to provide the retail customer, in writing, full and fair disclosure of all material facts 

relating to the scope of the relationship with the retail customer and all material facts relating to 

the conflicts of interest associated with the recommendations to the retail customer, prior to or at 

the time of the recommendation. However, this alternative would not impose either the Care 

Obligation or the Conflict of Interest Obligation.   

As discussed in Sections III.C.2 and III.C.4, there may be substantial overlap between the 

disclosure requirements of Regulation Best Interest and the disclosure requirements under the 

regulatory baseline. From this perspective, relative to the regulatory baseline, the cost of this 

alternative to the broker-dealers may be small, at least for some broker-dealers. However, as 

pointed out above, a disclosure-only alternative is not likely to address the agency costs 



660 

 

associated with obtaining advice from broker-dealers.  As a result, the Commission believes both 

specific disclosure and mitigation requirements are needed to address those conflicts.  Also, we 

noted above that sales contests, sales quotas, bonuses, and non-cash compensation that are based 

on the sales of specific securities within a limited period of time create high-pressure situations 

for associated persons to increase the sales of specific securities by compromising the best 

interest of their customers; the Commission does not believe such conflicts of interest can be 

reasonably mitigated, let alone disclosed, in a manner that adequately prevents harm to retail 

customers and, accordingly, believes that these conflicts must be eliminated in their entirety.   

Finally, as we discussed earlier, commenters noted that there are limits to the 

effectiveness of disclosure and cited a number of studies suggesting that disclosure alone is 

unlikely to solve the issues surrounding, for example, the conflicts of interest between a broker-

dealer (or their associated persons) and a retail customer.1372   

IV. PAPERWORK REDUCTION ACT 

Certain provisions of Regulation Best Interest and the rule amendments that we are 

adopting today contain “collection of information” requirements within the meaning of the 

Paperwork Reduction Act of 1995 (“PRA”).1373  The Commission submitted Regulation Best 

Interest and the rule amendments to the Office of Management and Budget (“OMB”) for review 
                                                                                                                                                             

 

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

1373  44 U.S.C. 3501 et seq.661 

 

and approval in accordance with the PRA.1374  The Commission’s earlier PRA assessments have 

been revised to reflect the modifications to the rule and amendments from the Proposing Release, 

as well as additional information and data provided to the Commission by commenters.  An 

agency may not conduct or sponsor, and a person is not required to respond to, a collection of 

information unless it displays a currently valid OMB control number.  The titles and OMB 

control numbers for the collections of information are: 

Rule Rule Title OMB Control 
Number 

Rule 15l-1 Regulation Best Interest  

Rule 17a-3 Records to be made by certain exchange members, brokers and 
dealers1375 
 

3235-0033 

Rule 17a-4 Records to be preserved by certain exchange members, brokers 
and dealers1376 
 

3235-0279 

 

Regulation Best Interest enhances the broker-dealer standard of conduct beyond existing 

suitability obligations, and aligns the standard of conduct with retail customers’ reasonable 

expectations by requiring broker-dealers, among other things, to:  (1) comply with specific 

obligations to make recommendations that are in the best interest of the retail customer, and that 
                                                                                                                                                             

 

1374  See 44 U.S.C. 3507(d); 5 CFR 1320.11. 
1375  See 17 CFR § 240.17a-3.  The addition of paragraph (a)(35) to Rule 17a-3 would amend 

the existing PRA for Rule 17a-3. 
1376  See 17 CFR § 240.17a-4.  The amendment to Rule 17a-4(e)(5) would amend the existing 

PRA for Rule 17a-4.  



662 

 

do not place the broker-dealer’s interests ahead of the interests of the retail customer; and (2) 

address conflicts of interest by fully and fairly disclosing material facts about conflicts of interest, 

and in instances where we believe disclosure is insufficient to reasonably address the conflict, 

establish, maintain and enforce policies and procedures reasonably designed to mitigate or, in 

certain instances, eliminate the conflict.  Generally, in crafting Regulation Best Interest, we 

aimed to provide broker-dealers flexibility in determining how to satisfy the component 

obligations.  For purposes of this analysis, we have made assumptions regarding how a broker-

dealer would comply with the obligations of Regulation Best Interest, as well as the amendments 

under Rule 17a-3(a)(35) and Rule 17a-4(e)(5).   

In the Proposing Release, we requested comment on the matters discussed in the PRA, 

including our estimates for the new and recurring burdens and associated costs described in 

connection with Regulation Best Interest and the amendments under Rule 17a-3(a)(35) and Rule 

17a-4(e)(5).1377  In particular, we sought comment on estimates as to: (1) the number of natural 

persons who are associated persons; (2) the number of broker-dealers that make securities-related 

recommendations to retail customers; (3) the number of natural persons who are associated 

persons that make securities-related recommendations to retail customers; and (4) any other costs 

                                                                                                                                                             

 

1377  The Proposing Release proposed to add new paragraph (a)(25) of Rule 17a-3.  As noted 
above, we are adopting the provision substantially as proposed but redesignating it as 
new paragraph (a)(35) of Rule 17a-3.  See supra footnote 820 and accompanying text.  



663 

 

or burdens1378 associated with proposed Regulation Best Interest that had not been identified in 

the Proposing Release.  

As discussed in Sections I, II, and III, we received comments that addressed whether we 

could minimize the burden of the proposed collections of information.  We received several 

comments suggesting that our estimated burdens and costs for the rule as a whole were too 

low.1379  In addition, the Commission received some comments specifically addressing the costs 

to smaller broker-dealers.1380  Also, as discussed in the Economic Analysis section above, we 

received comments regarding the potential costs and burdens of proposed Regulation Best 

                                                                                                                                                             

 

1378  Throughout the PRA analysis in the Proposing Release, the burdens on in-house 
personnel were measured in terms of burden hours, and external costs were expressed in 
dollar terms.   

1379  See, e.g., NSCP Letter; see also CCMC Letters (costs to implement the proposal were 
underestimated and greater than 40% of firms surveyed anticipate having to spend a 
moderate or substantial amount to implement Regulation Best Interest and Form CRS); 
Raymond James Letter (noting the significant implementation costs of Regulation Best 
Interest and Form CRS for the industry); SIFMA August 2018 Letter (stating that 
implementation costs of Regulation Best Interest and Form CRS would be significant).   

1380  See, e.g., Chepucavage Letter (finding that the estimates in the proposal are severely 
understated unless they are excluding time needed for review of the proposal and final 
rule and suggesting the Commission reconsider the impact on small investors and small 
broker-dealers); NSCP Letter (requesting the Commission to consider the financial and 
operational impacts of the proposed rule, particularly on small firms, and to minimize 
those impacts, given that small firms do not have compliance departments adequate to 
deal with increasing regulatory demands). See also, e.g., Iowa Insurance Commissioner 
Letter; Letter from David S. Addington, National Federation of Independent Business 
(May 30, 2018) (“NFIB Letter”). 



664 

 

Interest on broker-dealers.1381  In response, we have modified several substantive requirements to 

the rule by, among other things, providing more specificity in the rule text in the Disclosure and 

Conflict of Interest Obligations, which we believe will mitigate some of these burdens and costs 

relative to the Proposing Release.1382  At the same time, certain modifications, such as 

maintaining a written record of oral disclosure, resulted in new burdens and costs, relative to 

those addressed in the Proposing Release, which are reflected below.    

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

1. Broker-Dealers 

Regulation Best Interest imposes a best interest obligation on a broker-dealer when 

making recommendations of any securities transaction or investment strategy involving 

securities to retail customers.  Except where noted, we have assumed that a dually registered 

firm, already subject to the Advisers Act, would be subject to new, distinct burdens under 

Regulation Best Interest.  

As of December 31, 2018, 3,764 broker-dealers were registered with the Commission, 

either as standalone broker-dealers or as dually registered entities.1383  Based on data obtained 

                                                                                                                                                             

 

1381  See supra Section III. 
1382  Throughout this PRA analysis, the burdens on in-house personnel are measured in terms 

of burden hours, and external costs are expressed in dollar terms.   
1383  The Commission estimated the number of respondents in the Proposing Release as of 

December 31, 2017.  The Commission is updating its estimated number of broker-dealers 
 

 



665 

 

from Form BR, the Commission believes that approximately 73.5% of this population, or 2,766 

broker-dealers, have retail customers and therefore would be subject to Regulation Best Interest 

and the amendments under Rules 17a-3(a)(35) and 17a-4(e)(5).1384  Further, based on FOCUS 

Report data,1385 the Commission estimates that as of December 31, 2018, approximately 985 

broker-dealers may be deemed small entities under the Regulatory Flexibility Act.1386  Of these, 

                                                                                                                                                             

 

to reflect the number of broker-dealers registered with the Commission as of December 
31, 2018. 

1384  As of December 31, 2018, 3,764 broker-dealers filed Form BD.  Retail sales by broker-
dealers were obtained from Form BR.  As discussed above in Section III.B.1.a, the 
number of broker-dealers that serve retail customers (i.e., 2,766) likely overstates the 
number of broker-dealers that will be subject to Regulation Best Interest, because not all 
broker-dealers that serve retail investors provide recommendations to retail investors.  
We do not have reliable data to determine the precise number of broker-dealers that 
provide recommendations, and as a result, we have assumed, for purposes of this analysis 
that 2,766 broker-dealers will be subject to Regulation Best Interest. 

1385  FOCUS Reports, or “Financial and Operational Combined Uniform Single” Reports, are 
monthly, quarterly, and annual reports that broker-dealers are generally required to file 
with the Commission and/or SROs pursuant to Exchange Act Rule 17a-5.  See 17 CFR 
240.17a-5.   

1386  See infra Section V for an explanation of which brokers-dealers, subject to Regulation 
Best Interest, are “small entities,” for purposes of the Regulatory Flexibility Act analysis.   

 The Commission’s estimate is obtained from Form BD filings.  Although Form BD 
filings are updated on a more frequent basis than annually, FOCUS data, which also 
informs this baseline with respect to broker-dealers, is only sparsely updated throughout 
the year.  Moreover, instead, broker-dealers tend to make their most complete updates in 
the fourth calendar quarter of each year.  Therefore, in order to minimize discrepancies in 
the broker-dealer data between Form BD and FOCUS data, we have normalized all of the 
data to the most recently complete FOCUS data, which is for December 2018. 



666 

 

approximately 756 have retail business.1387  Therefore, we estimate that 2,010 broker-dealers 

would qualify as large broker-dealers with retail customers for purposes of this analysis.1388 

2. Natural Persons Who Are Associated Persons of Broker-Dealers 

As with broker-dealers, Regulation Best Interest imposes a best interest obligation on 

natural persons who are associated persons of broker-dealers when making recommendations of 

any securities transaction or investment strategy involving securities to retail customers.   

The Commission believes that approximately 428,404 natural persons would qualify as 

retail-facing, registered representatives at standalone broker-dealers or dually registered 

firms,1389 and would therefore be subject to Regulation Best Interest.1390 

                                                                                                                                                             

 

1387  Id. 
1388  This calculation was made as follows:  (2,766 total retail broker-dealers) – (756 total 

small retail broker-dealers) = 2,010 large retail broker-dealers.  
1389  See supra Section III.B.1 at Table 5.  This estimate is based on the following calculation:  

(504,005 total licensed representatives (including representatives of investment advisers)) 
x (15% (the percentage of total licensed representatives who are standalone investment 
adviser representatives)) = approximately 75,601 representatives at standalone 
investment advisers. To isolate the number of representatives at standalone broker-
dealers and dually registered firms, we have subtracted 75,601 from 504,005, for a total 
of 428,404 retail-facing, licensed representatives at standalone broker-dealers or dually 
registered firms.   

1390  Unless otherwise noted, for purposes of the PRA, we use the term “registered 
representatives” to refer to associated persons of broker-dealers who are registered, have 
series 6 or 7 licenses, and are retail-facing, and we use the term “dually registered 
representatives of broker-dealers” to refer to registered representatives who are dually 
registered and are associated persons of a standalone broker-dealer (who may be 
associated with an unaffiliated investment adviser) or a dually registered broker-dealer.   



667 

 

B. Summary of Collections of Information 

Regulation Best Interest requires broker-dealers and their associated persons1391 when 

making a recommendation of any securities transaction or investment strategy involving 

securities to a retail customer to act in the best interest of the retail customer at the time the 

recommendation is made, without placing the financial or other interest of the broker-dealer 

ahead of the interest of the retail customer.  As discussed above, Regulation Best Interest 

specifically provides that this best interest obligation shall be satisfied if the broker-dealer 

complies with the specific Disclosure, Care, Conflict of Interest, and Compliance Obligations. 

Rule 17a-3 requires a broker-dealer to make and keep current certain records.  The 

Commission is amending this rule by adding new paragraph (a)(35) to impose new record-

making obligations on broker-dealers subject to Regulation Best Interest.  Rule 17a-4 requires a 

broker-dealer to preserve certain records if it makes or receives them.  The Commission is 

amending Rule 17a-4(e)(5) to impose new record retention obligations on broker-dealers subject 

to Regulation Best Interest.   

The obligations arising under Regulation Best Interest and the amendments under Rule 

17a-3(a)(35) and Rule 17a-4(e)(5) would give rise to distinct collections of information and 

                                                                                                                                                             

 

1391  However, in certain instances, as described more fully below, the Commission assumes 
that broker-dealers will undertake certain Disclosure Obligations on behalf of their 
registered representatives.  See, e.g., infra footnote 1397. 



668 

 

associated costs and burdens for broker-dealers subject to the rules.  The collections of 

information associated with Regulation Best Interest and rule amendments are described below. 

1.  Disclosure Obligation 

The Disclosure Obligation under Regulation Best Interest requires a broker, dealer, or 

natural person who is an associated person of a broker or dealer, prior to or at the time of 

recommending a securities transaction or strategy involving securities to a retail customer, to 

provide the retail customer, in writing, full and fair disclosure of:  (1) all material facts relating to 

the scope and terms of the relationship with the retail customer, including (a) that the broker, 

dealer, or such natural person is acting as a broker, dealer, or an associated person of a broker or 

dealer with respect to the recommendation, (b) the fees and costs that apply to the retail 

customer’s transactions, holdings, and accounts, and (c) the type and scope of services provided 

to the retail customer, including any material limitations on the securities or investment strategies 

involving securities that may be recommended to the retail customer; and (2) all material facts 

relating to conflicts of interest that are associated with the recommendation.  The Commission 

believes that requiring broker-dealers to disclose to a retail customer, in writing, all material facts 

relating to the scope and terms of the relationship with the retail customer would facilitate the 

retail customer’s understanding of the nature of his or her account, the broker-dealer’s fees and 

costs, as well as the nature of services that the broker-dealer provides, as well as any limitations 

to those services.  It would also provide retail customers with information to better understand 

the differences among certain financial service providers, such as broker-dealers, investment 

advisers, and dually registered firms and dually registered financial professionals.  In addition, 

the obligation to disclose all material facts relating to conflicts of interest that are associated with 

a recommendation would raise retail customers’ awareness of the potential effects of conflicts of 



669 

 

interest, and increase the likelihood that broker-dealers would make recommendations that are in 

the retail customer’s best interest.  

 We are explicitly requiring in the rule text of Regulation Best Interest, items that the 

Proposing Release had only provided as examples of “material facts relating to the scope and 

terms of the relationship with the retail customer” that must be disclosed, namely: (1) that the 

broker, dealer or such natural person is acting as a broker, dealer or an associated person of a 

broker-dealer with respect to the recommendation; (2) the material fees and costs that apply to 

the retail customer’s transactions, holdings, and accounts; and (3) the type and scope of services 

provided to the retail customer, including: any material limitations on the securities or 

investment strategies involving securities that may be recommended to the retail customer.  We 

generally believe the proposed burdens and costs identified in the Proposing Release were 

accurate but have updated estimates to reflect changes in the number of broker-dealers and costs 

of certain services since the last estimate.  The collections of information associated with the 

Disclosure Obligation, as well as the associated record-making and recordkeeping obligations are 

addressed below. 

a. Obligation to Provide to the Retail Customer Full and Fair 
Disclosure, in Writing, of all Material Facts Relating to the 
Scope and Terms of the Relationship with the Retail Customer 

 
The Commission assumes for purposes of this analysis that broker-dealers would meet 

the obligation to disclose to the retail customer, in writing, the material facts related to the scope 

and terms of the relationship with the retail customer through a combination of delivery of the 

Relationship Summary, creating account disclosures to include standardized language related to 

capacity and type and scope of services, and the development of fee schedules.   



670 

 

(1) Disclosure of Capacity 
 

As discussed above, the Commission believes that a standalone broker-dealer would be 

able to satisfy its obligation to disclose that it is acting in a broker-dealer capacity by providing 

the retail customer with the Relationship Summary in the manner prescribed by the rules and 

guidance in the Relationship Summary Adopting Release.1392   

We assume, for purposes of this PRA analysis, that a dually registered broker-dealer 

would satisfy its obligation to disclose it is acting in a broker-dealer capacity by creating an 

account disclosure with standardized language, and by providing it to the retail customer at the 

beginning of the relationship.  The account disclosure would set forth when the broker-dealer 

would be acting in a broker-dealer capacity, and the method the broker-dealer planned to use to 

clarify its capacity at the time of the recommendation.  We understand that many broker-dealers 

already include such information in account disclosures. 

(2) Disclosure of Fees and Costs and Type and Scope of 
Services, Including Any Material Limitations on the 
Securities or Investment Strategies that may be 
Recommended 

 
While many broker-dealers provide fee information to retail customers in a fee schedule, 

the Commission believes that to comply with the Disclosure Obligation broker-dealers will either 

amend their existing schedules or develop a new standardized fee schedule to disclose the fees 

and costs applicable to retail customers’ transactions, holdings, and accounts.  This fee schedule 
                                                                                                                                                             

 

1392   See Relationship Summary Adopting Release.   



671 

 

would be delivered to retail customers at the beginning of a relationship.  If, at the time the 

recommendation is made, the disclosure made to the retail customer is not current or does not 

contain all material facts regarding the fees and costs of the particular recommendation, the 

broker-dealer would need to deliver an amended fee schedule or provide an oral update, under 

the circumstances outlined in Section II.C.1.  

With respect to disclosure of the type and scope of services provided by the broker-dealer, 

including any material limitations on the securities or investment strategies that may be 

recommended to the retail customer, we assume for purposes of this PRA analysis that a broker-

dealer would satisfy the Disclosure Obligation by including this information in the account 

disclosure provided to the retail customer at the beginning of the relationship, as described above.  

The broker-dealer would need to deliver an amended account disclosure to the retail customer in 

the case of any material changes made to the type and scope of services or provide an oral update, 

under the circumstances outlined in Section II.C.1.  

b. Obligation to Provide to the Retail Customer Full and Fair 
Disclosure, in Writing, of All Material Facts Relating to 
Conflicts of Interest that are Associated with the 
Recommendation 

 
Regulation Best Interest requires a broker-dealer to provide the retail customer, in writing, 

full and fair disclosure of all material facts relating to conflicts of interest that are associated with 

a recommendation. 

As discussed above, we assume that broker-dealers will satisfy the obligation to disclose 

all material facts relating to conflicts of interest through the use of: (1) a standardized, written 

disclosure document provided to all retail customers and (2) supplemental disclosure provided to 

certain retail customers for recommendations of specific products.   



672 

 

We assume for purposes of this analysis that delivery of written disclosure will occur at 

the beginning of a relationship, such as together with the account opening agreement.  For 

existing retail customers, the disclosure will need to occur “prior to or at the time” of a 

recommendation.  Subsequent disclosures may be delivered or the broker-dealer may provide an 

oral update, under the circumstances outlined in Section II.C.1, in the event of a material change 

or if the broker-dealer determines additional disclosure is needed for certain types of products. 

The corresponding estimated total annual reporting costs and burdens are addressed 

below.1393  

c. Estimated Costs and Burdens  

(1) Disclosure of Capacity, Type and Scope of Services 
 

Standalone broker-dealers will satisfy the obligation to disclose the capacity in which 

they are acting through the delivery to retail customers of the Relationship Summary, in 

accordance with the rules and guidance set forth in the Relationship Summary Adopting Release.  

Additionally, although we understand that many dual-registrants and standalone broker-dealers, 

as a matter of best practice, already disclose the capacity in which they are acting as well as the 

and type and scope of services they offer to retail customers, for purposes of this analysis, we 

assume that dual-registrants would create new account disclosure related to capacity and all 

                                                                                                                                                             

 

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



673 

 

broker-dealers would create or update account disclosure related to type and scope of services 

specifically for purposes of compliance with Regulation Best Interest.  The Commission assumes 

that broker-dealers would provide the account disclosure to each retail customer account, 

regardless of whether the retail customer has multiple accounts with the broker-dealer.   

While the Commission recognizes that the Disclosure Obligation applies to the broker-

dealer entity and its associated persons, we do not expect associated persons to incur any initial 

or ongoing burdens with respect to the scope and terms of the relationship, as we assume for 

purposes of this analysis that this information would be addressed by the broker-dealer entity’s 

account disclosure.1394  With regard to disclosure of the capacity in which the associated person 

is acting, the Commission believes that dually registered representatives of broker-dealers will 

incur initial and ongoing burdens.1395   

Following is a discussion of the estimated initial and ongoing burdens and costs. 

i. Initial Costs and Burdens 
 

                                                                                                                                                             

 

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

1395  See supra Section IV.B.5 (discussing the costs and burdens associated with record-
making). 



674 

 

Because, as noted above, standalone broker-dealers will satisfy the obligation to disclose 

the capacity in which they are acting through the delivery to retail customers of the Relationship 

Summary, we estimate zero burden hours for standalone broker-dealers to disclose the capacity 

in which they are acting.  We estimate that a dually registered firm will incur an initial internal 

burden of 10 hours for in-house counsel and in-house compliance1396 to draft language regarding 

the capacity in which they are acting for inclusion in the standardized account disclosure that is 

delivered to the retail customer.1397   

In addition, we estimate that dual-registrants will incur an estimated external cost of 

$4,970 for the assistance of outside counsel in the preparation and review of standardized 

language regarding capacity.1398  For the estimated 563 dually registered firms with retail 

                                                                                                                                                             

 

1396  The ten hour estimate includes five hours for in-house counsel to draft and review the 
standardized language, and five hours for consultation and review of compliance 
personnel. 

1397  As discussed above, the following estimates include the costs and burdens that broker-
dealers would incur in drafting standardized account disclosure language related to the 
scope and terms of the relationship on behalf of their dually registered representatives.  
For purposes of this analysis, the Commission assumes that broker-dealers will undertake 
these tasks on behalf of their registered representatives.  See Section IV.B.5 (discussing 
the costs and burdens associated with record-making). 

1398 Data from the Securities Industry Financial Markets Association’s Management & 
Professional Earnings in the Securities Industry 2013 (“SIFMA Management and 
Professional Earnings Report”), modified by Commission staff to account for an 1,800-
hour work-year and inflation, and multiplied by 5.35 (professionals) or 2.93 (office) to 
account for bonuses, firm size, employee benefits, and overhead, suggests that costs for 
this position is $497 per hour.  The SIFMA Management and Professional Earnings 
Report was updated in 2019 to reflect inflation.  The numbers in the report are higher 

 

 



675 

 

business,1399 we project an aggregate initial burden of 5,630 hours,1400 and $2.8 million in 

aggregate initial costs relating to disclosure of the capacity in which they are acting.1401   

Similarly, to comply with Regulation Best Interest, we believe that broker-dealers1402 will 

draft standardized language for inclusion in the account disclosure to provide the retail customer 

with more specific information regarding the type and scope of services that they provide.  We 

expect that the associated costs and burdens will differ between small and large broker-dealers, 

as large broker-dealers generally offer more products and services and therefore will need to 

evaluate a larger number of products and services.   

Given these assumptions, we estimate that a small broker-dealer will incur an internal 

initial burden of 10 hours for in-house counsel and in-house compliance to draft this standardized 

                                                                                                                                                             

 

than the numbers we used in the Proposing Release.  This estimate is based on the 
following calculation: (10 hours for outside counsel review/drafting) x ($497/hour for 
outside counsel services) = $4,970 in initial outside counsel costs.   

1399  See supra Section III.B.1.a, at Table 1, Panel B.  The number of dually registered broker-
dealers includes broker-dealers that are also Commission- and state-licensed investment 
advisers. 

1400  This estimate is based on the following calculation: (563 dually registered retail firms) x 
(10 hours) = 5,630 initial aggregate burden hours. 

1401  This estimate is based on the following calculation: (563 dually registered retail firms) x 
($4,970 in external cost per firm) = $2.8 million in aggregate initial costs. 

1402  In the Proposing Release, we inadvertently referred to “standalone broker-dealers” in this 
discussion, but our subsequent references and estimates reflected our intent to capture 
initial costs and burdens relating to disclosure of type and scope of services on all broker-
dealers (distinguishing between small and large). 



676 

 

language.1403  In addition, a small broker-dealer will incur an estimated external cost of $4,970 

for the assistance of outside counsel in the preparation and review of this standardized 

language.1404  For the estimated 756 small broker-dealers,1405 we project an aggregate initial 

burden of 7,560 hours,1406 and aggregate initial costs of $3.8 million.1407   

Given the broader array of products and services offered, we estimate that a large broker-

dealer will incur an internal burden of twenty hours to draft this standardized language.1408  A 

large broker-dealer will also incur an estimated cost of $7,470 for the assistance of outside 

counsel in the preparation and review of this standardized language.1409  For the estimated 2,010 

                                                                                                                                                             

 

1403  The 10-hour estimate includes 5 hours for in-house counsel to draft and review the 
standardized language, and 5 hours for consultation and review by in-house compliance. 

1404 This estimate is based on the following calculation: (10 hours for outside counsel 
review/drafting) x ($497/hour for outside counsel services) = $4,970 in initial outside 
counsel costs.   

1405  See supra footnote 1385 and accompanying text. 
1406  This estimate is based on the following calculation: (756 small broker-dealers) x (10 

hours per small broker-dealer) = 7,560 initial aggregate burden hours. 
1407  This estimate is based on the following calculation: (756 small broker-dealers) x ($4,970 

in external cost per small broker-dealer) = $3.8 million in aggregate initial outside 
counsel costs. 

1408  The 20-hour estimate includes 10 hours for in-house counsel to draft and review the 
standardized language, and 10 hours for consultation and review by in-house compliance. 

1409 This estimate is based on the following calculation: (15 hours for outside counsel 
review/drafting) x ($497/hour for outside counsel services) = $7,455 in initial outside 
counsel costs.   



677 

 

large retail broker-dealers, we estimate an aggregate initial burden of 40,200 hours1410 and $15 

million in aggregate initial costs.1411 

We estimate that all broker-dealers will each incur approximately 0.02 burden hours1412 

for delivery of the account disclosure document.1413  Based on FOCUS data, we estimate that the 

2,766 broker-dealers that report retail activity have approximately 139 million customer accounts, 

and that approximately 73.5%, or 102 million, of those accounts belong to retail customers.1414  

We therefore estimate that broker-dealers will have an aggregate initial burden of 2,040,000 
                                                                                                                                                             

 

1410  This estimate is based on the following calculation: (2,010 large broker-dealers) x (20 
burden hours) = 40,200 aggregate initial burden hours. 

1411  This estimate is based on the following calculation: (2,010 large broker-dealers) x 
($7,455 initial outside counsel costs) = $15 million in aggregate initial costs. 

1412  This is the same estimate the Commission makes in the Relationship Summary Adopting 
Release.  It is also the same estimate the Commission made in the Amendments to Form 
ADV Adopting Release, and for which we received no comment.  See Amendments to 
Form ADV, 17 CFR Parts 275 and 279 at 49259.  We expect that delivery requirements 
will be performed by a general clerk.  The general clerk’s time is included in the initial 
burden estimate. 

1413 As noted above, for new retail customers, we expect delivery to occur at the beginning of 
the relationship; for existing customers, we expect delivery to occur prior to or at the time 
of a recommendation. 

1414  We have revised our estimates from the Proposing Release to reflect the updated FOCUS 
Report data.  Therefore, the 2,766 broker-dealers (including dual-registrants) with retail 
customers report 139 million customer accounts.  See Section III.B.1.a, at Table 1, Panel 
B.  Assuming the amount of retail customer accounts is proportionate to the percentage of 
broker-dealers that have retail customers, or 73.5% of broker-dealers, then the number of 
retail customer accounts would be 73.5% of 139 million accounts = 102 million retail 
customer accounts.  This number likely overstates the number of deliveries to be made 
due to the double-counting of deliveries to be made by dual-registrants to a certain extent, 
and the fact that one customer may own more than one account. 



678 

 

hours, or approximately 738 hours1415 per broker-dealer for the first year after Regulation Best 

Interest is in effect.1416   

We estimate a total initial aggregate burden for all broker-dealers to develop and deliver 

to retail customers account disclosures relating to capacity and type and scope of services of 

2,093,390 burden hours.1417  We estimate a total initial aggregate cost of $21.6 million.1418 

ii. Ongoing Costs and Burdens 
 

For purposes of this analysis, we assume that broker-dealers will review and amend the 

standardized language in the account disclosure, on average, once a year.1419  Further, we assume 

                                                                                                                                                             

 

1415  These estimates are based on the following calculations:  (0.02 hours per customer 
account x (102 million retail customer accounts) = 2,040,000 aggregate burden hours.  
Conversely, (2,040,000 hours) / (2,766 broker-dealers) = approximately 738 burden hours 
per broker-dealer for the first year after Regulation Best Interest is in effect.   

1416  We estimate that broker-dealers will not incur any incremental postage costs because we 
assume that they will make such deliveries with another mailing the broker-dealer was 
already delivering to retail customers. 

1417  This estimate is based on the following calculation: (5,630 aggregate initial burden hours 
for dual-registrants) + (7,560 aggregate initial burden hours for small broker-dealers) + 
(40,200 burden hours for large broker-dealers) + (2,040,000 aggregate initial burden 
hours for all broker-dealers to deliver the account disclosures) = 2,093,390 total 
aggregate initial burden hours. 

1418  This estimate is based on the following calculation: ($2.8 million in initial aggregate 
costs for dual-registrants) + ($3.8 million in initial aggregate costs for small broker-
dealers) + ($15 million in initial aggregate costs for large broker-dealers) = $21.6 million 
in total initial aggregate costs. 

1419  We believe this annual timeframe is consistent with other obligations imposed on broker-
dealers.  For example, FINRA rules set an annual supervisory review as a minimum 
threshold for broker-dealers, for example, in FINRA Rules 3110 (requiring an annual 

 

 



679 

 

that broker-dealers will not incur outside costs in connection with updating account disclosures, 

as in-house personnel will be more knowledgeable about changes in capacity, and the type and 

scope of services offered by the broker-dealer.  Additionally, with respect to standalone broker-

dealers, because they will meet their obligation to disclose capacity by delivering the 

Relationship Summary, and will be subject to requirements to amend the Relationship Summary 

consistent with Form CRS, we estimate zero burden hours annually for ongoing costs relating to 

disclosure of capacity under the Disclosure Obligation. 

We estimate that each dually registered broker-dealer will incur approximately five 

burden hours annually for in-house compliance and business-line personnel to review changes in 

the dual-registrant’s capacity,1420 and another two burden hours annually for in-house counsel to 

amend the account disclosure to disclose material changes to the dual-registrant’s capacity, for a 

                                                                                                                                                             

 

review of the businesses in which the broker-dealer engages), 3120 (requiring an annual 
report detailing a broker-dealer’s system of supervisory controls, including compliance 
efforts in the areas of antifraud and sales practices); and 3130 (requiring each broker-
dealer’s CEO or equivalent officer to certify annually to the reasonable design of the 
policies and procedures for compliance with relevant regulatory requirements). 

1420  In the Proposing Release, we referred to capacity and type and scope of services, 
however, we captured the ongoing costs and burdens relating to disclosure of type and 
scope of services in the paragraphs that followed, where we inadvertently referred to 
“small standalone broker-dealers” and “large standalone broker-dealers,” but where our 
calculations reflected the burdens on all “small broker-dealers” and all “large broker-
dealers.”  See Proposing Release, footnotes 600-601.  We believe it is appropriate to 
distinguish between standalone and dually registered broker-dealers in assessing the costs 
and burdens relating to disclosure of capacity, and to distinguish between small and large 
firms in assessing the costs and burdens relating to disclosure of type and scope of 
services, as reflected in this section. 



680 

 

total of seven burden hours.  The estimated ongoing aggregate burden to amend dual-registrants’ 

account disclosures to reflect changes in capacity is therefore 3,941 hours per year.1421 

With respect to small broker-dealers, we estimate an internal burden of two hours for in-

house compliance and business-line personnel to review and update changes in types or scope of 

services, and another two burden hours annually for in-house counsel to amend the account 

disclosure to disclose material changes to type and scope of services—for a total of four burden 

hours.  The estimated ongoing aggregate burden for small broker-dealers to amend account 

disclosures to reflect changes in type and scope of services is therefore 3,024 hours per year.1422  

We estimate that large broker-dealers would incur ten burden hours annually for in-house 

compliance and business-line personnel to review and update changes the type and scope of 

services, and another ten burden hours annually for in-house counsel to amend the account 

disclosure to disclose material changes to the type and scope of services, for a total of twenty 

burden hours.  We therefore believe the ongoing, aggregate burden is 40,200 hours per year for 

large broker-dealers.1423 

                                                                                                                                                             

 

1421  This estimate is based on the following calculation: (7 burden hours per dually registered 
firm per year) x (563 dually registered broker-dealers) = 3,941 ongoing aggregate burden 
hours per year.   

1422  This estimate is based on the following calculation: (4 burden hours per broker-dealer per 
year) x (756 small broker-dealers) = 3,024 ongoing aggregate burden hours per year.   

1423  This estimate is based on the following calculation: (20 burden hours per broker-dealer 
per year) x (2,010 large broker-dealers) = 40,200 ongoing aggregate burden hours per 
year.681 

 

With respect to delivery of the amended account agreements in the event of material 

changes to the capacity disclosure or disclosure related to type and scope of services, we estimate 

that this would take place among 20% of a broker-dealer’s retail customer accounts annually.  

We therefore estimate broker-dealers to incur a total annual aggregate burden of 408,000 hours, 

or 148 hours per year per broker-dealer.1424  

The total ongoing aggregate burden for all broker-dealers to review, amend, and deliver 

updated account disclosures to reflect changes in capacity, type and scope of services would be 

455,165 burden hours per year.1425 

The Commission acknowledges that the types of services and product offerings vary 

greatly by broker-dealer, and therefore the costs and burdens associated with updating the 

account disclosure might also vary. 

(2) Disclosure of Fees and Costs 
 

The Commission assumes for purposes of this analysis that a broker-dealer will disclose 

its fees and costs through a standardized fee schedule, delivered to the retail customer at the 

                                                                                                                                                             

 

1424  (20%) x (102 million retail customer accounts) x (.02 hours for delivery to each customer 
account) = 408,000 aggregate burden hours.  Conversely, 408,000 aggregate burden 
hours / 2,766 broker-dealers = 148 burden hours per year per broker-dealer.   

1425  This estimate is based on the following calculation: (3,941 ongoing aggregate burden 
hours for dually registered broker-dealers) + (3,024 ongoing aggregate burden hours for 
small broker-dealers) + (40,200 ongoing aggregate burden hours for large broker-dealers) 
+ (408,000 ongoing aggregate burden hours for delivery of amended account disclosures) 
= 455,165 total ongoing aggregate burden hours per year. 



682 

 

beginning of the relationship, or, for existing retail customers, prior to or at the time of a 

recommendation and, as discussed below, will amend such fee schedules in the event of material 

changes.  Although we understand that many broker-dealers already provide fee schedules to 

retail customers, we are assuming for purposes of this analysis that a fee schedule would be 

created specifically for purposes of compliance with Regulation Best Interest.1426  While the 

Commission recognizes that the fee disclosure included in Disclosure Obligation applies to the 

broker-dealer entity and its associated persons, we do not expect any burdens or costs on 

associated persons related to the fees and costs as this information would be addressed in the 

broker-dealer entity’s fee schedule. 

i. Initial Costs and Burdens 
 

We assume that, for purposes of this analysis, the associated costs and burdens will differ 

between small and large broker-dealers, as large broker-dealers generally offer more products 

and services and therefore will need to evaluate a wider range of fees in their fee schedules.  As 

stated above, while we anticipate that many broker-dealers may already create fee schedules, we 

believe that small broker-dealers will initially spend five hours for in-house compliance and 

large broker-dealers will spend ten hours for in-house compliance to internally create a new fee 

schedule in consideration of the requirements of Regulation Best Interest.  We additionally 

                                                                                                                                                             

 

1426  Our estimates may be higher than actual, since firms may be able to use or simply update 
existing disclosures depending on the facts and circumstances. 



683 

 

estimate a one-time external cost of $2,485 for small broker-dealers1427 and $4,970 for larger 

broker-dealers for outside counsel to review the fee schedule.1428  We therefore estimate the 

initial aggregate burden for small broker-dealers to be 3,780 burden hours,1429 and the initial 

aggregate cost to be $1.88 million.1430  We estimate the aggregate burden for large broker-

dealers to be 20,100 burden hours,1431 and the aggregate cost to be $9.99 million.1432 

Similar to delivery of the account disclosure regarding capacity and type and scope of 

services, we estimate the burden for broker-dealers to make the initial delivery of the fee 

schedule to new retail customers, at the beginning of the relationship, and existing retail 

customers, prior to or at the time of a recommendation, will require approximately 0.02 hours to 

                                                                                                                                                             

 

1427  This cost estimate is based on the following calculation: (5 hours of review) x ($497/hour 
for outside counsel services) = $2,485 outside counsel costs. 

1428  This cost estimate is based on the following calculation: (10 hours of review) x 
($497/hour for outside counsel services) = $4,970 outside counsel costs.   

1429  This estimate is based on the following calculation: (5 burden hours of review per small 
broker-dealer) x (756 small broker-dealers) = 3,780 aggregate initial burden hours. 

1430  This estimate is based on the following calculation: ($2,485 for outside counsel costs per 
small broker-dealer) x (756 small broker-dealers) = $1.88 million in aggregate initial 
outside costs. 

1431  This estimate is based on the following calculation: (10 burden hours of review per large 
broker-dealer) x (2,010 large broker-dealers) = 20,100 aggregate initial burden hours. 

1432  This estimate is based on the following calculation: ($4,970 for outside counsel costs per 
large broker-dealer) x (2,010 large broker-dealers) = $9.99 million in aggregate initial 
costs. 



684 

 

deliver to each retail customer.1433  As stated above, we estimate that the 2,766 broker-dealers 

that report retail activity have approximately 139 million customer accounts, and that 

approximately 73.5%, or 102 million, of those accounts belong to retail customers.1434  We 

therefore estimate that broker-dealers will have an aggregate initial burden of 2,040,000 hours, or 

approximately 738 hours per broker-dealer for the first year after Regulation Best Interest is in 

effect.1435   

The total aggregate initial burden for broker-dealers is therefore estimated at 

2,063,8801436 hours, and the total aggregate initial cost is estimated at $11.87 million.1437 

ii. Ongoing Costs and Burdens 
 

For purposes of this PRA analysis, we assume that broker-dealers will review and amend 

the fee schedule on average, once a year.  With respect to small broker-dealers, we estimate that 

                                                                                                                                                             

 

1433  See supra footnote 1412. 
1434  See supra footnote 1413. 
1435  This estimate is based on the following calculation: (102 million retail customer 

accounts) x (.02 hours for delivery to each customer account) = 2,040,000 aggregate 
burden hours.  Conversely, (2,040,000 aggregate burden hours) / (2,766 broker-dealers) = 
738 burden hours per broker-dealer for the first year after Regulation Best Interest is in 
effect. 

1436  This estimate is based on the following calculations: (3,780 aggregate burden hours for 
small broker-dealers) + (20,100 burden hours for large broker-dealers) + (2,040,000 
burden hours for delivery) = 2,063,880 total aggregate initial burden hours.   

1437  This estimate is based on the following calculation: ($1.88 million for small broker-
dealer costs) + ($9.99 million large broker-dealer costs) = $11.87 million in total initial 
aggregate costs. 



685 

 

reviewing and updating the fee schedule will require approximately two hours for in-house 

compliance per year, and for large broker-dealers, we estimate that the recurring, annual burden 

to review and update the fee schedule will be four hours for in-house compliance for each large 

broker-dealer.  Based on these estimates, we estimate the recurring, aggregate, annualized burden 

will be 1,512 hours for small broker-dealers1438 and 8,040 hours for large broker-dealers.1439  We 

do not anticipate that small or large broker-dealers will incur outside legal, compliance, or 

consulting fees in connection with updating their standardized fee schedule since in-house 

personnel would be more knowledgeable about these facts, and we therefore do not expect 

external costs associated with updating the fee schedule.   

With respect to delivery of the amended fee schedule in the event of a material change, 

we estimate that this would take place among 40% of a broker-dealer’s retail customer accounts 

annually, and that broker-dealers will require approximately 0.02 hours to deliver the amended 

fee schedule to each retail customer.1440  We therefore estimate broker-dealers would incur a 

total annual aggregate burden of 816,000 hours, or 295 hours per broker-dealer.1441  

                                                                                                                                                             

 

1438  This estimate is based on the following calculation: (2 burden hours per broker-dealer) x 
(756 small broker-dealers) = 1,512 aggregate burden hours per broker-dealer per year. 

1439  This estimate is based on the following calculation: (4 burden hours per broker-dealer) x 
(2,010 large broker-dealers) = 8,040 aggregate burden hours per broker-dealer per year. 

1440  See supra footnote 1412.   
1441  This estimate is based on the following calculation: (40% of 102 million retail customer 

accounts) x (.02 hours) = 816,000 aggregate burden hours.  Conversely, (816,000 
 

 



686 

 

The total ongoing aggregate burden for all broker-dealers to review, amend, and deliver 

updated account disclosures to reflect changes in fees and costs would be 825,552 burden hours 

per year.1442 

The Commission acknowledges that the type of fee schedule may vary greatly by broker-

dealer, and therefore that the costs or burdens associated with updating the standardized fee 

schedule might similarly vary.   

(3) Disclosure of All Material Facts Relating to Conflicts of 
Interest Associated with the Recommendation 

 
Regulation Best Interest requires broker-dealers to provide a retail customer, in writing, 

full and fair disclosure of all material facts relating to conflicts of interest that are associated with 

the recommendation.  Because the Disclosure Obligation applies to both the broker-dealer entity 

and its associated persons, the Commission expects that the broker-dealer entity and its 

associated persons will incur initial and ongoing burdens.  However, as with the disclosure of the 

capacity in which they are acting and type and scope of services, we assume for purposes of this 

                                                                                                                                                             

 

aggregate burden hours) / (2,766 broker-dealers) = 295 burden hours per broker-dealer 
per year.   

1442  This estimate is based on the following calculation: (1,512 ongoing aggregate burden 
hours for small broker-dealers) + (8,040 ongoing aggregate burden hours for large 
broker-dealers) + (816,000 ongoing aggregate burden hours for delivery of amended 
account disclosures) = 825,552 total ongoing aggregate burden hours per year. 



687 

 

analysis that the broker-dealer entities will incur the costs and burdens of disclosing material 

conflicts of interest on behalf of their associated persons.1443  

i. Initial Costs and Burdens 
 

The Disclosure Obligation provides broker-dealers with the flexibility to choose the form 

and manner of conflict disclosure.  However, we believe that many or most broker-dealers will 

develop a standardized conflict disclosure document and deliver it to their retail customers.1444  

We also assume for purposes of this PRA analysis that broker-dealers will update and deliver the 

standardized conflict disclosure document yearly on an ongoing basis, following the broker-

dealer’s annual conflicts review process.  

For purposes of this PRA analysis, we assume that a standardized conflict disclosure 

document will be developed by in-house counsel and reviewed by outside counsel.  For small 

broker-dealers, we estimate it will take in-house counsel, on average, five burden hours to create 

the standardized conflict disclosure document and outside counsel five hours to review and 

revise the document.  We estimate that the initial aggregate burden for the development of a 

standardized disclosure document, based on an estimated 756 small broker-dealers, will be 3,780 

                                                                                                                                                             

 

1443  See Section IV.B.5 (discussing the costs and burdens associated with record-making, 
including for associated persons of a broker-dealer). 

1444  As noted above, we assume that delivery for new customers will occur at the beginning 
of the relationship, and that delivery for existing customers will occur prior to or at the 
time a recommendation is made. 



688 

 

burden hours.1445  We additionally estimate an initial cost of $2,485 per small broker-dealer,1446 

and an aggregate initial cost of $1.88 million for all small broker-dealers.1447   

We expect the development and review of the standardized conflict disclosure document 

to take longer for large broker-dealers because, as discussed above, we believe large broker-

dealers generally offer more products and services and employ more individuals, and therefore 

will need to disclose a larger number of conflicts.  We estimate that for large broker-dealers, it 

will take 7.5 burden hours for in-house counsel to create the standardized conflict disclosure 

document, and outside counsel will take another 7.5 hours to review and revise the disclosure 

document.  As a result, we estimate the initial aggregate burden, based on an estimated 2,010 

large broker-dealers, to be approximately 15,075 burden hours.1448  We additionally estimate 

                                                                                                                                                             

 

1445  This estimate is based on the following calculation: (5 hours) x (756 small broker-
dealers) = 3,780 aggregate initial burden hours. 

1446  This estimate is based on the following calculation: ($497/hour) x (5 hours) = $2,485 in 
initial costs. 

1447  This estimate is based on the following calculation: ($497/hour x 5 hours) x (756 small 
broker-dealers) = $1.88 million in aggregate initial costs. 

1448  This estimate is based on the following calculation: (7.5 hours x 2,010 large broker-
dealers) = 15,075 aggregate initial burden hours. 



689 

 

initial costs of $3,728 per broker-dealer,1449 and an aggregate initial cost for large broker-dealers 

of approximately $7.49 million.1450   

We assume that broker-dealers will deliver the standardized conflict disclosure document 

to new retail customers at the inception of the relationship, and to existing retail customers prior 

to or at the time of a recommendation.  We estimate that broker-dealers will require 

approximately 0.02 hours to deliver the standardized conflict disclosure document to each retail 

customer.1451  We therefore estimate that broker-dealers will incur an aggregate initial burden of 

2,040,000 hours, or approximately 738 hours per broker-dealer for delivery of the standardized 

conflict disclosure document the first year after Regulation Best Interest is in effect.1452  

                                                                                                                                                             

 

1449  This estimate is based on the following calculation: ($497/hour) x (7.5 hours) = $3,728 in 
initial costs per broker-dealer. 

1450  This estimate is based on the following calculation: ($497/hour) x (7.5 hours) x 2,010 
large broker-dealers) = $7.49 million in aggregate costs. 

1451  See supra footnote 1412.  For purposes of this PRA analysis, we have assumed any initial 
disclosures made by the broker-dealer related to material conflicts of interest will be 
delivered together. 

1452  These estimates are based on the following calculations:  (0.02 hours per customer 
account x 102 million retail customer accounts) = 2,040,000 aggregate initial burden 
hours.  Conversely, (2,040,000 hours) / (2,766 broker-dealers) = 738 burden hours per 
broker-dealer. 



690 

 

The total aggregate initial burden for broker-dealers is therefore estimated at 

2,058,8551453 hours, and the total aggregate initial cost is estimated at $9.37 million.1454 

ii. Ongoing Costs and Burdens 

We believe that broker-dealers will incur ongoing annual burdens and costs to update the 

disclosure document to include newly identified conflicts.  We assume for purposes of this 

analysis that broker-dealers will update their conflict disclosure document annually, after 

conducting an annual conflicts review.  We estimate that the conflicts disclosures will be updated 

internally by both small and large broker-dealers.   

We estimate that in-house counsel at a small broker-dealer will require approximately 

one hour per year to update the standardized conflict disclosure document, for an ongoing 

aggregate, annual burden of approximately 756 hours.1455  For large broker-dealers, we estimate 

that the ongoing, aggregate annual burden would be two hours for each broker-dealer: one hour 

for in-house compliance and one hour for in-house counsel for legal personnel.  We therefore 

estimate the ongoing, aggregate burden for large broker-dealers to be approximately 4,020 

                                                                                                                                                             

 

1453  This estimate is based on the following calculations: (3,780 aggregate burden hours for 
small broker-dealers) + (15,075 burden hours for large broker-dealers) + (2,040,000 
burden hours for delivery) = 2,058,855 total aggregate initial burden hours. 

1454  This estimate is based on the following calculation: ($1.88 million for small broker-
dealer costs) + ($7.49 million large broker-dealer costs) = $9.37 million in total aggregate 
initial costs. 

1455  This estimate is based on the following calculation: (1 hour per broker-dealer) x (756 
small broker-dealers) = 756 aggregate burden hours per year. 



691 

 

burden hours.1456  We do not anticipate that small or large broker-dealers will incur outside legal, 

compliance, or consulting fees in connection with updating their standardized conflict disclosure 

document, since in-house personnel would presumably be more knowledgeable about conflicts 

of interest.   

With respect to ongoing delivery of the updated conflict disclosure document, we 

estimate that this will take place among 40% of a broker-dealer’s retail customer accounts 

annually, and that broker-dealers will require approximately 0.02 hours to deliver the updated 

conflict disclosure document to each retail customer.1457  We therefore estimate that broker-

dealers will incur an ongoing, aggregate annual burden of 816,000 hours, or 295 burden hours 

per broker-dealer.1458  The total aggregate ongoing burden for broker-dealers is therefore 

estimated at 820,776 hours.1459 

                                                                                                                                                             

 

1456  This estimate is based on the following calculation: (2 hours per broker-dealer) x (2,010 
large broker-dealers) = 4,020 aggregate burden hours per year. 

1457  See supra footnote 1412.  The Commission estimates that broker-dealers will update their 
disclosures of fees and costs and material facts relating to conflicts of interest that are 
associated with their recommendation more frequently than disclosure related to capacity 
or type and scope of services. 

1458  This estimate is based on the following calculation: (40% of 102 million retail customer 
accounts) x (.02 hours) = 816,000 aggregate burden hours per year.  Conversely, 
(816,000 aggregate burden hours) / (2,766 broker-dealers) = 295 hours per broker-dealer 
per year.   

1459  This estimate is based on the following calculations: (756 aggregate burden hours for 
small broker-dealers) + (4,020 aggregate burden hours for large broker-dealers) + 
(816,000 aggregate burden hours for delivery) = 820,776 total aggregate ongoing burden 
hours.   



692 

 

Based on the calculation describe above, we estimate that broker-dealers will incur an 

aggregate total initial burden of 6,216,125 hours1460 and a total initial cost of $42.84 million,1461 

as well as an aggregate total ongoing annual burden of 2,101,493 hours1462 to comply with the 

Disclosure Obligation. 

2. Care Obligation 

The Care Obligation requires 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, 

                                                                                                                                                             

 

1460  This estimate is based on the following calculation: (2,093,390 aggregate initial burden 
hours for initial compliance with disclosure of capacity and type and scope of services) + 
(2,063,880 aggregate initial burden hours for initial compliance with disclosure of fees 
and costs) + (2,058,855 aggregate initial burden hours for initial compliance with 
disclosure of all material facts regarding disclosure of conflicts of interest associated with 
the recommendation) = 6,216,125 total aggregate initial burden hours for compliance 
with the Disclosure Obligation.  

1461  This estimate is based on the following calculation: ($21.6 million aggregate initial cost 
for compliance with disclosure of capacity and type and scope of services) + ($11.87 
million aggregate initial cost for compliance with disclosure of fees and costs) + ($9.37 
aggregate initial cost for compliance with disclosure of all material facts regarding 
disclosure of conflicts of interest associated with the recommendation) = $42.84 million 
total aggregate initial cost for compliance with the Disclosure Obligation.   

1462  This estimate is based on the following calculation: (455,165 aggregate annual burden 
hours for ongoing compliance with disclosure of capacity and type and scope of services) 
+ (825,552 aggregate annual burden hours for ongoing compliance with disclosure of 
fees and costs) + (820,776 aggregate annual burden hours for ongoing compliance with 
disclosure of all material facts regarding disclosure of conflicts of interest associated with 
the recommendation) = 2,101,493 total aggregate burden hours per year for ongoing 
compliance with the Disclosure Obligation. 



693 

 

that the 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.  However, any PRA burdens 

or costs associated with the Care Obligation are duplicative of costs associated with other 

obligations in Regulation Best Interest, including the Disclosure Obligation and the Record-

Making Obligation under Rule 17a-3(a)(35) and Recordkeeping Obligation under Rule 17a-

4(e)(5). 

3. Conflict of Interest Obligation 

The Conflict of Interest Obligation creates an overarching obligation to require broker-

dealers1463 to establish written policies and procedures reasonably designed to identify and at a 

minimum disclose, pursuant to the Disclosure Obligation, or eliminate all conflicts of interest 

associated with a recommendation. More specifically, broker-dealers are specifically required 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 to a retail 

                                                                                                                                                             

 

1463  As discussed above, the Conflict of Interest Obligation and Compliance Obligation apply 
solely to the broker or dealer entity, and not to the associated persons of a broker or 
dealer. 



694 

 

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 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.1464 

Written policies and procedures developed pursuant to the Conflict of Interest Obligation 

of Regulation Best Interest would help a broker-dealer to develop a process reasonably designed 

for its business, for identifying conflicts of interest, and then determining whether to eliminate, 

or disclose and/or mitigate the conflict and the appropriate means of eliminating, disclosing 

and/or mitigating the conflict.  In addition, establishing and maintaining written policies and 

procedures would generally (1) assist a broker-dealer in supervising its associated persons and 

assessing compliance with the Conflict of Interest Obligation; and (2) assist the Commission and 

SRO staff in connection with examinations and investigations.1465   

                                                                                                                                                             

 

1464  Rule 15l-1 under the Exchange Act. 
1465  See Section II.C.3.a. 

 Any written policies and procedures developed pursuant to Regulation Best Interest 
would be required to be retained pursuant to Exchange Act Rule 17a-4(e)(7), which 
requires broker-dealers to retain compliance, supervisory, and procedures manuals (and 
any updates, modifications, and revisions thereto) describing the policies and procedures 

 

 



695 

 

In light of the modifications to several substantive requirements of the rule relative to the 

Proposing Release, including the Conflict of Interest Obligation, as discussed in more detail 

above,  we believe these changes will allow broker-dealers’ to more easily incorporate the 

requirements of Regulation Best Interest into existing supervisory and compliance systems and 

streamline compliance with Regulation Best Interest.1466  Therefore, we generally believe our 

proposed burdens and costs are accurate but have updated estimates to reflect changes in the 

number of broker-dealers and costs of certain services since the last estimate in the Proposing 

Release. 

Following is a detailed discussion of the estimated costs and burdens associated with the 

Conflict of Interest Obligation. 

a. Written Policies and Procedures 

i. Initial Costs and Burdens 

We believe that most broker-dealers have policies and procedures in place to address 

conflicts of interest, but do not necessarily have written policies and procedures regarding the 

identification and management of conflicts as required by Regulation Best Interest.  To comply 

                                                                                                                                                             

 

of the broker-dealer with respect to compliance with applicable laws and rules, and 
supervision of the activities of each associated, for a specified period of time. The record 
retention requirements of Rule 17a-4(e)(7) include any written policies and procedures 
that broker-dealers may produce pursuant to the Conflict of Interest Obligation of 
Regulation Best Interest.   

1466  See Section II.C.3. 



696 

 

with the Conflict of Interest Obligation, we believe that broker-dealers would utilize a 

combination of in-house and outside legal and compliance counsel to update existing policies 

and procedures.1467  We assume that, for purposes of this analysis, the associated costs and 

burdens would differ between small and large broker-dealers, as large broker-dealers generally 

offer more products and services and therefore would need to evaluate and address a greater 

number of potential conflicts of interest.  As discussed above, we estimate that 2,010 broker-

dealers would qualify as large broker-dealers for purposes of this analysis and 756 would qualify 

as small broker-dealers that have retail business.1468 

In the Proposing Release, we estimated that a large broker-dealer would incur a one-time 

internal burden of 60 hours for in-house legal and in-house compliance counsel to update 

existing policies and procedures to comply with Regulation Best Interest.1469  We also estimated 

a cost of $4,720 for outside counsel to review updated policies and procedures on behalf of a 

large broker-dealer, with an aggregate initial burden of 123,300 burden hours and aggregate 

initial cost of $9.70 million for large broker-dealers.1470 

In the Proposing Release, we assumed that small broker-dealers would primarily rely on 

outside counsel to update existing policies and procedures, as small broker-dealers generally 

                                                                                                                                                             

 

1467   See footnote 1382 and accompanying text. 
1468  See footnote 1388 and accompanying text.  
1469  See Proposing Release at 21666. 
1470  Id.  



697 

 

have fewer in-house legal and compliance personnel.  Given that smaller broker-dealers 

generally have fewer conflicts of interest, we estimated that 40 hours of outside legal counsel 

services would be required, for a one-time cost of $18,800 per small broker-dealer, and an 

aggregate cost of $15.1 million for all small broker-dealers, and we also expected that in-house 

compliance personnel would require 10 hours to review and approve the updated policies and 

procedures, for an aggregate burden of 8,020 hours.1471  Therefore, we estimated the total initial 

aggregate burden to be 131,320 hours and the total initial aggregate cost to be $24.8 million.1472 

We believe our estimates are generally accurate in light of the increased specificity in 

Regulation Best Interest as to how a broker-dealer must address specified conflicts of interest but 

due to changes in the number of broker-dealers and cost estimates for certain services, we are 

revising our burden and cost estimates.1473   

For purposes of Regulation Best Interest as adopted, we estimate that a large broker-

dealer would incur an initial burden of 50 hours for in-house counsel and in-house compliance to 

update existing policies and procedures to comply with Regulation Best Interest and an initial 

burden of 5 hours for general counsel and 5 hours for a Chief Compliance Officer to review and 

                                                                                                                                                             

 

1471  Id. 
1472  Id. 
1473  We have revised our cost estimates to reflect the updated SIFMA Management and 

Professional Earnings Report which was updated in 2019 to reflect inflation.  Therefore, 
the hourly rates used here for certain services, for example, outside legal counsel and 
outside compliance costs, are higher than the numbers in the Proposing Release. 



698 

 

approve the updated policies and procedures, for a total of 60 burden hours.1474  We also estimate 

ten hours of outside counsel services will be required at a cost of $4,970 to review updated 

policies and procedures on behalf of a large broker-dealer.1475  We therefore estimate the 

aggregate initial burden for large broker-dealers to be of 120,600 burden hours1476 and initial 

aggregate cost of approximately $10.0 million for large broker-dealers.1477 

For small broker-dealers, we believe that they would primarily rely on outside counsel to 

update existing policies and procedures, as small broker-dealers generally have fewer in-house 

legal and compliance personnel.  Given that smaller broker-dealers generally have fewer 

conflicts of interest, we estimate that 40 hours of outside legal counsel would be required to 

update existing policies and procedures, for a one-time cost of $19,880 per small broker-

                                                                                                                                                             

 

1474  This estimate is based on the following calculation:  (50 hours of review for in-house 
counsel and in-house compliance counsel) + (5 hours of review for general counsel) + (5 
hours of review for Chief Compliance Officer) = 60 initial burden hours per large broker-
dealer. 

1475  Data from the SIFMA Management and Professional Earnings Report suggests that the 
average hourly rate for legal services is $497/hour.  This cost estimate is therefore based 
on the following calculation:  (10 hours of review) x ($497/hour for outside counsel 
services) = $4,970 in outside counsel costs per large broker-dealer. 

1476  This estimate is based on the following calculation:  (60 burden hours of review per large 
broker-dealer) x (2,010 large broker-dealers) = 120,600 aggregate burden hours for large 
broker-dealers. 

1477 This estimate is based on the following calculation:  ($4,970 for outside counsel costs per 
large broker-dealer) x (2,010 large broker-dealers) = approximately $10.0 million in 
outside counsel costs for large broker-dealers. 



699 

 

dealer,1478 and an aggregate cost of $15.0 million for all small broker-dealers.1479  We also 

expect that in-house compliance would require 10 hours to review and approve the updated 

policies and procedures, for an aggregate burden of 7,560 hours.1480  Therefore, we estimate the 

total initial aggregate burden to be 128,160 hours1481 and the total initial aggregate cost to be 

approximately $25.0 million.1482 

ii. Ongoing Costs and Burdens 

 For purposes of this analysis, we assume that small and large broker-dealers would 

review and update policies and procedures on an annual basis to accommodate the addition of, 

for example, new products or services, new business lines, and/or new personnel.  We also 

assume that broker-dealers would review and update their policies and procedures for 

                                                                                                                                                             

 

1478  This cost estimate is based on the following calculation:  (40 hours of review) x 
($497/hour for outside counsel services) = $19,880 in outside counsel costs per small 
broker-dealer. 

1479  This cost estimate is based on the following calculation: ($19,880 for outside attorney 
costs per small broker-dealer) x (756 small broker-dealers) = approximately $15.0 million 
in outside counsel costs for small broker-dealers.   

1480  This estimate is based on the following calculation: (10 burden hours) x (756 small 
broker-dealers) = 7,560 aggregate burden hours.   

1481  This estimate is based on the following calculation: (120,600 aggregate burden hours for 
large broker-dealers) + (7,560 aggregate burden hours for small broker-dealers) = 
128,160 total aggregate burden hours.   

1482  This estimate is based on the following calculation: ($10 million in aggregate costs for 
large broker-dealers) + ($15.0 million in aggregate costs for small broker-dealers) = 
$25.0 million total aggregate costs. 



700 

 

compliance with the Conflict of Interest Obligation on an annual basis, and in-house personnel 

would perform the review and make any updates. 

 In the Proposing Release, we estimated that large broker-dealers would incur an annual 

internal burden of 12 hours to review and update existing policies and procedures to identify new 

conflicts for an ongoing, aggregate burden of 24,660 hours with no ongoing costs as they would 

rely on internal personnel.1483  We assumed small broker-dealers would rely on outside legal 

counsel and compliance consultants to review and update policies and procedures, with final 

review and approval from in-house compliance1484 with an aggregate, annual ongoing cost of 

$3.08 million per year.1485  In addition to these costs, we believed that small broker-dealers 

would incur an internal an ongoing, aggregate burden of 28,670 hours.  While the Commission 

believes our time estimates from the Proposing Release are generally accurate, we have revised 

our burdens and estimates to account for changes in both the number of broker-dealers and 

external costs of services. 

 We estimate that large broker-dealers, which generally have more numerous and complex 

products and services, as well as and higher rates of hiring and turnover would incur an annual 

internal burden of 12 hours to review and update existing policies and procedures:  four hours for 

in-house counsel, four hours for in-house compliance, and four hours for business-line personnel 
                                                                                                                                                             

 

1483  Proposing Release at 21667. 
1484  Id. 
1485  Id.701 

 

to identify new conflicts.  We therefore estimate an ongoing, aggregate burden for large broker-

dealers of approximately 24,120 hours.1486  Because we assume that large broker-dealers would 

rely on internal personnel to update policies and procedures on an ongoing basis, we do not 

believe large broker-dealers would incur ongoing external costs. 

 We assume for purposes of this analysis that small broker-dealers, generally have fewer 

and less complex products and lower rates of hiring.  We also assume they would primarily rely 

on outside legal counsel and outside compliance consultants for review and update of their 

policies and procedures, with final review and approval from an in-house compliance manager.  

We estimate that outside legal counsel would require approximately five hours per year to update 

policies and procedures, for an annual cost of $2,485 for each small broker-dealer.1487  The 

projected aggregate, annual ongoing cost for outside legal counsel to update policies and 

procedures for small broker-dealers would be $1.88 million per year.1488  In addition, we expect 

that small broker-dealers would require five hours of outside compliance services per year to 

                                                                                                                                                             

 

1486  This estimate is based on the following calculation: (12 burden hours per large broker-
dealer) x (2,010 large broker-dealers) = 24,120 aggregate ongoing burden hours.   

1487  This estimate is based on the following calculation: (5 hours per small broker-dealer) x 
($497/hour for outside counsel services) = $2,485 in outside counsel costs.   

1488  This estimate is based on the following calculation: ($2,485 in outside counsel costs per 
small broker-dealer) x (756 small broker-dealers) = $1.88 million in aggregate, ongoing 
outside legal costs per year.   



702 

 

update their policies and procedures, for an ongoing cost of $1,365 per year,1489 and an aggregate 

ongoing cost of $1.03 million.1490  The total aggregate, ongoing cost for small broker-dealers is 

therefore projected at $2.91 million per year.1491 

 In addition to the costs described above, we additionally believe small broker-dealers 

would incur an internal burden of approximately 5 hours for an in-house compliance manager to 

review and approve the updated policies and procedures per year.  The ongoing, aggregate 

burden for small broker-dealers would be 3,780 hours for in-house compliance manager 

review.1492 

                                                                                                                                                             

 

1489  We believe that performance of this function will most likely be equally allocated 
between a senior compliance examiner and a compliance manager.  Data from the 
SIFMA Management and Professional Earnings Report suggests that costs for these 
positions are $237 and $309 per hour, respectively for an average of $273 per hour. This 
cost estimate is based on the following calculation: (5 hours of review) x ($273/hour for 
outside compliance services) = $1,365 in outside compliance service costs.   

1490  This estimate is based on the following calculation: ($1,365 in outside compliance costs 
per small broker-dealer) x (756 small broker-dealers) = $1.03 million in aggregate, 
ongoing outside compliance costs per year.   

1491  This estimate is based on the following calculation: ($1.88 million for outside legal 
counsel costs) + ($1.03 million for outside compliance costs) = $2.91 million total 
aggregate ongoing costs per year.   

1492  This estimate is based on the following calculation: (5 hours compliance manager review 
per small broker-dealer) x (756 small broker-dealers) = 3,780 aggregate ongoing burden 
hours per year.   



703 

 

 We therefore estimate the total ongoing aggregate ongoing burden to be 27,900 hours per 

year1493 
and the total ongoing aggregate cost to be $2.91 million per year.1494 

 The Commission acknowledges that policies and procedures may vary greatly by broker-

dealer, given the differences in size and the complexity of broker-dealer business models. 

Accordingly, we expect that the need to update policies and procedures might also vary greatly. 

b. Identification and Management of Conflicts of Interest 

 With respect to identifying and determining whether a conflict of interest exists in 

connection with a recommendation and whether it needs to be addressed through disclosure, 

mitigation and/or elimination, a broker-dealer would first need to establish mechanisms to 

proactively and systematically identify conflicts of interest in its business on an ongoing or 

periodic basis.1495  For purposes of this analysis, we assume that most broker-dealers already 

have an existing technological infrastructure in place, and we assume it would need to be 

modified to comply with the Conflict of Interest Obligation. 

                                                                                                                                                             

 

1493  This estimate is based on the following calculation: (24,120 aggregate ongoing burden 
hours for large broker-dealers) + (3,780 aggregate ongoing burden hours for small 
broker-dealers) = 27,900 total aggregate ongoing burden hours per year.   

1494  This estimate is based on the following calculation: ($2.91 million per year in total 
aggregate ongoing costs for small broker-dealers) + ($0 projected ongoing costs for large 
broker-dealers) = $2.91 million per year in total aggregate ongoing costs. 

1495  See supra Section III.C.3. 



704 

 

i. Initial Costs and Burdens 

 As stated in the Proposing Release, we believed that costs and burdens may vary greatly 

depending on the size of the broker-dealer, but we expected that modification of a broker-

dealer’s existing technology would initially require the retention of an outside programmer as 

well as coordination between the programmer and the broker-dealer’s in-house compliance 

manager.  The costs and burdens for this process were estimated to be $15.43 million and 14,285 

burden hours.1496  In addition to these costs and burdens, we expected that a broker-dealer would 

spend time to determine whether the conflict of interest identified were material and would have 

required an additional 14,285 burden hours for all broker-dealers for an aggregate burden of 

28,570 hours for identification of conflicts of interest.1497 

 As stated above, we believe the process would be largely the same as set forth in the 

Proposing Release but have revised our estimates and costs below to account for changes in the 

number of broker-dealers and external costs as well as to account for some changes to the 

structure of the Conflict of Interest Obligation. 

 To comply with the Conflict of Interest Obligation, we expect that broker-dealers will 

modify existing technology through the work of an outside programmer which would require, on 

                                                                                                                                                             

 

1496  Proposing Release at 21667. 
1497  Id. 



705 

 

average, an estimated 20 hours, for an estimated cost per broker-dealer of $5,680.1498  We 

additionally continue to estimate (as was set forth in the Proposing Release) that coordination 

between the programmer and the broker-dealer’s compliance manager would involve five burden 

hours.1499  The aggregate initial costs and burdens for the modification of existing technology to 

identify conflicts of interest would therefore be $15.71 million,1500 and 13,830 burden hours.1501 

 As a result of the changes made to the rule text of the Conflict of Interest Obligation, we 

believe that broker-dealers would incur burdens to:  (1) identify conflicts of interest and 

determine whether the conflict involves an incentive to an associated person to place the interest 

of the broker-dealer or natural person making the recommendation ahead of the interest of the 

retail customer, a material limitation on the product menu, or a sales practice that is based on the 

sales of specific securities or specific types of securities within a limited period of time and (2) 

determine whether and how the conflict would be disclosed, disclosed and mitigated, or 

eliminated in accordance with the Conflict of Interest Obligation.  In order to complete this 

                                                                                                                                                             

 

1498  Data from the SIFMA Management and Professional Earnings Report suggests that the 
average hourly rate for technology services in the securities industry is $284.  This cost 
estimate is based on the following calculation:  (20 hours of review) x ($284/hour for 
technology services) = $5,680. 

 
1500  This cost estimate is based on the following calculation:  ($5,680 in outside programmer 

costs per broker-dealer) x (2,766 broker-dealers) = $15.71 million in aggregate outside 
programmer costs. 

1501  This burden estimate is based on the following calculation:  (5 burden hours for in-house 
compliance manager) x (2,766 broker-dealers) = 13,830 aggregate burden hours. 



706 

 

process, we believe a broker-dealer, on average, would require approximately 20 hours1502 of 

review per broker-dealer,1503 for an aggregate of 55,320 burden hours for all broker-dealers.1504  

We therefore estimate the total initial aggregate burden for identification and management of 

conflicts of interest is 69,150 hours.1505 

ii. Ongoing Costs and Burdens 

 To maintain compliance with the Conflict of Interest Obligation, we assume for purposes 

of this analysis that a broker-dealer would seek to identify additional conflicts of interest as its 

business evolves.  As noted above, the Commission recognizes that broker-dealers vary in the 

types of services and product offerings and therefore vary in the types of conflicts of interest that 

exist within and across broker-dealers.1506   

 However, for purposes of the PRA analysis in the Proposing Release, we assumed that 

broker-dealers would, at a minimum, engage in a material conflicts identification process on an 

annual basis, and we estimated that in the aggregate broker-dealers would spend approximately 

                                                                                                                                                             

 

1502  In light of the changes made to the rule text of the Conflict of Interest Obligation and the 
comments received, we have increased our estimate to 20 burden hours per broker-dealer. 

1503  This burden estimate consists of 10 hours for review by business line personnel, and 10 
hours for review by in-house compliance manager. 

1504  This burden estimate is based on the following calculation:  (20 burden hours) x (2,766 
broker-dealers) = 55,320 aggregate burden hours. 

1505  This burden estimate is based on the following calculation: (13,830 burden hours for 
modification of technology) + (55,320 burden hours for evaluation of managing conflicts) 
= 69,150 total aggregate burden hours.   

1506  See supra Section II.C.3. 



707 

 

28,570 hours each to complete this process per year.1507  Similar to the Proposing Release, we 

believe that for purposes of this analysis, broker-dealers would, through the help of the business 

line and compliance personnel, spend on average 10 hours1508 to perform an annual conflicts 

review using the modified technology infrastructure.1509  Therefore, the Commission estimates 

that the aggregate ongoing burden for an annual conflicts review, based on an estimated 2,766 

retail broker-dealers, would be approximately 27,660 burden hours per year.1510  Because we 

assume that broker-dealers would use in-house personnel to identify and evaluate new, potential 

conflicts, we continue to believe they would not incur additional ongoing external costs. 

c. Training 

 As discussed in the Proposing Release, we expect that broker-dealers would develop 

training programs to comply with Regulation Best Interest, including the Conflict of Interest 

Obligation.  However, we believe that any burdens and costs associated with a training program 

                                                                                                                                                             

 

1507  See Proposing Release at 21668. 
1508  This burden estimate consists of five hours for review by business line personnel, and 

five hours for review by an in-house compliance manager. 
1509  FINRA rules set an annual supervisory review as a minimum threshold for broker-

dealers. See, e.g., FINRA Rules 3110 (requiring an annual review of the businesses in 
which the broker-dealer engages); 3120 (requiring an annual report detailing a broker-
dealer’s system of supervisory controls, including compliance efforts in the areas of 
antifraud and sales practices); and 3130 (requiring each broker-dealer’s CEO or 
equivalent officer to certify annually to the reasonable design of the policies and 
procedures for compliance with relevant regulatory requirements).   

1510  This estimate is based on the following calculation: (10 hours per retail broker-dealer) x 
(2,766 retail broker-dealers) = 27,660 aggregate burden hours per year.   



708 

 

would fall under the new Compliance Obligation as it would be developed to comply with 

Regulation Best Interest as a whole, including each of the component obligations. 

 In total, to comply with the Conflict of Interest Obligation, the Commission estimates 

that the total initial burdens and costs to be 197,310 hours1511 and $40.71 million,1512 and the 

total ongoing burdens and costs to be 55,560 hours1513 per year and $2.91 million per year.1514 

4. Compliance Obligation 

As discussed above, in response to comments that we should require policies and 

procedures to comply with Regulation Best Interest as a whole, we are adopting the Compliance 

Obligation.1515  The Compliance Obligation requires that the broker-dealer1516 establish, 

                                                                                                                                                             

 

1511  This estimate is based on the following calculation: (128,160 initial burden hours for 
policies and procedures) + (69,150 initial burden hours for identification and 
management of conflicts of interest) = 197,310 initial burden hours to comply with the 
Conflict of Interest Obligation. 

1512  This estimate is based on the following calculation: ($25.0 million initial costs for 
policies and procedures) + ($15.71 million initial costs for identification and management 
of conflicts of interest) =$40.71 million initial total costs to comply with the Conflict of 
Interest Obligation. 

1513  This estimate is based on the following calculation: (27,900 ongoing burden hours for 
policies and procedures) + (27,660 ongoing burden hours for identification and 
management of conflicts of interest) = 55,560 aggregate ongoing burden hours per year to 
comply with Conflict of Interest Obligation. 

1514  This estimate is based on the following calculation: ($2.91 million ongoing costs for 
policies and procedures) + ($0 ongoing costs for identification and management of 
conflicts of interest) = $2.91 million aggregate ongoing total costs per year to comply 
with the Conflict of Interest Obligation. 

1515  Section II.C.4. 



709 

 

maintain and enforce written policies and procedures reasonably designed to achieve compliance 

with Regulation Best Interest.  This Compliance Obligation creates an explicit obligation under 

the Exchange Act with respect to Regulation Best Interest as a whole.  Similar to the policies and 

procedures requirement of the Conflict of Interest Obligation, broker-dealers will have flexibility 

to design policies and procedures that are reasonable for the  scope, size and risks associated 

with the operations of the firm and the types of business in which the broker-dealer engages.  

Because we did not include the Compliance Obligation in the Proposing Release, we did not 

previously include costs and burdens associated with the Compliance Obligation, but we have 

provided a detailed explanation of these costs and burdens below.1517    

a. Written Policies and Procedures 

i. Initial Costs and Burdens 

While the Compliance Obligation creates an explicit requirement under the Exchange Act, 

we believe that broker-dealers would likely establish policies and procedures to comply with 

Regulation Best Interest pursuant to Section 15(b)(4)(E) and SRO rules by adjusting their current 

systems of supervision and compliance, as opposed to creating new systems. While broker-

dealers must already have policies and procedures in place to address other Commission and 

                                                                                                                                                             

 

1516  See supra footnote 1463 and accompanying text. 
1517  We note that any burdens and costs to comply with the Conflict of Interest Obligation are 

included in the estimates in Section IV.B.3 above.   



710 

 

SRO rules, they would need to update their systems of supervision and compliance to account for 

Regulation Best Interest.   

To comply with the Compliance Obligation, we believe that broker-dealers would 

employ a combination of in-house and outside legal and compliance counsel to update existing 

policies and procedures to account for the Disclosure and Care Obligations.1518  We assume that, 

for purposes of this analysis, the associated costs and burdens would differ between small and 

large broker-dealers, as large broker-dealers generally offer more products and services and 

employ more individuals and therefore would need to evaluate and update a greater number of 

systems.  As discussed above, we estimate that 2,010 broker-dealers would qualify as large 

broker-dealers for purposes of this analysis and 756 would qualify as small broker-dealers that 

have retail business.1519 

For purposes of this analysis we estimate that a large broker-dealer would incur a one-

time average internal burden of 30 hours for in-house legal personnel and in-house compliance 

counsel to update existing policies and procedures to comply with the Compliance Obligation 

and a one-time burden of five hours for general counsel and five hours for a Chief Compliance 

Officer to review and approve the updated policies and procedures, for a total of 40 burden 

                                                                                                                                                             

 

1518   Id.   
1519  See supra footnote 1388 and accompanying text.  



711 

 

hours.1520  We also estimate six hours of outside counsel services a cost of $2,982 for outside 

counsel to review updated policies and procedures on behalf of a large broker-dealer.1521  We 

therefore estimate the aggregate burden for large broker-dealers to be of 80,400 burden hours1522 

and aggregate cost of $6.0 million for large broker-dealers.1523 

 For small broker-dealers, we believe that they would primarily rely on outside counsel to 

update existing policies and procedures, as small broker-dealers generally have fewer in-house 

legal and compliance personnel.  We estimate that only 20 hours of outside legal counsel 

services would be required, for a one-time cost of $9,940 per small broker-dealer,1524 and an 

aggregate cost of $7.5 million for all small broker-dealers.1525  We also expect that in-house 

                                                                                                                                                             

 

1520  This estimate is based on the following calculation:  (30 hours of review for in-house 
legal and in-house compliance) + (5 hours of review for general counsel) + (5 hours of 
review for Chief Compliance Officer) = 40 burden hours. 

1521  Data from the SIFMA Management and Professional Earnings Report suggests that the 
average hourly rate for legal services is $497/hour.  This cost estimate is therefore based 
on the following calculation:  (6 hours of review) x ($497/hour for outside counsel 
services) = $2,982 in outside counsel costs. 

1522  This estimate is based on the following calculation:  (40 burden hours of review per large 
broker-dealer) x (2,010 large broker-dealers) = 80,400 aggregate burden hours. 

1523 This estimate is based on the following calculation:  ($2,982 for outside counsel costs per 
large broker-dealer) x (2,010 large broker-dealers) = $6.0 million in outside counsel 
costs. 

1524  This cost estimate is based on the following calculation:  (20 hours of review) x 
($497/hour for outside counsel services) = $9,940 in outside counsel costs. 

1525  This cost estimate is based on the following calculation: ($9,940 for outside counsel costs 
per small broker-dealer) x (756 small broker-dealers) = $7.5 million in outside counsel 
costs.   



712 

 

compliance personnel would require 6 hours to review and approve the updated policies and 

procedures, for an aggregate burden of 4,536 hours.1526  Therefore, we estimate the total initial 

aggregate burden to be 84,936 hours1527 and the total initial aggregate cost to be $13.5 

million.1528 

ii. Ongoing Costs and Burdens 

For purposes of this analysis, we assume that small and large broker-dealers would 

review and update policies and procedures on a periodic basis to accommodate the addition of, 

among other things, new products or services, new business lines, and/or new personnel.  We 

also assume that broker-dealers would review and update their policies and procedures for 

compliance with Regulation Best Interest on an annual basis, and for purposes of this analysis, 

we assume they would perform the review and update using in-house personnel.  Under the 

Compliance Obligation, we do not believe that broker-dealers would incur any costs or burdens 

associated with compliance with the Conflict of Interest Obligation, as those are included in the 

discussion above, but would for ongoing compliance with the Disclosure and Care Obligations. 

                                                                                                                                                             

 

1526  This estimate is based on the following calculation: (6 burden hours) x (756 small broker-
dealers) = 4,536 initial aggregate burden hours.   

1527  This estimate is based on the following calculation: (80,400 aggregate burden hours for 
large broker-dealers) + (4,536 aggregate burden hours for small broker-dealers) = 84,936 
total initial aggregate burden hours.   

1528  This estimate is based on the following calculation: ($6 million in aggregate costs for 
large broker-dealers) + ($7.5 million in aggregate costs for small broker-dealers) = $13.5 
million total initial aggregate costs. 



713 

 

For large broker-dealers with more numerous and complex products and services, as well 

as higher rates of hiring and turnover, we estimate that each broker-dealer would annually incur 

an internal burden of 12 hours to review and update existing policies and procedures:  four hours 

for legal personnel, four hours for compliance personnel, and four hours for business-line 

personnel.  We therefore estimate an ongoing, aggregate burden for large broker-dealers of 

approximately 24,120 hours per year.1529 

We assume for purposes of this analysis that small broker-dealers, who generally have 

fewer and less complex products, and lower rates of hiring and turnover, would mostly rely on 

outside legal counsel and compliance consultants for review and update of their policies and 

procedures, with final review and approval from an in-house compliance manager.  We estimate 

that outside counsel would require approximately five hours per year to update policies and 

procedures, for an annual cost of $2,485 for each small broker-dealer.1530  The projected 

aggregate, annual ongoing cost for outside legal counsel to update policies and procedures for 

                                                                                                                                                             

 

1529  This estimate is based on the following calculation:  (12 burden hours per large broker-
dealer) x (2,010 large broker-dealers) = 24,120 aggregate ongoing burden hours per year. 

1530  Data from the SIFMA Management and Professional Earnings Report suggests that the 
average hourly rate for legal services is $497/hour.  This estimate is therefore based on 
the following calculation: (5 hours per small broker-dealer) x ($497/hour for outside 
counsel services) = $2,485 in outside counsel costs per year. 



714 

 

small broker-dealers would be $1.88 million.1531  In addition, we expect that small broker-dealers 

would require five hours of outside compliance services per year to update their policies and 

procedures, for an ongoing cost of $1,365 per year,1532 and an aggregate ongoing cost of $1.03 

million.1533  The Commission estimates the total aggregate, ongoing cost for small broker-dealers 

is therefore $2.91 million per year.1534 

b. Training 

Pursuant to the Compliance Obligation’s requirement to “maintain and enforce” written 

policies and procedures, we additionally believe broker-dealers will develop training programs 

that promote compliance with Regulation Best Interest.  We believe that a training program 

would cover compliance with Regulation Best Interest as a whole and would therefore cover the 

                                                                                                                                                             

 

1531  This estimate is based on the following calculation:  ($2,485 in outside counsel costs per 
small broker-dealer) x (756 small broker-dealers) = $1.88 million in aggregate, ongoing 
legal costs per year. 

1532  We believe that performance of this function will most likely be equally allocated 
between a senior compliance examiner and a compliance manager. Data from the SIFMA 
Management and Professional Earnings Report suggests that costs for these positions are 
$237 and $309 per hour, respectively for an average of $273 per hour. This estimate is 
therefore based on the following calculation:  (5 hours per small broker-dealer) x 
($273/hour for outside counsel services) = $1,365 in outside compliance service costs per 
year. 

1533  This estimate is based on the following calculation: ($1,365 in outside compliance costs 
per small broker-dealer) x (756 small broker-dealers) = $1.03 million in aggregate, 
ongoing outside compliance costs per year. 

1534  This estimate is based on the following calculation: ($1.88 million for outside legal 
counsel costs) + ($1.03 million for outside compliance costs) = $2.91 million total 
aggregate ongoing costs per year. 



715 

 

Disclosure, Care and Conflict of Interest Obligations.  The initial and ongoing costs and burdens 

associated with such a training program are estimated below. 

i. Initial Costs and Burdens 

We believe that broker-dealers would likely use a computerized training model to train 

their associated persons regarding the policies and procedures pertaining to Regulation Best 

Interest.  We estimate that a broker-dealer would retain an outside systems analyst, outside 

programmer, and an outside programmer analyst to create the training module, at 20 hours, 40 

hours, and 20 hours, respectively.  The total cost to develop the training module would be 

approximately $20,920,1535 for an aggregate initial cost of $62.8 million.1536 

Additionally, we expect that the training module would require the approval of the Chief 

Compliance Officer, as well as in-house counsel, each of whom would require approximately 2 

                                                                                                                                                             

 

1535  Data from the SIFMA Management and Professional Earnings Report suggests that the 
average hourly rate in the securities industry is $263 for a systems analyst, $271 for a 
programmer, and $241 for a programmer analyst..  This cost estimate is based on the 
following calculation:  ((20 hours for a systems analyst) x ($263/ hour)) + ((40 hours of 
labor for a programmer) x ($271/hour)) + ((20 hours of labor for a programmer analyst) x 
($241/hour)) = $20,920 in external technology costs per broker-dealer.     

1536   This estimate is based on the following calculation:  (2,766 broker-dealers) x ($20,920in 
external technology costs per broker-dealer) = $57.9 million in aggregate costs for 
technology services 



716 

 

hours to review and approve the training module.  The initial aggregate burden for broker-dealers 

is therefore estimated at 11,064 burden hours.1537 

In addition, broker-dealers would incur an initial cost for associated persons to undergo 

training through the training module.  We estimate the training time at one hour per associated 

person, for an aggregate burden of 428,404 burden hours, or an initial burden of 154.9 hours per 

broker-dealer.1538  We estimate the total initial aggregate burden to approve the training module 

and implement the training program would be 439,486 burden hours.1539 

ii. Ongoing Costs and Burdens 

 We believe that, as a matter of best practice, broker-dealers would likely require 

registered representatives to repeat the training module for Regulation Best Interest on an annual 

basis.  The ongoing aggregate cost for the one-hour training would be 428,404 burden hours per 

year, or 154.9 burden hours per broker-dealer per year.1540 

                                                                                                                                                             

 

1537  This estimate is based on the following calculation:  (2,766 broker-dealers) x (4 burden 
hours per broker-dealer) = 11,064 burden hours. 

1538  This estimate is based on the following calculation: (1 burden hour) x (428,404 registered 
representatives at standalone or dually registered broker-dealers) = 428,404 aggregate 
burden hours. Conversely, (428,404 aggregate burden hours) / (2,766 retail broker-
dealers) = 154.9 initial burden hours per broker-dealer per year.   

1539  This estimate is based on the following calculation: (428,404 burden hours for training of 
registered representatives) + (11,064 burden hours to approve training program) = 
439,468 total aggregate burden hours per year.   

1540  This estimate is based on the following calculation: (1 burden hour) x (428,404 registered 
representatives at standalone or dually registered broker-dealers) = 428,404 burden hours. 

 

 



717 

 

 In total, to comply with the Compliance Obligation, the Commission estimates the total 

initial burdens and costs to be 524,414 hours1541 and $71.4 million,1542 and the total ongoing 

burdens and costs to be 463,588 hours1543 and $2.91 million.1544 

5. Record-Making and Recordkeeping Obligations 

The record-making and recordkeeping obligations will impose record-making and 

recordkeeping requirements on broker-dealers with respect to certain information collected from, 

or provided to, retail customers.  Specifically, the Commission is amending Rules 17a-3 and 17a-

4 of the Exchange Act, which set forth minimum requirements with respect to the records that 

broker-dealers must make, and how long those records and other documents must be kept, 

respectively.  Records made and retained in accordance with the amendments to Rule 17a-

3(a)(35) and 17a-4(e)(5) will (1) assist a broker-dealer in supervising and assessing internal 

                                                                                                                                                             

 

Conversely, (428,404 aggregate burden hours) / (2,766 retail broker-dealers) = 154.9 
initial burden hours per broker-dealer. 

1541  This estimate is based on the following calculation: (84,946 initial burden hours for 
policies and procedures) + (439,468 initial burden hours training) = 524,414 initial 
burden hours to comply with the Compliance Obligation. 

1542  This estimate is based on the following calculation: ($13.5 million initial costs for 
policies and procedures) + ($57.9 million initial costs for training) = $71.4 million initial 
total costs to comply with the Compliance Obligation. 

1543  This estimate is based on the following calculation: (24,120 ongoing burden hours for 
policies and procedures) + (439,468 ongoing burden hours for training) = 463,588 
ongoing burden hours to comply with Compliance Obligation. 

1544  This estimate is based on the following calculation: ($2.91 million ongoing costs for 
policies and procedures) + ($0 million ongoing costs for training) = $2.91 million 
ongoing costs to comply with the Compliance Obligation. 



718 

 

compliance with Regulation Best Interest; and (2) assist the Commission and SRO staff in 

connection with examinations and investigations.   

Due to changes in the number of broker-dealers and costs estimated for certain services, 

we are revising our estimates from those in the Proposing Release.  However, while we 

understand commenters’ concerns that the estimates are lower than what would actually be 

required to comply with Regulation Best Interest, we believe the estimates are generally accurate 

in light of the increased specificity in Regulation Best Interest on how to comply with the 

component obligations, including the Disclosure Obligation.1545  The record-making and 

recordkeeping costs and burdens associated with the amendments to Rule 17a-3(a)(35) and Rule 

17a-4(e)(5) are addressed below. 

a. Record-Making Obligation 

We are amending Rule 17a-3 by adding a new paragraph (a)(35) that requires a record of 

all information collected from, and provided to, the retail customer pursuant to Regulation Best 

Interest, as well as the identity of each natural person who is an associated person of a broker or 

dealer, if any, responsible for the account.1546  This requirement applies with respect to each 

                                                                                                                                                             

 

1545  See, e.g., Raymond James Letter; CCMC Letters; SIFMA August 2018 Letter. 

1546  As indicated in the Proposing Release, we understand that broker-dealers likely make 
such records in the ordinary course of their business pursuant to Exchange Act Rules 17a-
3(a)(6) and (7).  We continue to believe, for purposes of compliance with Rule 17a-
3(a)(35), that broker-dealers would need to create a record, or modify an existing record, 

 

 



719 

 

retail customer to whom a recommendation of any securities transaction or investment strategy 

involving securities is provided.  The neglect, refusal, or inability of a retail customer to provide 

or update any such information will, however, excuse the broker-dealer from obtaining that 

information. 

We indicated in the Proposing Release, and we continue to believe that broker-dealers 

currently make records of relevant customer investment profile information, and we therefore 

assume that no additional record-making obligations would arise as a result of broker-dealers’ or 

their registered representatives’ collection of information from retail customers.1547  In addition, 

we continue to believe that broker-dealers likely make records of the “identity of each natural 

person who is an associated person, if any, responsible for the account.”  However, we are 

assuming, for purposes of compliance with Rule 17a-3(a)(35), that broker-dealers will need to 

create a record, or modify an existing record, to identify the associated person, if any, 

                                                                                                                                                             

 

to identify the associated person, if any, responsible for the account in the context of 
Regulation Best Interest.  See Proposing Release at 21673. 

1547  The PRA burdens and costs arising from the requirement that a record be made of all 
information provided to the retail customer are accounted for in Regulation Best Interest 
and the Relationship Summary Adopting Release.  With respect to the requirement that a 
record be made of all information from the retail customer, we believe that Rule 17a-
3(a)(35) will not impose any new substantive burdens on broker-dealers.  As discussed 
above, we continue to believe that the obligation to exercise reasonable diligence, care, 
and skill will not require a broker-dealer to collect additional information from the retail 
customer beyond that currently collected in the ordinary course of business even though a 
broker-dealer’s analysis of that information and any resulting recommendations will need 
to adhere to the enhanced best interest standard of Regulation Best Interest.  See supra 
Section II.C.2. 



720 

 

responsible for the account in the context of Regulation Best Interest.  In addition, in cases where 

broker-dealers choose to meet part of the Disclosure Obligation orally under the circumstances 

outlined in Section II.C.1, Oral Disclosure or Disclosure After a Recommendation, we believe 

the requirement to maintain a record of the fact that oral disclosure was provided to the retail 

customer will trigger a record-making obligation under paragraph (a)(35) of Rule 17a-3 and a 

recordkeeping obligation under paragraph (e)(5) of Rule 17a-4 that may impose additional 

compliance costs and burdens on broker-dealers.   

i. Initial Costs and Burdens 

In the Proposing Release, we assumed that broker-dealers would satisfy the record-

making requirement of the proposed amendment to Rule 17a-3(a)(25) by amending an existing 

account disclosure document to include the “identity of each natural person who is an associated 

person, if any, responsible for the account.”  We estimated that the inclusion of this information 

in an account disclosure document would require an approximate total aggregate initial burden of 

3,808,000 hours, or approximately 1,333 hours per broker-dealer for the first year after 

Regulation Best Interest is in effect.1548  

                                                                                                                                                             

 

1548  These estimates were based on the following calculations: (0.04 hours per customer 
account) x (95.2 million retail customer accounts) = 3,808,000 aggregate burden hours.  
Conversely, (3,808,000 aggregate burden hours) / (2,857 broker-dealers) = 1,333 hours 
per broker dealer for the first year after Regulation Best Interest is in effect.  See 
Proposing Release at 21673.721 

 

As discussed above, we continue to believe that broker-dealers will satisfy the record-

making requirements of the amendment to Rule 17a-3(a)(35) by amending an existing account 

disclosure document to include the “identity of each natural person who is an associated person, 

if any, responsible for the account.”  We believe that the inclusion of this information in an 

account disclosure document will require, on average, approximately 1 hour per year for outside 

legal counsel at small broker-dealers, at an updated average rate of $497/hour, for an average 

annual cost of $497 for each small broker-dealer to update an account disclosure document.  The 

projected aggregate initial cost for small broker-dealers is therefore estimated to be $375,732 per 

year.1549  For broker-dealers that are not small entities, we estimate that the initial burden will be 

2 hours for each broker-dealer: 1 hour for compliance personnel and 1 hour for legal personnel.  

We therefore estimate the aggregate initial burden for broker-dealers that are not small entities to 

be approximately 4,020 burden hours.1550  Finally, we estimate it will require an additional 0.04 

hours for the registered representative responsible for the information (or other clerical 

personnel) to fill out that information in the account disclosure document, for an approximate 

total aggregate initial burden of 4,080,000 hours, or approximately 1,475 hours per broker-dealer 

                                                                                                                                                             

 

1549  This estimate is based on the following calculation: (1 hour per small broker-dealer) x 
(756 small broker-dealers) x ($497/hour) = $375,732 in aggregate costs per year.   

1550  This estimate is based on the following calculation: (2 burden hours per broker-dealer) x 
(2,010 large broker-dealers) = 4,020 aggregate burden hours per year. 



722 

 

for the first year after Regulation Best Interest is in effect.1551  Because we have already included 

the costs and burdens associated with the creation of a record to memorialize an oral disclosure, 

and the delivery of the amended account disclosure document discussed above, they are not 

included in this section of the analysis.1552   

The total aggregate initial burden for broker-dealers is therefore estimated at 4,084,020 

hours,1553 and the total aggregate initial cost is estimated at $375,732.1554 

ii. Ongoing Costs and Burdens 

We do not believe that the identity of the registered representative responsible for the 

retail customer’s account will change.  Accordingly, we continue to believe that there are no 

ongoing costs and burdens associated with this record-making requirement of the amendment to 

Rule 17a-3(a)(35).   

                                                                                                                                                             

 

1551  These estimates are based on the following calculations:  (0.04 hours per customer 
account) x (102 million retail customer accounts) = 4,080,000 aggregate burden hours.  
Conversely, (4,080,000 burden hours) / (2,766 broker-dealers) = 1,475 hours per broker-
dealer for the first year after Regulation Best Interest is in effect.   

1552  See supra Section IV.B.1. 
1553  This estimate is based on the following calculation: (0 aggregate burden hours for small 

broker-dealers) + (4,020 burden hours for large broker-dealers) + (4,080,000 burden 
hours for personnel to fill out information in the account disclosure document) = 
4,080,000 initial burden hours. 

1554  This estimate is based on the following calculation: ($375,732 for small broker-dealer 
costs) + ($0 for large broker-dealer costs) = ($375,732 in total aggregate initial costs). 



723 

 

With respect to memorializing oral disclosures in cases where broker-dealers choose to 

meet part of the Disclosure Obligation orally under the circumstances outlined in Section II.C.1, 

Oral Disclosure or Disclosure After a Recommendation, we estimate that this would take place 

among 52% of a broker-dealer’s retail customer accounts (and thus 52% of a registered 

representative’s retail customer accounts) annually.1555  We therefore estimate broker-dealers to 

incur a total annual aggregate burden of 1.06 million hours, or 383.5 burden hours per year per 

broker-dealer.1556  

b. Recordkeeping Obligation 

We are amending Rule 17a-4(e)(5) to require that broker-dealers retain all records of the 

information collected from or provided to each retail customer pursuant to Regulation Best 

                                                                                                                                                             

 

1555  We believe (and our experience indicates) that broker-dealers will use oral disclosure 
rarely, and primarily when making disclosures regarding a change in capacity.  We do not 
have reliable data to determine the precise number of retail customers that have both a 
brokerage and an advisory account with a dually registered associated person.  As 
indicated above, approximately 52% of registered representatives were dually registered 
as investment adviser representatives at the end of 2018.  See supra footnote 945 and 
accompanying text.  As a result, we have assumed for purposes of this analysis that this 
will take place among 52% of all retail customer accounts at broker-dealers annually.  
This estimate is likely over inclusive, as it includes all retail customer accounts at all 
broker-dealers (as opposed to only retail customer accounts where the retail customer has 
both a brokerage and advisory account with a dually registered financial professional), 
and under inclusive, as it assumes that such an oral disclosure will happen annually (as 
opposed to multiple times a year).    

1556  (52%) x (102 million retail customer accounts) x (0.02 hours for recording each oral 
disclosure relating to a retail customer’s account) = 1,060,800 aggregate burden hours.  
Conversely, 1,060,800 aggregate burden hours / 2,766 broker-dealers = 383.5 burden 
hours per broker-dealer per year. 



724 

 

Interest for at least six years after the earlier of the date the account was closed or the date on 

which the information was last replaced or updated.  We assume that, for purposes of this 

analysis, the following records would likely be retained pursuant to amended Rule 17a-3(a)(35): 

(1) existing account disclosure documents; (2) comprehensive fee schedules; (3) disclosures 

identifying material conflicts; and (4) memorialized oral disclosures under the circumstances 

outlined in Section II.C.1, Oral Disclosure or Disclosure After a Recommendation.1557 

i. Initial Costs and Burdens 

We believe that, to reduce costs and for ease of compliance, broker-dealers will utilize 

their existing recordkeeping systems in order to retain the forgoing records made pursuant to 

Regulation Best Interest, and as required to be kept under the amendment to Rule 17a-4(e)(5).  

As noted above, broker-dealers currently are subject to recordkeeping obligations pursuant to 

Rule 17a-4, which require, for example, broker-dealers to “preserve for a period of not less than 

six years, the first two years in an easily accessible place, all records required to be made 
                                                                                                                                                             

 

1557  In the Proposing Release, we identified four records that would likely need to be retained 
pursuant to amended Rule 17a-3(a)(25) (now reflected as Rule 17a-3(a)(35)): (1) a 
standardized Relationship Summary document; (2) existing account disclosure 
documents; (3) a comprehensive fee schedule; and (4) disclosures identifying material 
conflicts.  However, in calculating the estimated burden for broker-dealers to add new 
documents or modify existing documents to the broker-dealer’s existing retention system, 
we erroneously assumed a broker-dealer would upload or file five account documents, as 
opposed to the four account documents identified in the Proposing Release.  See 
Proposing Release at 21673-21674.  In addition, while the burden for broker-dealers to 
retain a standardized relationship summary was included in the Regulation Best Interest 
Proposing Release, it is excluded here because its associated burden is reflected in the 
Relationship Summary Proposal and Relationship Summary Adopting Release.    



725 

 

pursuant to” Rule 17a-3(a)(1), (a)(2), (a)(3), (a)(5), (a)(21), (a)(22), and analogous records 

created pursuant to paragraph 17a-3(f).  Thus, for example, broker-dealers are already required to 

maintain documents such as account blotters and ledgers for six years.   

We continue to believe that broker-dealers will utilize their existing recordkeeping 

systems to include any additional or amended records required by Regulation Best Interest or 

pursuant to the amendment to Rule 17a-4(e)(5), and would similarly utilize their existing 

recordkeeping systems to account for any differences in the retention period.  Thus, where 

broker-dealers currently retain documents on an electronic database to satisfy existing Rule 17a-

4 or otherwise, we continue to expect broker-dealers to maintain any additional documents 

required by Regulation Best Interest or the amendment to Rule 17a-4(e)(5) by the same means.  

Likewise, where broker-dealers maintain documents required by existing Rule 17a-4 by paper, 

we would expect broker-dealers to continue to do so.   

Based on our belief that broker-dealers will rely on existing infrastructures to satisfy the 

recordkeeping obligations of Regulation Best Interest and the amendment to Rule 17-a(4)(e)(5), 

we believe the burden for broker-dealers to add new documents or modify existing documents to 

the broker-dealer’s existing retention system will be approximately 13.6 million burden hours for 

all broker-dealers, assuming a broker-dealer will need to upload or file each of the four account 



726 

 

documents discussed above for each retail customer account.1558  We do not believe there will be 

additional substantive internal or external costs relating to the uploading or filing of the 

documents.  In addition, because we have already included the costs and burdens associated with 

the delivery of the amended account opening agreement and other documents above, we do not 

include them in this section of the analysis. 

ii. Ongoing Costs and Burdens 

We estimate that the approximate ongoing burden associated with the recordkeeping 

requirement of the amendment to Rule 17a-4(e)(5) is 4.46 million burden hours per year.1559  We 

                                                                                                                                                             

 

1558   This estimate is based on the following calculation: (4 documents per customer account) 
x (102 million retail customer accounts) x (2 minutes per document) / 60 minutes = 
13,600,000 aggregate burden hours.  As indicated above, the following records would 
likely need to be retained: (1) existing account disclosure documents; (2) comprehensive 
fee schedules; (3) disclosures identifying material conflicts; and (4) memorialized oral 
disclosures under the circumstances outlined in Section II.C.1, Disclosure Obligation, 
Oral Disclosure or Disclosure After a Recommendation. 

 
1559  This estimate is based on the percentage of account records we expect would be updated 

each year as described in Section IV.B.1, supra, and the following calculation: (40% of 
fee schedules x 102 million retail customer accounts) x (2 minutes per document) + (40% 
of conflict disclosure forms x 102 million retail customer accounts) x (2 minutes per 
document) + (20% of account opening documents x 102 million retail customer accounts) 
x (2 minutes per document) = 204 million minutes / 60 minutes = 3.4 million aggregate 
ongoing burden hours.  In addition, with respect to ongoing memorialization of the 
updated oral disclosures, we estimate that this will take place among 52% of a broker-
dealer’s retail customer accounts annually.  We therefore estimate that broker-dealers will 
incur an aggregate ongoing burden of 1.06 million hours per year (calculated as follows: 
(52% of updated oral disclosures x 102 million retail customer accounts) x (1.2 minutes 
per document) = 63.6 million minutes / 60 minutes = 1.06 million aggregate ongoing 
burden hours); or 383.5 burden hours per broker-dealer (1.06 million hours / 2,766 

 

 



727 

 

do not believe that the ongoing costs associated with ensuring compliance with the retention 

schedule would change from the current costs of ensuring compliance with existing Rule 17a-4 

and as outlined above.   

V. FINAL REGULATORY FLEXIBILITY ACT ANALYSIS 

The Commission has prepared this Final Regulatory Flexibility Analysis (“FRFA”) in 

accordance with the provisions of the Regulatory Flexibility Act (“RFA”)1560 relating to 

Regulation Best Interest.  An Initial Regulatory Flexibility Analysis (“IRFA”) was prepared in 

accordance with the RFA and included in the Proposing Release.1561 

A. Need for and Objectives of the Rule 

Broker-dealers play an important role in helping Americans organize their financial lives, 

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.   

As discussed in Section I, concerns exist regarding: (1) the potential harm to retail 

customers resulting from broker-dealer recommendations provided in the presence of conflicts of 

interest and (2) the insufficiency of existing broker-dealer regulatory requirements to address 

these conflicts when broker-dealers make recommendations to retail customers.  More 
                                                                                                                                                             

 

broker-dealers = 383.5).  3.4 million burden hours per year + 1.06 million burden hours 
per year = 4,460,000 total aggregate ongoing burden hours per year. 

1560  5 U.S.C. § 603. 

1561  See Proposing Release, supra footnote 7, at Section VII. 



728 

 

specifically, there are concerns that existing requirements do not require a broker-dealer’s 

recommendations to be in the retail customer’s best interest.  

 As a result, we are adopting Regulation Best Interest, which creates an enhanced 

standard of conduct applicable to broker-dealers 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.  This General Obligation is satisfied only if 

the broker-dealer complies with four specified component obligations: (1) Disclosure Obligation, 

(2) Care Obligation, (3) Conflict of Interest Obligation, and (4) Compliance Obligation.  In 

addition, the Commission is amending Rules 17a-3 and 17a-4 of the Exchange Act, which set 

forth minimum requirements with respect to the records that broker-dealers must make, and how 

long those records and other documents must be kept, respectively.     

First, as described in Section II.C.1, under the Disclosure Obligation, before or at the 

time of making a recommendation, a broker-dealer must disclose, in writing,1562 material facts 

about the scope and terms of its relationship with the customer.  This includes a disclosure that 
                                                                                                                                                             

 

1562  As discussed above, there are circumstances where broker-dealers and their associated 
persons may make oral disclosures or written disclosures after the time of a 
recommendation under the circumstances outlined in Section II.C.1, Disclosure 
Obligation, Oral Disclosure or Disclosure After a Recommendation. 



729 

 

the broker-dealer or associated person 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, proprietary products, payments 

from third parties, and compensation arrangements.        

Second, as described in Section II.C.2, under the Care Obligation, 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 broker-dealer must then consider those risks, rewards, and costs in 

light of the retail 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.  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 retail customer’s best interest when viewed in isolation.      

Third, as described in Section II.C.3, under the Conflict of Interest Obligation, 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.  Additionally, the policies and procedures must be 

reasonably designed to mitigate conflicts of interests that create an incentive for an associated 

person of the broker-dealer to place its interests or the interest of the firm ahead of the retail 



730 

 

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 to place the associated person’s or broker-dealer’s interests ahead of the 

customer’s interest.  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, as described in Section II.C.4, under the Compliance Obligation, 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 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 conflicts of interest.  Regulation Best 

Interest will complement the related rules, interpretations, and guidance that the Commission is 



731 

 

concurrently issuing.1563  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 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. 

All of these requirements are discussed in detail in Section II above.  The costs and 

burdens of these requirements on small broker-dealers are discussed below as well as above in 

our Economic Analysis and PRA Analysis, that discuss the costs and burdens on all broker-

dealers. 

B. Significant Issues Raised by Public Comments 

The Commission is sensitive to the burdens that the new rule may have on small entities.  

In the Proposing Release, we requested comment on matters discussed in the IRFA.  In 

particular, we sought comments on the number of small entities that may be affected by proposed 

Regulation Best Interest, and whether proposed Regulation Best Interest would have an effect on 

small entities that had not been considered.  We requested that commenters describe the nature of 

any impact on small entities and provide empirical data to support the extent of such impact.  We 

                                                                                                                                                             

 

1563  See Relationship Summary Adopting Release; Fiduciary Interpretation; Solely Incidental 
Interpretation. 



732 

 

also requested comment on the proposed compliance burdens and the effects these burdens 

would have on smaller entities. 

As discussed in the Economic Analysis and PRA Analysis above, we received comments 

regarding the potential costs and burdens of the proposal on broker-dealers, including those that 

are small entities.1564  Additionally, the Commission received some comments specifically 

addressing the costs to smaller broker-dealers.   

One commenter stated that for a small firm with $500,000 in net capital, a compliance 

cost of $60,0001565 could constitute 12% of that net capital, making compliance with the rule 

burdensome for such firms and potentially forcing many small firms to hire additional 

compliance personnel.1566  Another commenter raised concerns that replacing the term “suitable” 

                                                                                                                                                             

 

1564  See supra Sections III and IV. 
1565  See NSCP Letter (“Consider the estimated $60,000 in additional compliance costs 

referenced in the Release which would represent 12% of net capital of a $500,000 firm.”)  
1566  See id (“Several small firms estimate that they incur approximately $80,000 in 

compliance costs to meet basic ongoing regulatory requirements. Notably, this amount 
does not include expenses associated with new rules, regulatory changes, regulatory 
exams or running a compliance department. In isolation, it may seem that this single 
proposal by one regulatory agency would have manageable marginal impact on costs. But 
in fact, it would be one of many changes (and importantly, a major change) that smaller 
firms must address. Many small firms do not have large Compliance Departments 
adequate to shoulder these ever increasing regulatory demands. In fact, many small firm 
Compliance Departments are comprised of just one or two persons.”).  See also, 
generally, NFIB Letter (“America's small and independent businesses in the financial 
industry cannot afford the army of lawyers and clerks needed to comply with the welter 
of complex rules issued or proposed by the U.S. Department of Labor (DOL) (Reference 
1 above), the U.S. Securities and Exchange Commission (SEC) (Reference 2 above), and 

 

 



733 

 

with “best interest” could create legal risk and cause smaller and mid-sized professional firms to 

leave the market.1567  As noted above in Section III, we acknowledge that the costs of the rule 

could be more burdensome for small firms and discuss any corresponding competitive effects in 

Section III.D.1.1568  Further, as described above, we acknowledge the requests by commenters 

for further clarity on what it means to “act in the best interest” of the retail customer, and 

particularly what it means to make a recommendation in a retail customer’s “best interest” under 

the Care Obligation.  Consequently, in Section II.A, and in the detailed discussion of each of the 

Disclosure, Care, Conflict of Interest, and Compliance Obligations in Section II.C, we have 

provided further clarity on how a broker-dealer can comply with Regulation Best Interest.  
                                                                                                                                                             

 

the several states to govern the duties of financial businesses toward their retail 
customers.”) 

1567  See Iowa Insurance Commissioner Letter (“Striking "suitability," and its history and legal 
precedence, will usher in an age of legal and marketing confusion. Additionally, smaller 
and mid-sized professional firms, to avoid the risks of this confusion and the resulting 
litigation, will leave the market, and the larger firms will remain, increasing market 
concentration. A decision to replace the term "suitable" in the text of traditional 
suitability rules with the phrase "best interest" will disrupt the market, decrease 
competition, increase the price of services out of the reach of thousands of middle class 
Americans, and significantly reduce consumer options for selecting valuable professional 
services.”)  But see NAIFA Letter (“NAIFA supports a best interest standard of conduct 
for securities-licensed firms and individuals, and we appreciate the SEC’s considerable 
efforts to establish such a standard without imposing unduly prescriptive or burdensome 
implementation or compliance requirements. The SEC’s general approach, we believe, 
will preserve choices for consumers at all income levels and account sizes – and should 
not unnecessarily increase costs for consumers or businesses.”) 

1568  See also infra Section V.E., noting that we believe that Regulation Best Interest will 
result in multiple investor protection benefits, and these benefits should apply to retail 
customers of smaller entities as well as retail customers of large broker-dealers.  



734 

 

However, with respect to the comment concerning the term “suitable,” we are adopting a “best 

interest” standard as proposed—which enhances the broker-dealer standard of conduct beyond 

existing suitability obligations—in light of our goal to enhance retail investor protection and 

decision making.      

Another commenter stated that costs for small broker-dealers could be reduced if the 

Commission approved a standard disclosure, which would add certainty and reduce costs for 

small firms and their customers.1569  We considered, as an alternative to the Disclosure 

Obligation, mandating a standardized disclosure.1570  However, as described in Section II.C.1, 

after careful consideration of the comments concerning the proposed Disclosure Obligation, we 

have decided not to require any standard written disclosures under Regulation Best Interest at 

this time.  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 

                                                                                                                                                             

 

1569  See Chepucavage Letter (“Costs for the small bd’s however can be reduced with a 
commission approved standard disclosure which would add certainty and ought to be 
considered especially for the small investor. […] A standard disclosure document would 
also be useful for the small bd that cannot afford the legal assistance needed to evaluate 
this 1,000 page proposal and draft appropriate documents. […] The Commission should 
therefore reconsider the impact of its proposal on small investors and small bd’s with the 
assumption that retirement accounts are significantly more important than regular 
brokerage accounts especially for small and elderly investors. A standard disclosure for 
small firms would reduce costs for the firms and their customers.”) 

1570  See supra Section III.E and infra Section V.E.  



735 

 

read at relevant points in time, rather than, for example, mandating a standardized all-inclusive 

(and likely lengthy) disclosure.  

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, 

but nearly all commenters suggested modifications to proposed Regulation Best Interest.  These 

suggestions touch on almost every aspect of the proposal, as summarized in Section I.C above 

and as discussed in more detail, along with explanations of modifications made in light of the 

comments, throughout the release.   

C. Small Entities Subject to the Rule 

For purposes of a Commission rulemaking in connection with the RFA, a broker-dealer 

will be deemed a small entity if it: (i) had total capital (net worth plus subordinated liabilities) of 

less than $500,000 on the date in the prior fiscal year as of which its audited financial statements 

were prepared pursuant to Rule 17a-5(d) under the Exchange Act,1571 or, if not required to file 

such statements, had total capital (net worth plus subordinated liabilities) of less than $500,000 

on the last business day of the preceding fiscal year (or in the time that it has been in business, if 

shorter); and (ii) is not affiliated with any person (other than a natural person) that is not a small 

business or small organization.1572    

                                                                                                                                                             

 

1571  17 CFR 240.17a-5(d). 

1572  See 17 CFR 240.0-10(c). 



736 

 

As discussed in Section IV above, the Commission estimates that as of December 31, 

2018, approximately 2,766 retail broker-dealers will be subject to Regulation Best Interest and 

the amendments to Rules 17a-3 and 17a-4.1573  Based on FOCUS Report data,1574 the 

Commission estimated that as of December 31, 2018, approximately 756 of those retail broker-

dealers might be deemed small entities for purposes of this analysis.1575  For purposes of this 

RFA analysis, we refer to broker-dealers that might be deemed small entities under the RFA as 

“small entities,” and we continue to use the term “broker-dealers” to refer to broker-dealers 

generally, as the term is used elsewhere in this release.1576  Of these 756 small entities, the 

Commission estimates that 623 are standalone broker-dealers and 133 are dually registered as 

investment advisers.1577 

D. Projected Reporting, Recordkeeping, and Other Compliance Requirements 

The new requirements impose certain reporting and compliance requirements on certain 

broker-dealers, including those that are small entities.  The new requirements are summarized in 

this FRFA (Section V.A. above).  All of these requirements are also discussed in detail, in 

                                                                                                                                                             

 

1573  As noted above, this estimate likely overstates the number that would be impacted by 
Regulation Best Interest.  See supra Section III.C.1.a. 

1574  See supra footnote 1385. 
1575  See supra footnote 1387. 
1576  Consistent with the PRA, unless otherwise notes, we use the terms “registered 

representative” and “dually registered representative of a broker-dealer” herein. 
1577  These estimate are based on FOCUS Report Data, see supra footnote 1385 



737 

 

Section II above, and these requirements as well as the costs and burdens on broker-dealers, 

including those that are small entities, are discussed above in Sections III and IV (the Economic 

Analysis and PRA Analysis) and below.   

1. Disclosure Obligation 

The Disclosure Obligation under Regulation Best Interest requires a broker-dealer or its 

associated persons, prior to or at the time of recommending a securities transaction or strategy 

involving securities to a retail customer, to provide the retail customer, in writing, full and fair 

disclosure of: (1) all material facts relating to the scope and terms of the relationship with the 

retail customer, including: (a) that the broker, dealer, or such natural person is acting as a broker, 

dealer, or an associated person of a broker or dealer with respect to the recommendation, (b) the 

fees and costs that apply to the retail customer’s transactions, holdings, and accounts, and (c) the 

type and scope of services provided to the retail customer, including any material limitations on 

the securities or investment strategies involving securities that may be recommended to the retail 

customer; and (2) all material facts relating to conflicts of interest that are associated with the 

recommendation.  The estimated costs and burdens incurred by small entities in relation to this 

Disclosure Obligation are discussed in detail below.1578 

a. Obligation to Provide to the Retail Customer Full and Fair Disclosure, in 
Writing, of all Material Facts Relating to the Scope and Terms of the 
Relationship with the Retail Customer 

                                                                                                                                                             

 

1578  For a discussion of additional costs and burdens as well as monetized burdens, related to 
the Disclosure Obligation, see supra Section III.C.2.b. 



738 

 

The Commission assumes for purposes of this analysis that small entities would meet the 

obligation to disclose to the retail customer, in writing, the material facts related to the scope and 

terms of the relationship with the retail customer through a combination of delivery of the 

Relationship Summary,1579 creating account disclosures to include standardized language related 

to the capacity in which they are acting and type and scope of services, and the development of 

fee schedules.   

b. Estimated Costs and Burdens  

In addition to the costs described below, additional costs associated with Regulation Best 

Interest are described above in Section III.C.1580  

(1) Disclosure of Capacity, Type and Scope of Services 
 
As explained above, standalone broker-dealers that are small entities will satisfy the 

obligation to disclose the capacity in which they acting through the delivery to the retail 

customer of the Relationship Summary, and accordingly, we estimate zero burden hours for 

standalone broker-dealers that are small entities to disclose the capacity in which they are acting.  

We estimate that a dually registered firm that is a small entity will incur an initial internal 

burden of 10 hours for in-house counsel and in-house compliance to draft language regarding the 

capacity in which it is acting for inclusion in the standardized account disclosure that is delivered 

                                                                                                                                                             

 

1579  See Exchange Act Rule 17a-14 and Relationship Summary Adopting Release, supra 
footnote 12. 

1580  See Sections III.C.2.b, III.C.3.b, III.C.4, III.C.5, and III.C.6. 



739 

 

to the retail customer.1581  In addition, we estimate that dual-registrants that are small entities 

will incur an estimated external cost of $4,970 for the assistance of outside counsel in the 

preparation and review of standardized language regarding capacity.1582  For the estimated 133 

dually registered broker-dealers that are small entities, we project an aggregate initial burden of 

1,330 hours,1583 and $661,010 in aggregate initial costs for drafting language regarding 

capacity.1584   

Similarly, to comply with Regulation Best Interest, we believe that small entities will 

draft standardized language for inclusion in the account disclosure to provide the retail customer 

with more specific information regarding the type and scope of services that they provide.  We 

estimate that a small entity will incur an internal initial burden of 10 hours for in-house counsel 

and in-house compliance to draft this standardized language.1585  In addition, a small entity will 

incur an estimated external cost of $4,970 for the assistance of outside counsel in the preparation 

                                                                                                                                                             

 

1581  See supra footnotes 1396-1397. 
1582 See supra footnote 1398.   
1583  See supra footnote 1396.  This estimate is based on the following calculation: (133 dually 

registered retail firms that are small entities) x (10 hours) = 1,330 initial aggregate burden 
hours.)  The professional skills associated with the estimated burden hours are specified 
in Section IV above.   

1584  This estimate is based on the following calculation: (133 dually registered retail firms 
that are small entities) x ($4,970 in external cost per firm) = $661,010 in aggregate initial 
costs. 

1585  See supra footnote 1403. 



740 

 

and review of this standardized language.1586  For the estimated 756 small entities,1587 we project 

an aggregate initial burden of 7,560 hours,1588 and aggregate initial costs of $3.8 million for 

drafting language regarding type and scope of services.1589   

We estimate that small entities will each incur approximately 0.02 burden hours1590 for 

delivery of the account disclosure document.1591  Based on FOCUS data, we believe that the 756 

small entities have a total of 5,281 customer accounts, and that approximately all of those 

accounts belong to retail customers.1592  We therefore estimate that small entities will have an 

aggregate initial burden of 106 hours, or approximately 0.14 hours1593 per small entity for the 

                                                                                                                                                             

 

1586 See supra footnote 1404.   
1587  See supra footnote 1386  and accompanying text. 
1588  See supra footnote 1406. 
1589  See supra footnote 1407. 
1590  See supra footnote 1412. 
1591 See supra footnote 1413. 
1592  This estimate may overstate the number of retail customer accounts at small entities 

and/or may overstate the number of deliveries to be made due to the double-counting of 
deliveries to be made by dual-registrants to a certain extent, and the fact that one 
customer may own more than one account. 

1593  These estimates are based on the following calculations: (0.02 hours per customer 
account x (5,281 retail customer accounts) = 106 aggregate burden hours.  Conversely, 
(106 hours) / (756 small entities) = approximately 0.14 burden hours per small entity for 
the first year after Regulation Best Interest is in effect.741 

 

first year after Regulation Best Interest is in effect for delivery of the account disclosure 

document.1594   

We therefore estimate a total initial aggregate burden for small entities to develop and 

deliver to retail customers account disclosures relating to the capacity in which they are acting 

and type and scope of services of 7,666 burden hours.1595   

In terms of ongoing costs, we estimate that each dually registered broker-dealer that is a 

small entity will incur approximately 5 burden hours annually for in-house compliance and 

business-line personnel to review changes in the dual-registrant’s capacity, and another 2 burden 

hours annually for in-house counsel to amend the account disclosure to disclose material changes 

to the dual-registrant’s capacity, for a total of 7 burden hours.  The estimated ongoing aggregate 

burden to amend account disclosures of dual-registrants that are small entities to reflect changes 

in capacity is therefore 931 hours per year.1596 

With respect to small entities, we estimate an internal burden of 2 hours for in-house 

compliance and business-line personnel to review and update changes in types or scope of 
                                                                                                                                                             

 

1594  See supra footnote 1416. 
1595  This estimate is based on the following calculation: (1,330 aggregate initial burden hours 

for dually registered broker-dealers that are small entities) + (6,230 aggregate initial 
burden hours for standalone broker-dealers that are small entities) + (106 aggregate initial 
burden hours for small entities to deliver the account disclosures) = 7,666 total aggregate 
initial burden hours. 

1596  This estimate is based on the following calculation: (7 burden hours per dually registered 
firm per year) x 133 dually registered broker-dealers that are small entities) = 931 
ongoing aggregate burden hours per year.   



742 

 

services,1597 and another 2 burden hours annually for in-house counsel to amend the account 

disclosure to disclose material changes to type and scope of services—for a total of 4 burden 

hours per year.  The estimated ongoing aggregate burden for standalone broker-dealers that are 

small entities to amend account disclosures to reflect changes in type and scope of services is 

therefore 2,492 hours per year.1598  

With respect to delivery of the amended account agreements in the event of material 

changes to the capacity disclosure or disclosure related to type and scope of services, we estimate 

that this would take place among 20% of a small entity’s retail customer accounts annually.  We 

therefore estimate small entities to incur a total annual aggregate burden of 21 hours, or 0.03 

hours per small entity per year.1599  

                                                                                                                                                             

 

1597  As noted above, we estimate zero burden hours annually for standalone broker-dealers 
that are small entities relating to disclosure of capacity under the Disclosure Obligation.  
See supra Section IV.B.1.a.ii.   

1598  This estimate is based on the following calculation: (4 burden hours per small entity per 
year) x (623 standalone broker-dealers that are small entities) = 2,492 ongoing aggregate 
burden hours per year.   

1599  (20%) x (5,281 retail customer accounts) x (0.02 hours for delivery to each customer 
account) = 21 aggregate burden hours per year.  Conversely, 21 aggregate burden hours / 
756 small entities = 0.03 burden hours per small entity per year.   



743 

 

The total ongoing aggregate burden for small entities to review, amend, and deliver 

updated account disclosures to reflect changes in capacity, type and scope of services would be 

3,444 burden hours per year.1600 

The Commission acknowledges that the types of services and product offerings vary 

greatly by broker-dealer, and therefore the costs or burdens associated with updating the account 

disclosure might also vary. 

(2) Disclosure of Fees and Costs 

  As stated above, while we anticipate that many small entities may already create fee 

schedules, we believe that small entities will initially spend 5 hours to internally create a new fee 

schedule in consideration of the requirements of Regulation Best Interest.  We additionally 

estimate a one-time external cost of $2,485 for small entities.1601  We therefore estimate the 

initial aggregate burden for small entities to be 3,780 burden hours,1602 and the initial aggregate 

cost to be $1.88 million.1603   

                                                                                                                                                             

 

1600  This estimate is based on the following calculation: (931 ongoing aggregate burden hours 
for dually registered broker-dealers that are small entities) + (2,492 ongoing aggregate 
burden hours for standalone broker-dealers that are small entities) + (21 ongoing 
aggregate burden hours for delivery of amended account disclosures) = 3,444 total 
ongoing aggregate burden hours per year. 

1601  See supra footnote 1427. 
1602  See supra footnote 1429. 
1603  See supra footnote 1430. 



744 

 

Similar to delivery of the account disclosure regarding capacity and type and scope of 

services, we estimate the burden for small entities to make the initial delivery of the fee schedule 

to new retail customers, at the inception of the relationship, and existing retail customers, prior to 

or at the time of a recommendation, will require approximately 0.02 hours to deliver to each 

retail customer.1604  We therefore estimate that small entities will have an aggregate initial 

burden of 106 hours, or approximately 0.14 hours per small entity for the first year after 

Regulation Best Interest is in effect.1605   

With respect to small entities, we estimate that reviewing and updating the fee schedule 

will require approximately 2 hours per year.  Based on these estimates, we estimate the recurring, 

aggregate, annualized burden will be 1,512 hours for small entities.1606  We do not anticipate that 

small entities will incur outside legal, compliance, or consulting fees in connection with updating 

their standardized fee schedule since in-house personnel would be more knowledgeable about 

these facts, and we therefore do not expect external costs associated with updating the fee 

schedule.   

                                                                                                                                                             

 

1604  See supra footnote 1412. 
1605  This estimate is based on the following calculation: (5,281 retail customer accounts) x 

(0.02 hours for delivery to each customer account) = 106 aggregate burden hours.  
Conversely, (106 aggregate burden hours) / (756 small entities) = 0.14 burden hours per 
small entity for the first year after Regulation Best Interest is in effect. 

1606  See supra footnote 1438. 



745 

 

With respect to delivery of the amended fee schedule in the event of a material change, 

we estimate that this would take place among 40% of a small entity’s retail customer accounts 

annually, and that small entities will require approximately 0.02 hours to deliver the amended fee 

schedule to each retail customer.  We therefore estimate small entities would incur a total annual 

aggregate burden of 42 hours, or 0.06 hours per small entity.1607  

The Commission acknowledges that the type of fee schedule may vary greatly by small 

entity and therefore that the costs or burdens associated with updating the standardized fee 

schedule might similarly vary. 

(3) Disclosure of All Material Facts Relating to Conflicts of 
Interest Associated with the Recommendation 

 
We believe that many or most small entities will develop a standardized conflict 

disclosure document and deliver it to their retail customers.1608  For small entities, we estimate it 

will take in-house counsel, on average, 5 burden hours to create the standardized conflict 

disclosure document and outside counsel 5 hours to review and revise the document.  We 

estimate that the initial aggregate burden for the development of a standardized disclosure 

document, based on an estimated 756 small entities, will be 3,780 burden hours.1609  We 

                                                                                                                                                             

 

1607  This estimate is based on the following calculation: (40% of 5,281 retail customer 
accounts) x (0.02 hours) = 42 aggregate burden hours.  Conversely, (42 aggregate burden 
hours) / (756 small entities) = 0.06 burden hours per small entity per year.   

1608  See supra footnote 1444. 
1609  See supra footnote 1445. 



746 

 

additionally estimate an initial cost of $2,485 per small entity,1610 and an aggregate initial cost of 

$1.88 million for all small broker-dealers.1611   

We assume that small entities will deliver the standardized conflict disclosure document 

to new retail customers at the inception of the relationship, and to existing retail customers prior 

to or at the time of a recommendation.  We estimate that small entities will require 

approximately 0.02 hours to deliver the standardized conflict disclosure document to each retail 

customer.1612  We therefore estimate that small entities will incur an aggregate initial burden of 

106 hours, or approximately 0.14 hours per small entity for delivery of the standardized conflict 

disclosure document the first year after Regulation Best Interest is in effect.1613  Accordingly, the 

                                                                                                                                                             

 

1610  See supra footnote 1446. 
1611  See supra footnote 1447. 
1612  See supra footnote 1412.  For purposes of this analysis, we have assumed any initial 

disclosures made by the small entities related to material conflicts of interest will be 
delivered together. 

1613  These estimates are based on the following calculations:  (0.02 hours per customer 
account x 5,281 retail customer accounts) = 106 aggregate burden hours.  Conversely, 
(106 hours) / (756 small entities) = 0.14 burden hours per small entity for the first year 
after Regulation Best Interest is in effect. 



747 

 

total aggregate initial burden for small entities is estimated at 3,886 hours,1614 and the total 

aggregate initial cost is estimated at $1.88 million.1615 

We believe that small entities will incur ongoing annual burdens and costs to update the 

disclosure document to include newly identified conflicts.  We estimate that in-house counsel at 

a small entity will require approximately 1 hour per year to update the standardized conflict 

disclosure document, for an ongoing aggregate burden of approximately 756 hours per year.1616  

We do not anticipate that small entities will incur outside legal, compliance, or consulting fees in 

connection with updating their standardized conflict disclosure document, since in-house 

personnel would presumably be more knowledgeable about conflicts of interest.   

With respect to ongoing delivery of the updated conflict disclosure document, we 

estimate that this will take place among 40% of a small entity’s retail customer accounts 

annually, and that small entities will require approximately 0.02 hours to deliver the updated 

conflict disclosure document to each retail customer.1617  We therefore estimate that small 

                                                                                                                                                             

 

1614  This estimate is based on the following calculation: (3,780 aggregate initial burden hours 
for the development of a standardized conflict disclosure document) + (106 burden hours 
for delivery of the standardized conflict disclosure document) = 3,886 aggregate initial 
burden hours. 

1615  See supra footnote 1430. 
1616  See supra footnote 1454. 
1617  See supra footnote 1456. 



748 

 

entities will incur an aggregate ongoing burden of 42 hours, or 0.06 burden hours per small entity 

per year.1618  

2. Care Obligation 

As discussed above in Section IV.B.2, we believe that any burdens or costs associated 

with the Care Obligation are accounted for in other obligations under Regulation Best Interest, 

including the Disclosure Obligation and the Record-making Obligation under Rule 17a-3(a)(35) 

and Recordkeeping Obligation under Rule 17a-4(e)(5).  Other costs applicable to broker-dealers, 

including small entities, associated with the Care Obligation are discussed above in Section 

III.C.3.b. 

3. Conflict of Interest Obligation 

As described more fully above in Section IV.B.3, the Conflict of Interest Obligation 

would generally include the obligation to: (1) update written policies and procedures to comply 

with Regulation Best Interest and (2) establish mechanisms to proactively and systematically 

identify and manage conflicts of interest in its business on an ongoing or periodic basis.1619   

                                                                                                                                                             

 

1618  This estimate is based on the following calculation: (40% of 5,281 retail customer 
accounts) x (0.02 hours) = 42 aggregate burden hours.  Conversely, (42 aggregate burden 
hours per year) / (756 small entities) = 0.06 hours per small entity per year.   

1619  See supra Section IV.B.3.  For a discussion of additional costs and burdens, as well as 
monetized burdens, related to the Conflict of Interest Obligation, see supra Section 
III.C.4. 



749 

 

a. Written Policies and Procedures 

i. Initial Costs and Burdens 

To initially comply with this obligation, we believe that small entities would primarily 

rely on outside counsel to update existing policies and procedures, as small broker-dealers 

generally have fewer in-house legal and compliance personnel.  We estimate that 40 hours of 

outside legal counsel services would be required, for a one-time initial cost of $19,880 per small 

entity,1620 and an aggregate initial cost of $15.0 million for all small entities.1621  We also expect 

that in-house compliance would require 10 hours to review and approve the updated policies and 

procedures, for an initial aggregate burden of 7,560 hours.1622  Therefore, we estimate the total 

initial aggregate burden for small entities to be 128,160 hours1623 and the total initial aggregate 

cost to be $25.0 million.1624 

 We believe that the related ongoing costs for small entities (relating to outside counsel 

reviewing and updating policies and procedures on a periodic basis) would be $2,485 annually 

for each small entity,1625 and the projected aggregate, annual ongoing cost for small entities 

                                                                                                                                                             

 

1620  See supra footnote 1478. 
1621  See supra footnote 1479.   
1622  See supra footnote 1480.   
1623  See supra footnote 1481.   
1624  See supra footnote 1482. 
1625  See supra footnote 1487.   



750 

 

(relating to outside legal counsel) would be $1.88 million.1626  In addition, we expect that small 

entities would require five hours of outside compliance services per year to update their policies 

and procedures, for an ongoing cost of $1,365 per year per small entity,1627 and an aggregate 

ongoing cost of $1.03 million per year.1628  The total aggregate, ongoing cost for small entities is 

therefore projected at $2.91 million per year.1629 

 In addition to the costs described above, we additionally believe small broker-dealers 

would incur an internal burden of approximately five hours for an in-house compliance manager 

to review and approve the updated policies and procedures per year.  The ongoing, aggregate 

burden for small broker-dealers would be 3,780 hours for in-house compliance manager review 

per year.1630 

b. Identification and Management of Conflicts of Interest 

 To comply with Regulation Best Interest, we expect that small entities would modify 

existing technology through an outside programmer which would require, on average, an 

estimated 20 hours, for an estimated initial cost per small entity of $5,680.1631  We additionally 

continue to project that coordination between the programmer and the small entity’s compliance 
                                                                                                                                                             

 

1626  See supra footnote 1488.   
1627  See supra footnote 1489.   
1628  See supra footnote 1490.   
1629  See supra footnote 1491.   
1630  See supra footnote 1492.   
1631  See supra footnote 1498.   



751 

 

manager would involve five initial burden hours.  The aggregate initial costs and burdens for 

small entities for the modification of existing technology to identify conflicts of interest would 

therefore be $4.29 million,1632 and 3,780 burden hours.1633 

 As a result of the changes made to the rule text of the Conflict of Interest Obligation of 

Regulation Best Interest, we believe that small entities would incur burdens to determine how to 

manage the conflict of interest.  We believe that small entities would require approximately 20 

hours per small entity,1634 for an aggregate of 15,120 initial burden hours for all small 

entities.1635  The total initial aggregate burden for small entities for identification and 

management of conflicts of interest is therefore 18,900 initial burden hours.1636 

 To maintain compliance with the Conflict of Interest Obligation, we believe that for 

purposes of this analysis, small entities would, through the help of the business line and 

                                                                                                                                                             

 

1632  This cost estimate is based on the following calculation:  ($5,680 in outside programmer 
costs per broker-dealer) x (756 small entities) = $4.29 million in aggregate initial outside 
programmer costs. 

1633  This burden estimate is based on the following calculation:  (5 burden hours) x (756 
small entities) = 3,780 aggregate initial burden hours. 

1634  See supra footnotes 1502 and 1503.   
1635  This burden estimate is based on the following calculation:  (20 burden hours) x (756 

small entities) = 15,120 aggregate initial burden hours. 
1636  This burden estimate is based on the following calculation: (3,780 burden hours for 

modification of technology) + (15,120 burden hours for evaluation of managing conflicts) 
= 18,900 total aggregate initial burden hours.   



752 

 

compliance personnel, spend on average 10 hours1637 to perform an annual conflicts review using 

the modified technology infrastructure.1638  Therefore, the aggregate ongoing burden for an 

annual conflicts review, based on an estimated 756 small entities, would be approximately 7,560 

burden hours per year.1639  Because we assume that small entities would use in-house personnel 

to identify and evaluate new, potential conflicts, we continue to believe they would not incur 

additional ongoing costs. 

c. Training 

 As discussed in the Proposing Release, we expect that small entities would develop 

training programs to comply with Regulation Best Interest, including the Conflict of Interest 

Obligation.  However, we believe that any burdens and costs associated with a training program 

would fall under the new Compliance Obligation as it would be developed to comply with the 

rule as a whole, including each of the component obligations. 

 In total, to comply with the Conflict of Interest Obligation, the Commission estimates 

that the total initial burdens and costs for small entities to be 135,720 hours1640 and $29.29 

                                                                                                                                                             

 

1637  See supra footnote 1508. 
1638  See supra footnote 1509.   
1639  This estimate is based on the following calculation: (10 hours of labor per small entity 

per year) x (756 small entities) = 7,560 aggregate burden hours per year.   
1640  This estimate is based on the following calculation: (128,160 burden hours for written 

policies and procedures) + (7,560 burden hours for identification and management of 
conflicts of interest) = 135,720 hours. 



753 

 

million1641 and the total ongoing burdens and costs for small entities to be 11,340 hours1642 and 

$2.91 million.1643 

4. Compliance Obligation 

As discussed above, in response to comments that we should require policies and 

procedures to comply with the rule as a whole, we are adopting the Compliance Obligation.1644  

Because we did not include the Compliance Obligation in the Proposing Release, we did not 

include costs and burdens associated with the Compliance Obligation, but have provided a 

detailed explanation in Section IV.B.4 above, and a summary below.    

To comply with the Compliance Obligation, we believe that small entities would 

primarily rely on outside counsel to update existing policies and procedures, and that 20 hours of 

outside legal counsel services would be required, for a one-time cost of $9,940 per small 

entity,1645 and an aggregate initial cost of $7.5 million for all small entities.1646  We also expect 

                                                                                                                                                             

 

1641  This estimate is based on the following calculation: ($25 million initial aggregate costs 
relating to written policies and procedures) + ($4.29 million initial aggregate costs for 
modification of existing technology to identify conflicts of interest) = $29.29 million 
initial aggregate costs. 

1642  This estimate is based on the following calculation: (3,780 burden hours for reviewing 
and approving the updated policies and procedures) + (7,560 burden hours for annual 
conflicts review) = 11,340 initial aggregate burden hours. 

1643  See supra footnote 1629.  
1644  Section II.C.4. 
1645  See supra footnote 1524. 
1646  See supra footnote 1525.   



754 

 

that in-house compliance personnel would require 6 hours to review and approve the updated 

policies and procedures, for an aggregate initial burden of 4,536 hours.1647   

In terms of ongoing costs, we assume for purposes of this analysis that small entities 

would mostly rely on outside legal counsel and compliance consultants for review and update of 

their policies and procedures, with final review and approval from an in-house compliance 

manager.  We estimate that outside counsel would require approximately five hours per year to 

update policies and procedures, for an annual cost of $2,485 for each small entity.1648  The 

projected aggregate, annual ongoing cost for outside legal counsel to update policies and 

procedures for small entities would be $1.88 million per year.1649  In addition, we expect that a 

small entity would require five hours of outside compliance services per year to update its 

policies and procedures, for an ongoing cost of $1,365 per year,1650 and an aggregate ongoing 

cost of $1.03 million per year.1651  The total aggregate, ongoing cost for small entities is 

therefore projected at $2.91 million per year.1652 

                                                                                                                                                             

 

1647  See supra footnote 1526.   
1648  See supra footnote 1530. 
1649  See supra footnote 1531. 
1650  See supra footnote 1532. 
1651  See supra footnote 1533. 
1652  See supra footnote 1534. 



755 

 

a. Training 

Pursuant to the obligation to “maintain and enforce” written policies and procedures, we 

additionally believe small entities will develop training programs that promote compliance with 

Regulation Best Interest.   

We estimate that a small entity would retain an outside systems analyst, outside 

programmer, and an outside programmer analyst to create a training module, at 20 hours, 40 

hours, and 20 hours, respectively.  The total cost to develop the training module would be 

approximately $20,920 per small entity,1653 for an aggregate initial cost to small entities of 

$17.18 million.1654 

Additionally, we expect that the training module would require the approval of the Chief 

Compliance Officer, as well as in-house counsel, each of whom would require approximately 2 

hours to review and approve the training module.  The initial aggregate burden for small entities 

is therefore estimated at 3,024 initial burden hours.1655 

In addition, small entities would incur an initial cost for registered representatives to 

undergo training through the training module.  We estimate the training time at one hour per 

                                                                                                                                                             

 

1653  See supra footnote 1535.     
1654  This estimate is based on the following calculation:  (756 small entities) x ($20,920 initial 

costs per broker-dealer) = $15.81 million in aggregate initial costs for technology 
services. 

1655  This estimate is based on the following calculation:  (756 small entities) x (4 initial 
burden hours per small entity) = 3,024 initial burden hours. 



756 

 

associated person, for an aggregate initial burden of 5,094 burden hours, or an initial burden of 

6.7 hours per small entity.1656  The total aggregate burden to approve the training module and 

implement the training program would be 8,118 initial burden hours.1657 

 For purposes of this analysis, we assume that  small entities would likely require 

registered representatives to repeat the training module for Regulation Best Interest on an annual 

basis.  The ongoing aggregate cost for the one-hour training would be 5,094 burden hours per 

year, or 6.7 burden hours per small entity per year.1658 

 In total, for small entities to comply with the Compliance Obligation, the Commission 

estimates the total initial burdens and costs to be 12,654 hours1659 and $23.31 million,1660 and the 

total ongoing burdens and costs to be 5,094 hours1661 and $2.91 million.1662 

                                                                                                                                                             

 

1656  This estimate is based on the following calculation: (1 burden hour) x (5094 registered 
representatives at small entities) = 5,094 aggregate initial burden hours.  Conversely, 
(5,094 aggregate burden hours) / (756 small entities) = 6.7 initial burden hours per 
broker-dealer.   

1657  This estimate is based on the following calculation: (5,094 burden hours for training of 
registered representatives) + (3,024 burden hours to approve training program) = 8,118 
total aggregate initial burden hours.   

1658  See supra footnote 1656. 
1659  This estimate is based on the following calculation: (4,536 initial burden hours for 

policies and procedures) + (8,118 initial burden hours training) = 12,654 initial burden 
hours to comply with Compliance Obligation. 

1660  This estimate is based on the following calculation: ($7.5 million initial costs for policies 
and procedures) + ($15.81 million initial costs for training) = $23.31 million initial total 
costs to comply with Compliance Obligation. 



757 

 

5. Record-Making and Recordkeeping Obligations 

The record-making and recordkeeping obligations will impose record-making and 

recordkeeping requirements on broker-dealers with respect to certain information collected from, 

or provided to, retail customers.   

a. Record-Making Obligation 

As discussed above, we continue to believe that small entities will satisfy the record-

making requirements of the amendment to Rule 17a-3(a)(35) by amending an existing account 

disclosure document to include certain information.1663  We believe that the inclusion of this 

information in an account disclosure document will require, on average, approximately 1 hour 

per year for outside counsel at small entities, at an updated average rate of $497/hour, for an 

annual cost of $497 for each small entity to update an account disclosure document.  The 

projected initial, aggregate cost for small entities is therefore estimated to be $375,732.1664  

Finally, we estimate it will require an additional 0.04 hours for the registered representative 

responsible for the information (or other clerical personnel) to fill out that information in the 

                                                                                                                                                             

 

1661  This estimate is based on the following calculation: (0 ongoing burden hours for policies 
and procedures) + (5,094 ongoing burden hours for training) = 5,094 ongoing burden 
hours to comply with Compliance Obligation. 

1662  This estimate is based on the following calculation: ($2.91 million ongoing costs for 
policies and procedures) + ($0 ongoing costs for training) = $2.91 million ongoing total 
costs to comply with Compliance Obligation. 

1663  See supra Section IV.B.5.a.i. 
1664  See supra footnote 1549.   



758 

 

account disclosure document, for an approximate total aggregate initial burden of 211 hours, or 

approximately 0.28 hours per small entity for the first year after the rule is in effect.1665   

Because we have already included the costs and burdens associated with the creation of a 

record to memorialize an oral disclosure, and the delivery of the amended account disclosure 

document in Section V.D.1., we need not include them in this section of the analysis. 

We do not believe that the identity of the registered representative responsible for the 

retail customer’s account will change.  Accordingly, we continue believe that there are no 

ongoing costs and burdens associated with this record-making requirement of the amendment to 

Rule 17a-3(a)(35).  With respect to memorializing oral disclosures, we estimate that this would 

take place among 52% of a small entity’s retail customers (and thus 52% of a registered 

representative’s retail customer accounts) annually.1666  We therefore estimate that small entities 

will incur a total annual aggregate ongoing burden of 55 hours or 0.07 hours per small entity per 

year.1667 

                                                                                                                                                             

 

1665  These estimates are based on the following calculations:  (0.04 hours per customer 
account) x (5,281 retail customer accounts at small entities) = 211 aggregate initial 
burden hours.  Conversely, (211 burden hours) / (756 small entities) = 0.28 initial burden 
hours per broker-dealer.   

1666  See supra footnote 1555. 
1667  (52%) x (5,281 retail customer accounts at small entities) x (0.02 hours for recording 

each oral disclosure relating to a retail customer’s account) = 55 aggregate burden hours 
per year.  Conversely, 55 aggregate burden hours / 756 small entities = 0.07 ongoing 
burden hours per small entity per year. 



759 

 

b. Recordkeeping Obligation 

For purposes of this analysis, we assume the following records would likely be retained 

pursuant to amended Rule 17a-3(a)(35): (1) existing account disclosure documents; (2) 

comprehensive fee schedules; (3) disclosures identifying material conflicts; and (4) 

memorialized oral disclosures under the circumstances outlined in Section II.C.1, Oral 

Disclosure or Disclosure After a Recommendation. 

Based on our belief that small entities will rely on existing infrastructures to satisfy the 

recordkeeping obligations of Regulation Best Interest and the amendment to Rule 17-a(4)(e)(5), 

we believe the burden for small entities to add new documents or modify existing documents to 

the small entity’s existing retention system will be approximately 704 burden hours for small 

entities, assuming a small entity will need to upload or file each of the four account documents 

discussed above for each retail customer account.1668  We do not believe there will be additional 

internal or external costs relating to the uploading or filing of the documents.  In addition, 

because we have already included the costs and burdens associated with the delivery of the 

amended account opening agreement and other documents in Section V.D.1 above, we do not 

include them in this section of the analysis. 

                                                                                                                                                             

 

1668   This estimate is based on the following calculation: (4 documents per customer account) 
x (5,281 retail customer accounts at small entities) x (2 minutes per document) / 60 
minutes = 704 aggregate burden hours.   



760 

 

We estimate that the approximate ongoing burden associated with the recordkeeping 

requirement of the amendment to Rule 17a-4(e)(5) is 231 burden hours per year.1669  We do not 

believe that the ongoing costs associated with ensuring compliance with the retention schedule 

would change from the current costs of ensuring compliance with existing Rule 17a-4 and as 

outlined above.   

E. Agency Action to Minimize Effect on Small Entities 

The RFA directs the Commission to consider significant alternatives that would 

accomplish the stated objective, while minimizing any significant adverse impact on small 

entities.  As described in the Proposing Release we considered the following alternatives for 

small entities in relation to the new requirements: (1) the establishment of differing compliance 

or reporting requirements or timetables that take into account the resources available to small 

                                                                                                                                                             

 

1669  This estimate is based on the percentage of account records we expect would be updated 
each year as described in Section IV.B.1, supra, and the following calculation: ((40% of 
fee schedules x 5,281 retail customer accounts at small entities) x (2 minutes per 
document) + (40% of conflict disclosure forms x 5,281 retail customer accounts at small 
entities) x (2 minutes per document) + (20% of account opening documents x 5,281  
retail customer accounts at small entities) x (2 minutes per document)) = 10,560 minutes / 
60 minutes = 176 aggregate ongoing burden hours.  In addition, with respect to ongoing 
memorialization of the updated oral disclosures, we estimate that this will take place 
among 52% of a small entity’s retail customer accounts annually.  We therefore estimate 
that small entities will incur an aggregate ongoing burden of 55 hours, or 0.07 burden 
hours per broker-dealer (calculated as follows: (52% of updated oral disclosures x 5,281 
retail customer accounts at small entities) x (1.2 minutes per document) = 3,295 minutes / 
60 minutes = 55 aggregate ongoing burden hours (or 55 aggregate burden hours / 756 
small entities = 0.07 burden hours per small entity)).  176 hours + 55 hours = 231 total 
aggregate ongoing burden hours.761 

 

entities; (2) the clarification, consolidation, or simplification of compliance and reporting 

requirements for small entities; (3) the use of performance rather than design standards; and (4) 

an exemption from coverage of the new requirements, or any part thereof, for such small entities. 

Regarding the first alternative, the Commission does not believe that we could effectively 

achieve our stated objectives by establishing different requirements applicable to broker-dealers 

of different sizes.  We considered adopting tiered compliance dates so that smaller broker-dealers 

would have had more time to comply.  However, as discussed in Section II.E above, we believe 

the operational capability needed to develop processes to comply with Regulation Best Interest is 

sufficiently established by firms of all sizes and resources.  The Commission has determined, in 

light of the importance of the protections afforded by Regulation Best Interest to retail 

customers, that a Compliance Date of one year after the Effective Date is an appropriate 

timeframe for firms to conduct the requisite operational changes to their systems to establish 

internal processes to comply with Regulation Best Interest.  Further, as discussed above in 

Section III, each of the component obligations in Regulation Best Interest shares features with 

existing market best practices, as shaped by FINRA’s guidance on relevant rules or as described 

in its Report on Conflicts of Interest.1670  To the extent that broker-dealer (and small entity) 

practices are already aligned with the requirements of Regulation Best Interest, the anticipated 

                                                                                                                                                             

 

1670  See supra Section III.C.1.b.  



762 

 

magnitude of the costs associated with a given component of the rule will be correspondingly 

reduced.1671 

As discussed above, we believe that Regulation Best Interest will result in important 

investor protection benefits, and these benefits apply to retail customers of smaller entities as 

well as retail customers of large broker-dealers.  For example, a primary objective of this 

rulemaking is to enhance the quality of recommendations provided by broker-dealers to retail 

customers, by establishing under the Exchange Act a “best interest” obligation.  We do not 

believe that the interest of investors who are retail customers would be served by establishing 

differing compliance or reporting requirements or timetables for broker-dealers that are small 

entities under Regulation Best Interest and the amendments to Rules 17a-3 and 17a-4(e)(5).   

Moreover, we continue to believe that providing an exemption or different requirements 

for small entities would be inconsistent with our goal of facilitating more consistent regulation, 

in recognition of the importance for both investors and broker-dealers of having the applicable 

standards for brokerage recommendations be clear, understandable, and as consistent as possible 

across a brokerage relationship (i.e., whether for retirement or non-retirement purposes) and 

better aligned with other advice relationships (e.g., a relationship with an investment adviser).  

Further, as discussed above, broker-dealers are subject to regulation under the Exchange Act and 

the rules of each SRO of which the broker-dealer is a member, including a number of obligations 

                                                                                                                                                             

 

1671  See supra text following footnote 1159. 



763 

 

that attach when a broker-dealer makes a recommendation to a customer, as well as general and 

specific requirements aimed at addressing certain conflicts of interest.  We note that these 

existing requirements do not generally distinguish between small entities and other broker-

dealers.  

For the same reasons as described in the Proposing Release, we still do not believe that 

additional clarification, consolidation, or simplification of compliance and reporting 

requirements would be appropriate for small entities.  We note, however, in crafting Regulation 

Best Interest, we generally aimed to provide broker-dealers flexibility in determining how to 

satisfy the component obligations.  We continue to believe that this flexibility reflects a general 

performance-based approach, rather than design-based approach. 

As discussed in the Economic Analysis in Section III.E above, the Commission also 

considered a number of alternatives as they affect all firms, including small entities.  Specifically, 

the Commission considered three different options for imposing a fiduciary standard on broker-

dealers: (1) applying the fiduciary standard under the Advisers Act to broker-dealers; 

(2) adopting a “new” uniform fiduciary standard of conduct applicable to both broker-dealers 

and investment advisers, such as that recommended by the staff in the 913 Study, and, or (3) 

adopting similar standards to what the DOL had provided under its fiduciary rule to broker-

dealers and investment advisers.  The Commission further considered requiring broker-dealers to 

use a specific form for disclosure, similar to, for example, Form ADV Part II in lieu of the 

flexible approach of the Disclosure Obligation, or in the alternative, developing a disclosure-only 

standard, which would require that broker-dealers satisfy only the Disclosure Obligation of the 

final rule. 



764 

 

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 relationships can solve 

for every issue presented.  After careful consideration of the comments and additional 

information we have received, 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. 

VI. STATUTORY AUTHORITY AND TEXT OF THE RULE 

Pursuant to Dodd-Frank Wall Street Reform and Consumer Protection Act Section 913(f), 

Pub. L. 111-203, 124 Stat. 1376, 1827 (2010), and Exchange Act sections 3, 10, 15, 15(c)(6), 

15(l), 17, 23 and 36 thereof, 15 U.S.C. 78c, 78j, 78o, 78o(c)(6), 78o(l), 78q, 78w and 78mm, the 

Commission is adopting § 240.15l-1 and adopting amendments to § 240.17a-3 by adding new 

paragraph (a)(25), and to revise § 240.17a-4(e)(5) of Title 17 of the Code of Federal Regulations 

in the manner set forth below. 

List of Subjects in 17 CFR Part 240 

Brokers, Reporting and recordkeeping requirements, Securities. 

Text of the Rule 

 In accordance with the foregoing, Title 17, Chapter II of the Code of Federal Regulations 

is amended as follows:  

PART 240 – GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE 

ACT OF 1934 



765 

 

1.  The authority citation for part 240 is amended by adding sectional authorities for section 

240.15l-1 to read as follows: 

  Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 77eee, 77ggg, 77nnn, 77sss, 

77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 

78o-4, 78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-

37, 80b-3, 80b-4, 80b-11, 7201 et seq.; and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 

U.S.C. 1350; and Pub. L. 111-203, 939A, 124 Stat. 1887 (2010); and secs. 503 and 602, Pub. L. 

112-106, 126 Stat. 326 (2012), unless otherwise noted. 

* * * * * 

 Section 240.15l-1 is also issued under Pub. L. 111-203, sec. 913, 124 Stat. 1376, 1827 

(2010). 

* * * * * 

2.   Add § 240.15l-1 to read as follows:  

§ 240.15l-1 Regulation Best Interest.  

(a)  Best interest obligation.  (1)  A broker, dealer, or a natural person who is an associated 

person of a broker or dealer, when making a recommendation of any securities transaction or 

investment strategy involving securities (including account recommendations) to a retail 

customer, 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, or natural person who 

is an associated person of a broker or dealer making the recommendation ahead of the interest of 

the retail customer.   

(2) The best interest obligation in paragraph (a)(1) of this section shall be satisfied if: 



766 

 

(i)  Disclosure obligation.  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, provides the retail customer, in 

writing, full and fair disclosure of:  

(A)  All material facts relating to the scope and terms of the relationship with the retail customer, 

including:  

(1) That the broker, dealer, or such natural person is acting as a broker, dealer, or an associated 

person of a broker or dealer with respect to the recommendation;  

(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; and 

(B)  All material facts relating to conflicts of interest that are associated with the 

recommendation.  

(ii) Care obligation. The broker, dealer, or natural person who is an associated person of a broker 

or dealer, in making the recommendation, exercises reasonable diligence, care, and skill to: 

(A) Understand the potential risks, rewards, and costs 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; 

(B) 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, rewards, and costs associated with the recommendation and does not place the financial or 



767 

 

other interest of the broker, dealer, or such natural person ahead of the interest of the retail 

customer;  

(C) 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 

and does not place the financial or other interest of the broker, dealer, or such natural person 

making the series of recommendations ahead of the interest of the retail customer.  

(iii) Conflict of interest obligation.  The broker or dealer establishes, maintains, and enforces 

written policies and procedures reasonably designed to: 

(A) Identify and at a minimum disclose, in accordance with paragraph (a)(2)(i) of this section, or 

eliminate, all conflicts of interest associated with such recommendations; 

(B) Identify and mitigate any conflicts of interest associated with such 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, dealer, or such natural person ahead of the interest of the retail 

customer; 

(C)(1) Identify and disclose any material limitations placed on the securities or investment 

strategies involving securities that may be recommended to a retail customer and any conflicts of 

interest associated with such limitations, in accordance with subparagraph (a)(2)(i), and  

(2) 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  



768 

 

(D) Identify and eliminate any sales contests, sales quotas, 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.  

(iv) Compliance obligation.  In addition to the policies and procedures required by paragraph 

(a)(2)(iii) of this section, the broker or dealer establishes, maintains, and enforces written policies 

and procedures reasonably designed to achieve compliance with Regulation Best Interest.  

(b) Definitions.  Unless otherwise provided, all terms used in this rule shall have the same 

meaning as in the Securities Exchange Act of 1934.  In addition, the following definitions shall 

apply for purposes of this section: 

(1)  Retail customer means a natural person, or the legal representative of such natural person, 

who:  

(i) 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  

(ii) Uses the recommendation primarily for personal, family, or household purposes. 

(2)  Retail customer investment profile includes, but is not 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. 

(3)  Conflict of interest means 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.   



769 

 

 

3. Amend § 240.17a-3 by adding reserved paragraphs (a)(24) through (34) and paragraph 

(a)(35) to read as follows:   

§ 240.17a-3 Records to be made by certain exchange members, brokers and dealers.   

(a)*** 

(24) – (34)  [Reserved]. 

(35)  For each retail customer to whom a recommendation of any securities transaction or 

investment strategy involving securities is or will be provided: 

(i) A record of all information collected from and provided to the retail customer pursuant to § 

240.15l-1, as well as the identity of each natural person who is an associated person, if any, 

responsible for the account. 

(ii) For purposes of this paragraph (a)(35), the neglect, refusal, or inability of the retail customer 

to provide or update any information described in paragraph (a)(35)(i) of this section shall 

excuse the broker, dealer, or associated person from obtaining that required information. 

* * * * * 

4. Amend § 240.17a-4 by revising paragraph (e)(5) to read as follows: 

§ 240.17a-4  Records to be preserved by certain exchange members, brokers and dealers. 

 * * * * * 

(e)*** 

(5)  All account record information required pursuant to § 240.17a-3(a)(17) and all 

records required pursuant to § 240.17a-3(a)(35), in each case until at least six years after 

the earlier of the date the account was closed or the date on which the information was 

collected, provided, replaced, or updated.   



770 

 

* * * * * 

By the Commission. 

 

Dated: June 5, 2019 

 

 

      Vanessa Countryman 
      Acting Secretary