Form CRS Relationship Summary; Amendments to Form ADV; Required Disclosures in Retail Communications and Restrictions on the Use of Certain Names or Titles

Federal RegisterMay 9, 2018

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240, 249, 275 and 279

[Release No. 34-83063; IA-4888; File No. S7-08-18]

RIN 3235-AL27

Form CRS Relationship Summary; Amendments to Form ADV; Required Disclosures in Retail Communications and Restrictions on the Use of Certain Names or Titles

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rule.

SUMMARY:

The Securities and Exchange Commission (“Commission”) is proposing new and amended rules and forms under both the Investment Advisers Act of 1940 (“Advisers Act”) and the Securities Exchange Act of 1934 (“Exchange Act”) to require registered investment advisers and registered broker-dealers (together, “firms”) to provide a brief relationship summary to retail investors to inform them about the relationships and services the firm offers, the standard of conduct and the fees and costs associated with those services, specified conflicts of interest, and whether the firm and its financial professionals currently have reportable legal or disciplinary events. Retail investors would receive a relationship summary at the beginning of a relationship with a firm, and would receive updated information following a material change. The relationship summary would be subject to Commission filing and recordkeeping requirements. The Commission also is proposing two rules to reduce investor confusion in the marketplace for firm services, a new rule under the Exchange Act that would restrict broker-dealers and associated natural persons of broker-dealers, when communicating with a retail investor, from using the term “adviser” or “advisor” in specified circumstances; and new rules under the Exchange Act and Advisers Act that would require broker-dealers and investment advisers, and their associated natural persons and supervised persons, respectively, to disclose, in retail investor communications, the firm's registration status with the Commission and an associated natural person's and/or supervised person's relationship with the firm.

DATES:

Comments should be received on or before August 7, 2018.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's internet comment form (

http://www.sec.gov/rules/proposed.shtml

); or

• Send an email to

rule-comments@sec.gov

. Please include File Number S7-08-18 on the subject line.

Paper Comments

• Send paper comments to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549.

All submissions should refer to File Number S7-08-18. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's internet website (

http://www.sec.gov/rules/proposed.shtml

). Comments also are available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. Investors seeking to comment on the relationship summary may want to submit our short-form tear sheet for providing feedback on the relationship summary, available at Appendix F.

Studies, memoranda or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the Commission's website. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at

www.sec.gov

to receive notifications by email.

FOR FURTHER INFORMATION CONTACT:

Emily Rowland, Jennifer Songer, Gena Lai, Roberta Ufford, Jennifer Porter (Branch Chief), and Sara Cortes (Assistant Director), Investment Adviser Regulation Office at (202) 551-6787 or

IArules@sec.gov

, and Benjamin Kalish, Elizabeth Miller, Parisa Haghshenas (Branch Chief), and Holly Hunter-Ceci (Assistant Director), Chief Counsel's Office at (202) 551-6825 or

IMOCC@sec.gov

, Division of Investment Management, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

The Commission is proposing new rule 204-5 under the Investment Advisers Act of 1940 [15 U.S.C. 80b],

and is proposing to amend Form ADV to add a new Part 3: Form CRS [17 CFR 279.1] under the Advisers Act. The Commission is also proposing to amend rules 203-1 [17 CFR 275.203-1], 204-1 [17 CFR 275.204-1], and 204-2 [17 CFR 275.204-2] under the Advisers Act. The Commission is proposing new rule 17a-14 under the Securities Exchange Act of 1934 [17 CFR 240.17a-14],

and new Form CRS [17 CFR 249.640] under the Exchange Act. The Commission is also proposing to amend rules 17a-3 [17 CFR 240.17a-3] and 17a-4 [17 CFR 240.17a-4] under the Exchange Act. The Commission is further proposing new rule 15l-2 under the Exchange Act [17 CFR 240.15l-2], new rule 15l-3 under the Exchange Act [17 CFR 240.15l-3], and new rule 211h-1 under the Advisers Act [17 CFR 275.211h-1].

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

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

I. Background

II. Form CRS Relationship Summary

A. Presentation and Format

B. Items

1. Introduction

2. Relationships and Services

3. Obligations to the Retail Investor—Standard of Conduct

4. Summary of Fees and Costs

5. Comparisons

6. Conflicts of Interest

7. Additional Information

8. Key Questions

C. Delivery, Updating, and Filing Requirements

1. Filing Requirements

2. Delivery Requirements

3. Updating Requirements

D. Transition Provisions

E. Recordkeeping Amendments

III. Restrictions on the Use of Certain Names and Titles and Required Disclosures

A. Investor Confusion

B. Restrictions on Certain Uses of “Adviser” and “Advisor”

1. Firms Solely Registered as Broker-Dealers and Associated Natural Persons

2. Dually Registered Firms and Dual Hatted Financial Professionals

C. Alternative Approaches

D. Disclosures About a Firm's Regulatory Status and a Financial Professional's Association

IV. Economic Analysis

A. Baseline

1. Providers of Financial Services

2. Investor Account Statistics

3. Investor Perceptions About Broker-Dealers and Investment Advisers

B. Form CRS Relationship Summary

1. Broad Economic Considerations

2. Economic Effects of the Relationship Summary

3. Impact on Efficiency, Competition, and Capital Formation

4. Alternatives to the Proposed Relationship Summary

5. Request for Comments

C. Restrictions on the Use of Certain Names and Titles and Required Disclosures

1. Broad Economic Considerations

2. Economic Effects of the Proposed Restrictions on the Use of Certain Titles and Required Disclosures

3. Impact on Efficiency, Competition, and Capital Formation

4. Alternatives to the Proposed Rules

5. Request for Comments

D. Combined Economic Effects of Form CRS Relationship Summary and Restrictions on the Use of Certain Titles and Required Disclosures About a Firm's Regulatory Status

V. Paperwork Reduction Act Analysis

A. Form ADV

1. Respondents: Investment Advisers and Exempt Reporting Advisers

2. Changes in Burden Estimates and New Burden Estimates

3. Total Revised Burden Estimates for Form ADV

B. Rule 204-2 Under the Advisers Act

1. Changes in Burden Estimates and New Burden Estimates

2. Revised Annual Burden Estimates

C. Rule 204-5 Under the Advisers Act

1. Respondents: Investment Advisers

2. Initial and Annual Burdens

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

1. Respondents: Broker-Dealers

2. Initial and Annual Burdens

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

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

1. Changes in Burden Estimates and New Burden Estimates

2. Revised Annual Burden Estimates

G. Rule 151-3 Under the Exchange Act

1. Respondents: Broker-Dealers and Associated Natural Persons

2. Initial and Annual Burdens

H. Rule 211h-1 Under the Advisers Act

1. Respondents: Investment Advisers and Supervised Persons

2. Initial and Annual Burdens

I. Request for Comment

VI. Initial Regulatory Flexibility Analysis

A. Reason for and Objectives of the Proposed Action

1. Proposed Form CRS Relationship Summary

2. Proposed Rules Relating to Restrictions on the Use of Certain Terms and Required Disclosure of Regulatory Status and a Financial Professional's Firm Association

B. Legal Basis

C. Small Entities Subject to the Rule and Rule Amendments

1. Investment Advisers

2. Broker-Dealers

D. Projected Reporting, Recordkeeping and Other Compliance Requirements

1. Initial Preparation of Form CRS Relationship Summary

2. Rule 15l-2 Relating to Restrictions on the Use of Certain Terms in Names and Titles

3. Rules 15l-3 and 211h-1 Relating to Disclosure of Commission Registration Status and Financial Professional Association

E. Duplicative, Overlapping, or Conflicting Federal Rules

F. Significant Alternatives

1. Form CRS Relationship Summary

2. Rule 15l-2 Relating to Restrictions on the Use of Certain Terms in Names and Titles

3. Rule 15l-3 Relating to Disclosure of Commission Registration Status and Financial Professional Association

G. Solicitation of Comments

VII. Consideration of the Impact on the Economy

VIII. Statutory Authority

IX. Text of Rule and Form

Appendices

Appendix A: Form ADV: General Instructions

Appendix B: [Form ADV, Part 3:] Instructions to Form CRS

Appendix C: Dual Registrant Mock-Up

Appendix D: Broker-Dealer Mock-Up

Appendix E: Investment Adviser Mock-Up

Appendix F: Feedback on the Relationship Summary

I. Background

Individual investors rely on the services of broker-dealers and investment advisers when making and implementing investment decisions. Such “retail investors” can receive investment advice from a broker-dealer, an investment adviser, or both, or decide to make their own investment decisions.

A number of firms are dually registered with the Commission as broker-dealers and investment advisers, and offer both types of services.

Broker-dealers, investment advisers and dually registered firms all provide important services for individuals who invest in the markets. Studies show that retail investors are confused about the differences among them.

These differences include the scope and nature of the services they provide, the fees and costs associated with those services, conflicts of interest, and the applicable legal standards and duties to investors.

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), at 10-11,

available at

www.sec.gov/news/studies/2011/913studyfinal.pdf

(“913 Study”). As discussed below, we have considered the findings, conclusions and recommendations of the 913 Study in developing this proposal.

Retail investors also can choose to receive advisory services from other sources, such as banks, that are not required to be registered with the Commission.

Investment advisers also may be registered with one or more states if, among other things, they have less than a certain amount of assets under management.

See

section 203A of the Advisers Act. References in this release to investment advisers generally refer only to SEC-registered investment advisers.

See, e.g.,

913 Study,

supra

note 3.

See also

Letter from Barbara Roper, Director of Investor Protection, Consumer Federation of America,

et al.,

(Sept. 15, 2010) (“CFA Survey”) (submitting the results of a national opinion survey regarding U.S. investors and the fiduciary standard conducted by ORC/Infogroup for the Consumer Federation of America, AARP, the North American Securities Administrators Association, the Certified Financial Planner Board of Standards, Inc., the Investment Adviser Association, the Financial Planning Association and the National Association of Personal Financial Advisors); Siegel & Gale, LLC/Gelb Consulting Group, Inc.,

Results of Investor Focus Group Interviews About Proposed Brokerage Account Disclosures

(Mar. 5, 2005),

available at

http://www.sec.gov/rules/proposed/s72599/focusgrp031005.pdf

(“Siegel & Gale Study”); Angela A. Hung,

et al.,

RAND Institute for Civil Justice,

Investor and Industry Perspectives on Investment Advisers and Broker-Dealers

(2008),

available at

https://www.sec.gov/news/press/2008/2008-1_randiabdreport.pdf

(“RAND Study”).

We recognize the benefits of retail investors having access to diverse business models and of preserving investor choice among brokerage services, advisory services, or both. We also believe that retail investors need clear and sufficient information in order to understand the differences and key characteristics of each type of service. Providing this clarity is intended to assist investors in making an informed choice when choosing an investment firm and professional, and type of account to help to ensure they receive services that meet their needs and expectations.

The Commission, as the primary regulator of both broker-dealers and investment advisers, has considered ways to address this confusion and preserve investor choice for some time, including through the RAND study of investor perspectives commissioned in 2006, the 913 Study conducted in 2010-2011, and a solicitation of data and other relevant information in 2013.

A number of approaches with a range of formats have been considered to address this issue, such as a statement by broker-dealers that an account is a brokerage account and not an advisory

account, and encouraging investors to ask questions.

Through these initiatives, we have heard and considered the views of a wide range of commenters—financial firms, investors, consumer advocates, academics, and others. Improving retail investors' understanding of their different options for investment-related services through better disclosure is one key area on which commenters have focused. Commenters have suggested a range of presentations. Some commenters recommended a short disclosure document that explains the firm's services, fees, certain conflicts of interest, and the scope and nature of its services to the retail investor.

Others recommended a longer, more comprehensive narrative document such as the Form ADV Part 2 brochure that investment advisers are required to deliver to their clients.

See

RAND Study,

supra

note 5; 913 Study,

supra

note 3; Duties of Brokers, Dealers, and Investment Advisers, Exchange Act Release No. 69013 (Mar. 1, 2013) [78 FR 14848 (Mar. 7, 2013)] (“2013 Request for Data”).

See, e.g.,

Certain Broker-Dealers Deemed Not to Be Investment Advisers, Exchange Act Release No. 51523 (Apr. 12, 2005) [70 FR 20424, 20435 (Apr. 19, 2005)], at n.124 and accompanying text (“2005 Broker Dealer Release”).

See, e.g.,

Comment letters of Sammons Retirement Solutions (Jun. 4, 2013) and Insured Retirement Institute (Jul. 3, 2013) (recommending a short summary disclosure document together with a longer disclosure document similar to Form ADV, to be offered by both broker-dealers and investment advisers); Comment letter of AARP (Jul. 25, 2013); Comment letter of American Council of Life Insurers (Jul. 5, 2013) (incorporating by reference its comment letter, dated Aug. 30, 2010); Comment letter of Financial Services Institute (Jul. 5, 2013).

See, e.g.,

Comment letter of Committee of Annuity Insurers (Jul. 5, 2013); Comment letter of Edward D. Jones and Co., L.P. (Jul. 12, 2013); Comment letter of North American Securities Administrators Association, Inc. (Jul. 5, 2013); Comment letter of PFS Investments, Inc. (Jul. 5, 2013).

Similarly, the staff in the 913 Study and the Commission's Investor Advisory Committee, as part of its recommendation that the Commission adopt a fiduciary duty for broker-dealers, recommended uniform, simple, and clear summary disclosures to retail customers about the terms of their relationships with broker-dealers and investment advisers, including any material conflicts of interests.

Disclosure has also been a feature of other regulatory efforts that address investment advice, including those of the U.S. Department of Labor (“DOL”) applicable to services provided by broker-dealers and investment advisers,

and rules applicable to broker-dealers issued by the Financial Industry Regulatory Authority (“FINRA”).

See

913 Study,

supra

note 3, at 114-117. The 913 Study contemplated that the general relationship guide would be akin to Part 2A of Form ADV, which is generally referred to as an investment adviser's “brochure” and is the form investment advisers use to register with the Commission and states, which is provided to advisory clients. The 913 Study identified a number of potential disclosures that the Commission should consider including in such relationship guide.

See also

Recommendation of the Investor Advisory Committee: Broker-Dealer Fiduciary Duty,

available at

https://www.sec.gov/spotlight/investor-advisory-committee-2012/fiduciary-duty-recommendation-2013.pdf

(“Broker-Dealer Fiduciary Duty Recommendations”). The recommendation of the Investor Advisory Committee suggested that the disclosure be provided at the start of the engagement and periodically thereafter, and that it cover basic information about the nature of the services offered, fees and compensation, conflicts of interest, and disciplinary record.

For example, DOL regulations relating to “reasonable plan service arrangements” require firms providing advisory and other services to workplace retirement plans covered by the Employee Retirement Income Security Act of 1974 (“ERISA”) and the prohibited transaction provisions under section 4975 of the Internal Revenue Code (“Code”) to disclose in writing (among other things) a description of services and applicable fees.

See

29 CFR 2550.408b-2.

See also

29 CFR 2550.408g-1 (regulation requires fiduciary advisers to plans and individual retirement accounts (“IRAs”) seeking to rely on the statutory exemption for participant investment advice to provide certain disclosures, among other conditions).

See also infra

Section IV.A.1.c

which further describes disclosure obligations under DOL regulations and exemptions, including the DOL's “Best Interest Contract Exemption” (the “BIC Exemption”).

Disclosure of Services, Conflicts and Duties, FINRA Notice 10-54 (Oct. 2010),

available at

http://www.finra.org/sites/default/files/NoticeDocument/p122361.pdf

(“FINRA Notice 10-54”).

In 2017, Commission Chairman Clayton continued the discourse on these issues by outlining a series of questions and welcoming the public to submit their views on standards of conduct and related disclosures for investment advisers and broker-dealers. More than 250 commenters responded.

Many commenters recommended enhanced disclosures in addition to regulations that would raise the standard of conduct for broker-dealers providing advice.

Some recommended that both broker-dealers and investment advisers should provide a uniform disclosure document to retail investors,

while others suggested new disclosure requirements only for broker-dealers.

Commenters also noted that investor confusion based on financial professionals' titles persists, and made a range of suggestions.

Specifically, some commenters believed that particular titles cause investors to either form misimpressions about whether the services received are those of an investment adviser and subject to a fiduciary duty, or these investors are misled by financial professionals to form such beliefs.

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

(“Chairman Clayton's Request for Comment”).

See, e.g.,

Comment letter of T. Rowe Price (Oct. 12, 2017) (“T. Rowe 2017 Letter”); Comment letter of Vanguard (Sept. 29, 2017) (“Vanguard 2017 Letter”); Comment letter of Teachers Insurance and Annuity Association of America (Sept. 26, 2017) (“TIAA 2017 Letter”); Comment letter of the Investment Adviser Association (Aug. 31, 2017) (“IAA 2017 Letter”); Comment letter of Stifel, Nicolaus & Co. (Jul. 25, 2017) (“Stifel 2017 Letter”); Comment letter of Bernardi Securities, Inc. (Sept. 11, 2017) (“Bernardi Securities 2017 Letter”); Comment letter of UBS Financial Services Inc. (Jul. 21, 2017) (“UBS 2017 Letter”); Comment letter of SIFMA (Jul 21, 2017) (“SIFMA 2017 Letter”); Comment letter of the Equity Dealers of America (Sept. 11, 2017) (“Equity Dealers of America 2017 Letter”); Comment letter of AARP (Sept. 6, 2017) (“AARP 2017 Letter”); Comment letter of Financial Services Institute (Oct. 30, 2017); Comment letter of Financial Services Roundtable (Oct. 17, 2017) (“FSR 2017 Letter”); Comment letter of Consumer Federation of America (Sept. 14, 2017) (“CFA 2017 Letter”).

See, e.g.,

Stifel 2017 Letter; Equity Dealers of America 2017 Letter; Comment letter of Michael Kiley (Jul. 6, 2017) (“Kiley 2017 Letter”); Comment letter of the American Council of Life Insurers (Oct. 3, 2017) (“ACLI 2017 Letter”); Comment letter of Allianz Life Insurance Company of North America (Oct. 13, 2017) (“Allianz 2017 Letter”); AARP 2017 Letter; Comment letter of Robert Shaw (Jun. 5, 2017) (“Shaw 2017 Letter”); Comment letter of Alan Syzdek (Jul. 2 2017); Comment letter of Americans for Financial Reform (Sept. 22, 2017) (“AFR 2017 Letter”).

See, e.g.,

SIFMA 2017 Letter; Comment letter of the Investment Company Institute (Feb. 5, 2018); IAA 2017 Letter; Comment letter of Fidelity Investments (Aug. 11, 2017) (“Fidelity 2017 Letter”); Vanguard 2017 Letter; T. Rowe 2017 Letter; FSR 2017 Letter; UBS 2017 Letter; TIAA 2017 Letter; Comment letter of Wells Fargo & Company (Sept. 20, 2017) (“Wells Fargo 2017 Letter”); Bernardi Securities 2017 Letter; Comment letter of State Farm Mutual Automobile Insurance Company (Aug. 21, 2017) (“State Farm 2017 Letter”); Comment letter of PFS Investments Inc. (Dec. 10, 2017); Comment letter of Davis & Harman LLP (Jan. 18, 2018); Comment letter of LPL Financial LLC (Feb. 22, 2018).

See, e.g.,

CFA 2017 Letter; Comment letter of the Public Investors Arbitration Bar Association (Aug. 11, 2017) (“PIABA 2017 Letter”); IAA 2017 Letter; Comment letter of Pefin (Sept. 13, 2017) (“Pefin 2017 Letter”); Comment letter of Jackson National Life Insurance Company (Nov. 1, 2017) (“Jackson 2017 Letter”); Comment letter of CFA Institute (Jan. 10, 2018); Comment letter of First Ascent Asset Management (Jan. 10, 2018) (“First Ascent 2018 Letter”).

See e.g.,

CFA 2017 Letter; IAA 2017 Letter; Comment letter of the National Employment Law Project (Oct. 20, 2017) (“National Employment Law Project 2017 Letter”).

Many commenters recommended a short disclosure document addressing the nature and scope of services, fees and material conflicts of interest.

These suggestions are consistent with our staff's financial literacy study,

which found that retail investors favor a summary document and find these categories of disclosures, plus a financial intermediary's disciplinary history, to be important in choosing financial intermediaries.

Regarding investor confusion based on titles, commenters also recommended, for example, prohibiting the use of certain terms in titles, and prohibiting a firm not registered as an investment adviser from holding itself out in a manner that implies it is an investment adviser.

See, e.g.,

SIFMA 2017 Letter; UBS 2017 Letter; Stifel 2017 Letter; AARP 2017 Letter; Bernardi Securities 2017 Letter; Fidelity 2017 Letter; Allianz 2017 Letter.

See, e.g.,

Staff of the Securities and Exchange Commission,

Study Regarding Financial Literacy Among Investors as required by Section 917 of the Dodd-Frank Wall Street Reform and Consumer Protection Act

(Aug. 2012), at iv, v, xiv, 37, 73, 121-23 and 131-32,

available at

https://www.sec.gov/news/studies/2012/917-financial-literacy-study-part1.pdf

(“917 Financial Literacy Study”).

See, e.g.,

917 Financial Literacy Study,

supra

note 20, at iv, x-xiii, xxi, 37, 66-67, 73, 119.

See, e.g.

Comment letter of Mark D. Moss (Jun. 2, 2017); Comment letter of Gimme Credit (Aug. 8, 2017); PIABA 2017 Letter; AFL-CIO 2017 Letter; IAA 2017 Letter; Pefin 2017 Letter; Jackson 2017 Letter; AFR 2017 Letter; National Employment Law Project 2017 Letter; First Ascent 2018 Letter.

We agree that it is important to ensure that retail investors receive the information they need to understand the services, fees, conflicts, and disciplinary history of firms and financial professionals they are considering. Likewise, we believe that we should reduce the risk that retail investors could be confused or misled about the financial services they will receive as a result of the titles that firms and financial professionals use, and mitigate potential harm to investors as a result of that confusion. We also believe the information should be reasonably concise. Accordingly, we are proposing new rules to require broker-dealers and investment advisers to deliver to retail investors a customer or client relationship summary (“Form CRS”) that would explain general information about each of these topics.

Second, we are proposing rules that would (i) restrict the use of the terms “adviser” and “advisor” by broker-dealers and their associated financial professionals, and (ii) require broker-dealers and investment advisers to disclose in retail investor communications the firm's registration status while also requiring their associated financial professionals to disclose their association with such firm.

For investment advisers, Form CRS would be required by Form ADV Part 3. For broker-dealers, Form CRS would be required by proposed new rule 17a-14 under the Exchange Act. When we refer to Form CRS in this release, we are referring to Form CRS for both broker-dealers and investment advisers.

Together, these requirements would complement a separate release that the Commission is proposing concurrently to enhance existing broker-dealer conduct obligations (“Regulation Best Interest”).

Regulation Best Interest would establish a standard of conduct for broker-dealers and associated natural persons of broker-dealers to act in the best interest of a retail customer when making a recommendation of a securities transaction or investment strategy involving securities. While Regulation Best Interest would enhance the standard of conduct owed by broker-dealers to retail customers, it would not make that standard of conduct identical to that of investment advisers, given important differences between investment advisers and broker-dealers. The requirements we are proposing in this release would help an investor better understand these differences, and distinguish among different firms in the marketplace, which in turn should assist the investor in making an informed choice for the services that best suit her particular needs and circumstances.

Regulation Best Interest, Exchange Act Release No. 34-83062 (Apr. 18, 2018) (“Regulation Best Interest Proposal”).

II. Form CRS Relationship Summary

We are proposing to require registered investment advisers and registered broker-dealers to deliver a relationship summary to retail investors. In the case of an investment adviser, initial delivery would occur before or at the time the firm enters into an investment advisory agreement with the retail investor; in the case of a broker-dealer, initial delivery would occur before or at the time the retail investor first engages the firm's services. Dual registrants would deliver the relationship summary at the earlier of entering into an investment advisory agreement with the retail investor or the retail investor engaging the firm's services.

For purposes of the relationship summary, we propose to define dual registrant as a firm that is dually registered as a broker-dealer and an investment adviser and offers services to retail investors as both a broker-dealer and investment adviser. Proposed

General Instruction 9.(b) to Form CRS. Accordingly, a firm that is registered with the Commission as a broker-dealer and with one or more states as an investment adviser would be a dual registrant.

The relationship summary would be as short as practicable (limited to four pages or equivalent limit if in electronic format), with a mix of tabular and narrative information, and contain sections covering: (i) Introduction; (ii) the relationships and services the firm offers to retail investors; (iii) the standard of conduct applicable to those services; (iv) the fees and costs that retail investors will pay; (v) comparisons of brokerage and investment advisory services (for standalone broker-dealers and investment advisers); (vi) conflicts of interest; (vii) where to find additional information, including whether the firm and its financial professionals currently have reportable legal or disciplinary events and who to contact about complaints; and (viii) key questions for retail investors to ask the firm's financial professional. Form CRS would be required by Form ADV Part 3 and rule 204-5 of the Advisers Act for investment advisers, and by Form CRS and rule 17a-14 of the Exchange Act for broker-dealers.

We propose to amend Form ADV, which investment advisers must file to register with the Commission and with state securities regulators, to include a new Part 3: Form CRS that describes the requirements for the relationship summary, and we propose conforming technical amendments to the General Instructions of Form ADV.

See

proposed amendments to Advisers Act rule 203-1; proposed amendments to General Instructions to Form ADV. We also propose a rule 17a-14 to require a Form CRS for broker-dealers registered with the Commission.

See

Exchange Act proposed rule 17a-14. Advisers use Form ADV to apply for registration with us (Part 1A) or with state securities authorities (Part 1B), and must keep it current by filing periodic amendments as long as they are registered.

See

Advisers Act rules 203-1 and 204-1. Form ADV has two parts. Part 1(A and B) of Form ADV provides regulators with information to process registrations and to manage their regulatory and examination programs. Part 2 is a uniform form used by investment advisers registered with both the Commission and the state securities authorities.

See

Instruction 2 of General Instructions to Form ADV. This release discusses the Commission's proposal of Form ADV Part 3: Form CRS and related rules applicable to advisers registered with the Commission. To the extent that state securities authorities could consider making similar changes that affect advisers registered with the states, we can forward comments to the North American Securities Administrators Association (“NASAA”) for consideration by the state securities authorities.

We are proposing to define “relationship summary” as a written disclosure statement that firms must provide to retail investors.

A “retail investor” would be defined as a prospective or existing client or customer who is a natural person (an individual).

All natural persons would be included in the definition, regardless of the individual's net worth (thus including,

e.g.,

accredited investors, qualified clients or qualified purchasers).

The definition would

include a trust or other similar entity that represents natural persons, even if another person is a trustee or managing agent of the trust.

We believe that this definition is appropriate because section 913 of the Dodd-Frank Act defines “retail customer” to include natural persons and legal representatives of natural persons without distinction based on net worth, and because financial literacy studies report deficiencies in financial literacy among the general population.

While studies also report variability in financial literacy among certain sub-sections of the general population,

we believe that all individual investors would benefit from clear and succinct disclosure regarding key aspects of their advisory and brokerage relationships.

Proposed General Instruction 9.(d) to Form CRS.

Proposed General Instruction 9.(e) to Form CRS.

Advisers Act proposed rule 204-5(d)(2) and Exchange Act proposed rule 17a-14(e)(2); proposed General Instruction 9.(e) to Form CRS. We recognize that the definition of “retail investor” would differ from that of “retail customer,” as used in Regulation Best Interest. “Retail customer” for broker-dealers under Regulation Best Interest would be defined 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.” Regulation Best Interest Proposal,

supra

note 24, section II.C.4. We believe it is beneficial to require firms to provide a relationship summary to all natural persons to

facilitate their understanding of account choices, regardless of whether they will receive investment advice primarily for personal, family, or household purposes. The relationship summary is intended for an earlier stage in the relationship between an investor and a financial professional, potentially before discussing the investment purposes of the investor. In contrast, Regulation Best Interest focuses on recommendations to “retail customers” who have chosen to engage the services of a broker-dealer after receiving the relationship summary.

Advisers Act proposed rule 204-5(d)(2) and Exchange Act proposed rule 17a-14(e)(2); proposed General Instruction 9.(e) to Form CRS.

See

Federal Research Division, Library of Congress,

Financial Literacy Among Retail Investors in the United States

(Dec. 30, 2011),

available at

https://www.sec.gov/news/studies/2012/917-financial-literacy-study-part2.pdf

(“Library of Congress Report”). The Library of Congress Report is incorporated by reference into the 917 Financial Literacy Study,

supra

note 20, at Appendix 1.

See, e.g.,

917 Financial Literacy Study,

supra

note 20, at viii (“In addition, surveys demonstrate that certain subgroups, including women, African-Americans, Hispanics, the oldest segment of the elderly population, and those who are poorly educated, have an even greater lack of investment knowledge than the average general population.”); Library of Congress Report,

supra

note 31, at 1.

As discussed further below, the relationship summary would be in addition to, and not in lieu of, current disclosure and reporting requirements for broker-dealers and investment advisers.

The relationship summary would alert retail investors to important information for them to consider when choosing a firm and a financial professional, and would prompt retail investors to ask informed questions. In addition, the content of the relationship summary would facilitate comparisons across firms that offer the same or substantially similar services. We are promoting these goals through specifying much of the content and presentation of Form CRS in the form's instructions (“Instructions”); while firms will be required to include firm-specific information in Form CRS, they will have limited discretion in the scope and presentation of that information. We are proposing that firms electronically file the relationship summary and any updates with the Commission, and therefore such filings would be subject to section 207 of the Advisers Act

and section 18 of the Exchange Act.

Investment advisers would file on the Investment Adviser Registration Depository (“IARD”), broker-dealers would file on the Commission's Electronic Data Gathering, Analysis and Retrieval System (“EDGAR”), and dual registrants would file on both IARD and EDGAR.

See infra

Section II.C.

15 U.S.C. 80b-7.

15 U.S.C. 78r.

To aid firms in understanding the type of disclosures we propose to require, we have created mock-ups of a relationship summary for an investment advisory firm, a brokerage firm, and a dual registrant, and have included them as Appendices C-E to this release. The mock relationship summaries are for illustrative purposes only, reflect the business models of hypothetical firms, and are not intended to imply that they reflect a “typical” firm. They do not provide a safe harbor and, depending on the circumstances of a particular firm, a relationship summary that merely copies the mock-ups may not provide sufficient or accurate information about the firm, including for purposes of meeting the firm's obligations under the antifraud provisions of the federal securities laws. Investors seeking to comment on the relationship summary may want to submit our short-form tear sheet for providing feedback on the relationship summary, available at Appendix F. Below we request comments on all requirements of the relationship summary, including format, content, method of filing, method of delivery, updating, and other aspects as discussed below.

We preliminarily believe that providing this information before or at the time a retail investor enters into an investment advisory agreement or first engages a brokerage firm's services, as well as at certain points during the relationship (

e.g.,

switching or adding account types), as further discussed below, is appropriate and in the public interest and will improve investor protection, and will deter potentially misleading sales practices by helping retail investors to make a more informed choice among the types of firms and services available to them.

See

Exchange Act section 15(l)(2) and Advisers Act section 211(h)(2) (providing that the Commission shall examine and, where appropriate, promulgate rules prohibiting or restricting certain sales practices, among other things, for brokers, dealers, and investment advisers that the Commission deems contrary to the public interest and the protection of investors).

A. Presentation and Format

We are proposing requirements designed to make the relationship summary short and easy to read. We believe that the required disclosure provides an overview of information that would help retail investors when choosing a firm, financial professional, and account type. The proposed formatting requirements would help retail investors, many of whom may not be sophisticated in legal or financial matters, to understand the information in the relationship summary and be in a better position to ask informed questions. The proposal is also informed by our experience with the mutual fund summary prospectus, which has illustrated the benefits of highlighting certain information in summary form, coupled with layered disclosure and disclosure designed to facilitate comparisons across investments.

We encourage firms to use innovative technology to create a relationship summary that is user-friendly, concise, easy-to-read, and more interactive than paper, and request comment below on ways to do so. The relationship summary would be provided to retail investors in addition to, and not in lieu of, any other required disclosures.

In a previous study, Commission staff found that most of the retail investors agreed that it was important to read a summary prospectus prior to investing in a mutual fund, and a majority of the retail investors surveyed on the mutual fund summary prospectus panel agreed that the actual summary prospectus they reviewed highlighted important information, was well-organized, written using words that they understood, clear and concise, and user friendly, and agreed that summary prospectuses contain the `right amount' of information. 917 Financial Literacy Study,

supra

note 20, at xvii and xix.

See

Proposed General Instruction 3 to Form CRS. Broker-dealers and investment advisers have disclosure and reporting obligations under state and federal law, and broker-dealers are also subject to disclosure obligations under the rules of self-regulatory organizations. Delivery of the relationship summary would not necessarily satisfy a firm's other disclosure obligations.

As noted in the General Instructions, the requirements of the relationship summary are designed to promote effective communication between the firm and its retail investors.

First, as several commenters have recommended, we propose requiring that firms use “plain language” principles for the organization, wording, and design of the entire relationship summary, taking into consideration retail investors' level of financial sophistication.

Specifically,

firms would be required to be concise and direct and to use short sentences, active voice, and definite, concrete, everyday words.

Firms would not be permitted to use legal jargon, highly technical business terms or multiple negatives.

Firms should write the relationship summary as if addressing the retail investor, using “you,” “us,” or “our firm.”

Proposed General Instruction 2 to Form CRS.

See, e.g.,

PIABA 2017 Letter; State Farm 2017 Letter; Fidelity 2017 Letter; Comment letter of BlackRock (Aug. 7, 2017); Comment letter of the

Investor Advisory Committee (Aug. 24, 2017); CFA 2017 Letter; AFR 2017 Letter; ACLI 2017 Letter; FSR 2017 Letter.

Proposed General Instruction 2 to Form CRS.

Second, we are proposing to require that, whether in electronic or paper format, the relationship summary should be no more than four 8

1/2

x 11 inch pages if converted to Portable Document Format (“PDF”), using at least an 11 point font size, and margins of at least 0.75 inches on all sides.

For example, if delivered directly in the text of an email or in a mobile viewing format on the firm's website, the content of the relationship summary should not exceed this four-page PDF-equivalent length. This approach is consistent with our experience and commenters' suggestion that brief disclosure is more effective than a long-form narrative to focus retail investors on relevant information, and with suggestions from commenters who advocated for a clear, concise disclosure.

If delivered in paper, the paper size, font, and margin requirements would also encourage a clear presentation for retail investors, for example, by presenting important disclosures in a readable font-size and eliminating fine print.

Recognizing, however, that many firms deliver disclosures in electronic format and employ a variety of technologies to interact with prospective and existing retail investors, the Commission is requesting comment on formatting and other features of the relationship summary in electronic form.

Proposed General Instruction 1.(c) to Form CRS.

See, e.g.,

Shaw 2017 Letter; SIFMA 2017 Letter; AFL-CIO 2017 Letter; AARP 2017 Letter; CFA 2017 Letter; AFR 2017 Letter; TIAA 2017 Letter; Vanguard 2017 Letter; ACLI 2017 Letter; FSR 2017 Letter; Allianz 2017 Letter.

See, e.g.,

917 Financial Literacy Study,

supra

note 20, at xiii and 32.

In the past, the Commission has declined to impose page limits on disclosures required by the Investment Company Act of 1940 (“Investment Company Act”), including the summary prospectus, expressing concern that page limits could constrain appropriate disclosure and lead funds to omit material information about fund offerings.

The proposed relationship summary is intended to serve different purposes than the summary prospectus, including to provide a general overview of firms that could prompt a more detailed, individualized, and open conversation between the retail investor and his or her financial professional. The Commission preliminarily believes that the utility and effectiveness of the relationship summary lie in its brevity and conciseness; accordingly, we believe a page limit (or equivalent limit if in electronic format) is appropriate.

See

Enhanced Disclosure and New Prospectus Delivery Option for Registered Open-End Management Investment Companies, Investment Company Act Release No. 28584 (Jan. 13, 2009) [74 FR 4546 (Jan. 26, 2009)], at 24 (“Enhanced Mutual Fund Disclosure Adopting Release”).

Brief disclosure would also facilitate a layered approach to disclosure in which firms would include certain information in the relationship summary, along with references and links to other disclosure where interested investors can find additional information.

The proposed relationship summary also would encourage retail investors to seek additional information in other ways, including through suggested questions for retail investors to ask their financial professional, as discussed further below.

These requirements are intended to create a concise summary that points out relevant areas for retail investors to focus on as they consider financial services, and the cross references and suggested questions facilitate investors' ability to choose to seek additional information. In addition, providing retail investors with a relationship summary containing specified information about the firm in a standardized format should aid retail investors' ability to compare firms at a higher level. The suggested questions and cross references to more information would enable them to more easily find and compare these details about the firms.

Firms would be required to include cross-references to where investors could find additional information, such as in the Form ADV Part 2 brochure and brochure supplement for investment advisers or on the firm's website or in the account opening agreement for broker-dealers. For electronic versions of the relationship summary, we would require firms to use hyperlinks to the cross-referenced document if it is available online.

See

proposed Items 7.E.1. and 7.E.2. of Form CRS; proposed General Instruction 1.(g) to Form CRS.

See

proposed Item 8 of Form CRS.

We considered requiring more detailed disclosure for broker-dealers similar to many items in the Form ADV brochure that advisers currently must deliver to clients. This longer disclosure would provide, for example, more information about fee amounts for specific accounts and products and more detailed descriptions of a wider range of conflicts of interest. We believe, however, that brief disclosure that focuses on the proposed topics would be more effective in capturing the attention of retail investors, encouraging them to explore certain key areas further, including by asking questions, and allowing them to make a quick comparison among a number of options.

We also encourage the use of methods, such as embedded hyperlinks, to direct retail investors to additional disclosures.

See, e.g.,

917 Financial Literacy Study,

supra

note 20, at 23-24 (citing CFA 2012 Letter, at 4-5).

Alternatively, we considered shorter disclosure, such as a one-page document (or equivalent length if in electronic format) that would provide either a much abbreviated general description of a firm's services, fees, and conflicts, or a list of suggested questions for retail investors to discuss with their financial professional. We are concerned, however, that these approaches might not provide retail investors with enough information to compare firms and types of accounts. In addition, we are concerned that providing only a list of questions, without sufficient background information for investors to know why the question is important to ask, could make it less likely that investors would ask the questions or have an informed conversation. Only providing questions also would not ensure a standardized minimum of information that retail investors would receive across firms and therefore would not facilitate comparing firms or account types.

The relationship summary would require eight separate items covering: (i) Introduction; (ii) relationships and services the firm provides to retail investors; (iii) standard of conduct applicable to those services; (iv) the fees and costs that retail investors will pay; (v) comparisons of brokerage and investment advisory services (for standalone broker-dealers and investment advisers);

(vi) conflicts of

interest; (vii) where to find additional information, including whether the firm and its financial professionals currently have reportable legal or disciplinary events and who to contact about complaints; and (viii) key questions for retail investors to ask the firm's financial professional.

In order to promote comparison across firms, we would require firms to present this information under prescribed headings in the same order.

Firms also would be prohibited from including any information other than what the Instructions and the applicable item require or permit.

We believe that allowing only the required and specified permitted information would promote consistency of information presented to investors, allow retail investors to focus on information that we believe would be particularly helpful in deciding among firms, and help retail investors to decide what further information is needed. It would also encourage impartial information by preventing firms from adding information commonly used in marketing materials, such as performance.

For purposes of the relationship summary, we propose to define a standalone investment adviser as a registered investment adviser that offers services to retail investors and (i) is not dually registered as a broker-dealer or (ii) is dually registered as a broker-dealer but does not offer services to retail investors as a broker-dealer. We propose to define a standalone broker-dealer as a registered broker-dealer that offers services to retail investors and (i) is not dually registered as an investment adviser or (ii) is dually registered as an investment adviser but does not offer services to retail investors as an investment adviser. Proposed General Instruction 9.(f) to Form CRS. We are including certain dual registrants in these proposed definitions because we understand that dual

registrants do not always offer both brokerage and advisory accounts to retail investors. For example, some dual registrants offer advisory accounts to retail investors, but offer brokerage broker-dealer services only to institutions (

e.g.,

for their underwriting services).

See

proposed Items 1-8 of Form CRS.

Proposed General Instruction 1.(b) and (e) to Form CRS.

see also

Benbasat & Dexter,

infra

note 592.

Empirical evidence suggests that visualization improves individual perception of information (

see

Hattie,

infra

note 591) and that tabular reports may lead to better decision making (

see

Benbasat & Dexter,

infra

note 592).

Dual registrants must present the information in Items 2 through 4 and Item 6 in a tabular format, comparing advisory services and brokerage services side-by-side. In the column discussing brokerage services, firms must include the heading “Broker-Dealer Services” and the sub-heading “Brokerage Accounts.” In the column discussing investment advisory services, firms must include the heading “Investment Adviser Services” and the sub-heading “Advisory Accounts.”

See

proposed General Instruction 1.(e) to Form CRS.

Standalone broker-dealers and investment advisers would be required to include the sub-heading “You can receive advice in either type of account, but you may prefer paying:” and present prescribed information comparing a transaction-based fee and an asset-based fee in side-by-side columns, in a tabular format.

See

proposed Items 5.A.4. and 5.B.6. of Form CRS.

Proposed General Instruction 1.(f) to Form CRS.

Id.

Empirical evidence suggests that users are better able to make coherent, rational decisions when they have comparative, standardized disclosure that allows them to assess relevant trade-offs.

See infra

note 593 and accompanying text.

We request comment on the following for the relationship summary.

• Should firms only be required to deliver the relationship summary to retail investors? Or should they be required to deliver one to other types of investors, too, such as individuals representing sole proprietorships or other small businesses, or institutional investors that are not natural persons, including workplace retirement plans and funds? Would such investors have the need for the information in the relationship summary to facilitate a choice among different firms, financial professionals, and account types? Or would these investors rely directly on the more detailed disclosures in the Form ADV Part 2 brochure or pursuant to Regulation Best Interest?

• Should retail investors be defined for purposes of Form CRS to include all natural persons, as proposed? Should we instead exclude certain categories of natural persons based on their net worth or income level, such as accredited investors,

qualified clients,

qualified purchasers?

If we did exclude certain categories of natural persons based on their net worth, what threshold should we use for measuring net worth? Should we exclude certain categories of natural persons for other reasons?

Accredited investors include natural persons who (i) have a net worth over $1 million, either individually or together with a spouse (excluding the value of the primary residence); (ii) had an individual income greater than $200,000 (or $300,000 together with a spouse) in each of the two most recent years, and has a reasonable expectation of reaching the same income level in the current year; or (iii) for purposes of a securities offering of a particular issuer, are directors, executive officers, or general partners of that issuer. Accredited investors also include non-natural persons, such as, banks, broker-dealers, insurance companies, investment companies registered under the Investment Company Act of 1940, and certain partnerships, corporations, nonprofit entities, retirement plans, and trusts. 17 CFR 230.501.

A qualified client is a client that meets one or more of the following criteria: (i) Is a natural person

or company that has at least $1 million in assets under management with the adviser immediately after entering into an investment advisory contract with the adviser; (ii) the adviser reasonably believes the natural person has a net worth (together with assets held jointly with a spouse) of more than $2.1 million immediately prior to entering into an advisory contract (excluding the value of the primary residence); (iii) the adviser reasonably believes the natural person or company is a “qualified purchaser” as defined in section 2(a)(51)(A) of the Investment Company Act at the time an advisory contract is entered into; (iv) is an executive officer, director, trustee, general partner, or person serving in a similar capacity, of the adviser; or (v) is an employee of the adviser who participates in the investment activities of the adviser, and has performed investment activities for at least twelve months. The dollar thresholds under the definition of qualified client are subject to inflation adjustments every five years. 17 CFR 275.205-3(d)(1); Order Approving Adjustment for Inflation of the Dollar Amount Tests in Rule 205-3 under the Investment Advisers Act of 1940, Investment Advisers Act Release No. 4421 (Jun. 14, 2016) [81 FR 39985 (Jun. 20, 2016)].

The term “qualified purchaser” has been defined for purposes of the Investment Company Act and for the Securities Act. Under the Investment Company Act, the term “qualified purchaser” includes any natural persons who or certain family-owned companies that own not less than $5 million in investments; certain trusts; and any person, acting for its own account or the accounts of other qualified purchasers, who in the aggregate owns and invests on a discretionary basis, not less than $25 million in investments. 15 U.S.C. 80a-2(a)(51)(A).

For purposes of section 18(b)(3) of the Securities Act, the term “qualified purchaser” means any person to whom securities are offered or sold pursuant to a Tier 2 offering as defined in Regulation A. 17 CFR 230.256. Tier 2 offerings generally may be sold only to (i) accredited investors; (ii) natural persons for whom the aggregate purchase price to be paid by the purchaser for the securities is no more than 10% of the purchaser's annual income or net worth; or (iii) non-natural persons for which the aggregate purchase price to be paid by the purchaser for the securities is no more than 10% of its revenue or net assets for the most recently completed fiscal year. 17 CFR 230.251.

• Should we conform the definition of retail investor to the definition of retail customer as proposed in Regulation Best Interest, which would include non-natural persons who use the recommendation primarily for personal, family, or household purposes? Should the definition of retail investor include trusts or similar entities that represent natural persons, as proposed? Are there other persons or entities that should be covered? Should we expand the definition to cover plan participants in workplace retirement plans who receive services from a broker-dealer or investment adviser for their individual accounts within a plan?

• Should we include any additional definitions of terms or phrases in the relationship summary? Should we omit any definitions we have proposed for the relationship summary? Should any of the proposed definitions be changed? If so, why?

• Will the length and presentation proposed for the relationship summary be effective for retail investors? Are there other approaches we should consider? What are the benefits and drawbacks of shorter or longer disclosure for retail investors relative to the proposed approach?

• We are proposing that the relationship summary discuss all of the firm's advisory and brokerage services in one relationship summary. Should we instead permit firms to prepare a separate relationship summary for different business lines or different programs or types of accounts and/or services that a broker-dealer or investment adviser offers? If we adopt such an approach, how could we modify the requirements to allow for comparison among account options within and across firms? For example, should we require that each such separate summary refer to the other summaries and include hyperlinks or other electronic features if presented on a firm's website? Should we require the use of hyperlinks that direct the investor directly to specific disclosure (

i.e.,

a “deep link”) or a more general landing page? How would delivery obligations be formulated to ensure that retail investors receive sufficient but still user-friendly information?

• In the alternative, should we permit or require firms to prepare one relationship summary for the entire affiliated group or firm complex,

i.e.,

to summarize the services offered to retail investors of all affiliated companies together in a single relationship summary? What factors should dictate whether affiliates should be permitted or required to prepare a single relationship summary? For example, should we base any permissive instruction or requirement on whether the affiliates typically market services of multiple investment advisers and broker-dealer entities together? What about investment advisers and broker-dealers that are not affiliates but have partnership agreements, are part of one wrap fee program,

or other arrangements? Should they be required or permitted to cross-reference to other firms?

A wrap fee program would be defined as an advisory program under which a specified fee or fees not based directly upon transactions in a retail investor's account is charged for investment advisory services and the execution of retail investor transactions. Proposed General Instruction 9.(g) to Form CRS.

See infra

note 173.

• Should we permit the relationship summary, or any part of it, to substitute for other disclosure obligations that broker-dealers or investment advisers have, if the disclosure obligations overlap? If so, for what disclosures could the relationship summary substitute? If not, why not?

• Does the proposal sufficiently encourage electronic design and delivery? Are there other ways we can modify the requirements to make clear that paper-based delivery is not the only permissible or desired delivery format?

• With respect to firms that use paper delivery to meet investor preferences, are the proposed presentation and content requirements appropriate for a relationship summary provided in paper or in PDF (

e.g.,

11 point font, and have margins of at least 0.75 inches on all sides)? Would they be helpful in encouraging relationship summaries that address retail investors' preferences for concise and user-friendly information? If not, what requirements would improve the document's utility and accessibility for retail investors? In particular, are there any areas where requiring the use of a specific check-the-box approach, bullet points, tables, charts, graphs or other graphics or text features would be helpful in presenting any of the information or making it more engaging to retail investors? Should we include different requirements for font size, margins and paper size? Should we restrict certain types or sizes of font, color choices or the use of footnotes?

• Are there special technical specifications we should consider for other forms of electronic or online delivery on phones, tablets and other devices, and for information conveyed via videos, interactive graphics, or tools and calculators? Are the Instructions to the relationship summary sufficiently flexible to permit delivery on phones, tablets and other devices and to accommodate information conveyed via videos, interactive graphics, or tools and calculators? Should we require that firms make the relationship summary available by specific forms of electronic delivery or certain electronic devices? How can the Commission encourage investment advisers and broker-dealers to make fuller use of innovative technology to enable more interactive, user-friendly relationship summary disclosure, while still creating a short, easy-to-read relationship summary that includes the proposed content? Are there potential tools that the Commission should encourage or require firms to use in order to make

their disclosures more interactive and understandable? For instance, should we permit or require a firm to use pop-ups or hovers to provide retail investors with additional information required or permitted by the relationship summary, without retail investors having to scroll to find the information in another section of the relationship summary? Would this tool be useful for firms to use, for example, in the Introduction section of the relationship summary, so that a retail investor could access upfront additional information about the terms used (advisory and brokerage accounts) that is presented in other sections of the relationship summary? Instead of requiring and permitting hyperlinks in certain circumstances (

e.g.,

to link to an adviser's Form ADV or a fee schedule), are there other technological tools that would better help an investor find information that is cross-referenced in the relationship summary? Should we permit or require other technologies (such as QR codes

) in addition to or in lieu of hyperlinks to connect to such information?

A QR code is a two-dimensional barcode capable of encoding information such as a website address, text information, or contact information. These codes are becoming increasingly popular in print materials and can be read using the camera on a smartphone.

• Would retail investors be more likely to read a firm's relationship summary if we required or permitted firms to use certain design elements—such as larger font sizes or greater use of white space, colors, or visuals? Could this be accomplished while still providing retail investors with the information we are proposing to require in a short and easy-to-read relationship summary?

• We are proposing that the firm use plain language principles and the Instructions refer to the SEC's Plain English Handbook. Should we modify any of these principles? Should the Instructions refer to any other principles to promote understandable wording?

• Do firms commonly market to non-English speakers or provide information—including marketing materials—in languages other than English? To what extent would firms expect to deliver a relationship summary in a language other than English? Should we propose requirements to prepare relationship summaries in languages other than English? For example, should we require that firms prepare, file, and deliver a relationship summary in any language in which they disseminate marketing materials? Are there concerns with translating the relationship summary without also having to translate the firm's other disclosures? If so, what are those concerns?

• Should we limit the relationship summary to four pages (or equivalent limit if in electronic format), as proposed? Is this enough space for firms to provide meaningful information? Should we instead eliminate page limits (and their equivalent for electronic format) or increase the amount of permitted pages or their equivalent? Are there particular items that may require longer responses than others? If so, how should the Commission take these into account in considering page limits? For example, if commenters believe the use of graphics will be more effective to communicate fees, should we permit a greater number of pages to account for the use of graphics? Conversely, will retail investors read four pages? Should the page limit be shorter, such as one to three pages? If so, what information in the proposed requirements should we omit? Should we have different page limits for dual registrants than for firms that offer only brokerage or only advisory services? If we do require shorter disclosure, what information should firms be required to provide regardless of the length?

• Are there too few or too many items that would be required in the relationship summary? Are there other items that we should also require or proposed items that we should delete? Do commenters agree that we should only permit the items required by the relationship summary? Is there other information that we should permit, but not require, firms to include? If so, what items are those?

• Do commenters agree that all items should be presented in the same order under the same heading to promote comparability across firms? Why or why not? If the items are not listed in the same order, could retail investors still easily compare firm relationship summaries? Does the prescribed order work, or should we consider a different order? Is there information that we should always require to appear on the first page or at the beginning of an electronic relationship summary? Are there any specifications we should include to enhance comparability for electronic delivery of the relationship summary in various forms?

• Should we, as proposed, prescribe headings for each item or allow firms to choose their own headings? Should we require or permit a different style of headings, such as a question and answer format or other wording to encourage retail investors to continue reading?

• Should we permit firms to include additional disclosure with the relationship summary, such as a comprehensive fee table, or other disclosures? Would the inclusion of additional disclosures affect whether retail investors would view the relationship summary? What are the benefits and drawbacks of such an approach?

• Should we generally permit firms to use charts, graphs, tables, and/or other graphics or text features to explain the information required by the relationship summary (so long as any such feature meets requirements as specified in the Instructions), as proposed? Should we permit firms to choose the graphical presentation that they will use? Are there specific graphical presentations that we should require? Should we permit other mediums of presentation, such as the use of video presentations?

• Do any elements of the proposed presentation requirements impose unnecessary costs or compliance challenges? Please provide specific data. Are there any changes to the proposal that could lower those costs? Please provide examples.

• Are the mock relationship summaries useful and illustrative of the proposed form requirements? Do they appropriately show the level of detail that firms might provide?

With respect to each item for which we prescribe wording in the relationship summary, we request the following comment on each of those required disclosures:

• Does the narrative style work for the prescribed wording or are there other presentation formats that we should require? Should the Commission instead require more prescribed wording? Conversely, is there prescribed wording we have proposed that we should modify or replace with a more general instruction that allows firms to use their own description?

B. Items

1. Introduction

We are proposing that the beginning of the relationship summary contain a title highlighting the types of investment services and accounts the firm offers to retail investors, specifically “Which Type of Account is Right for You—Brokerage, Investment Advisory or Both?” for dual registrants and “Is a[n] [Brokerage/Investment Advisory] Account Right for You?” for standalone brokerage firms or investment advisory firms, respectively.

A firm also would be required to include its name, whether it is registered with the Commission as a broker-dealer, investment adviser, or

both, and date of the relationship summary prominently on the first page or beginning of the electronic disclosure (this information could be included in the header or footer).

Proposed Items 1.B., 1.C. and 1.D. of Form CRS.

Proposed Item 1.A. of Form CRS. The disclosure of Commission registration would make the relationship summary consistent with proposed rules 15l-3 of the Exchange Act and 211h-1 of the Advisers Act, which would require that a broker-dealer and a registered investment adviser prominently disclose that it is registered with the Commission as a broker-dealer or investment adviser, respectively, in print or electronic retail investor communications.

An introductory paragraph would briefly explain the types of accounts (brokerage accounts and/or investment advisory accounts) and services the firm offers. Using prescribed wording, all firms would be required to state: “There are different ways you can get help with your investments. You should carefully consider which types of accounts and services are right for you.” In a new paragraph and using prescribed wording and bold font, a standalone broker-dealer would be required to state: “We are a broker-dealer and provide brokerage accounts and services rather than advisory accounts and services.”

Likewise, a standalone investment adviser would be required to state in bold font: “We are an investment adviser and provide advisory accounts and services rather than brokerage accounts and services.”

Dual registrants would include a similar statement in bold font that discusses both types of services, specifically: “Depending on your needs and investment objectives, we can provide you with services in a brokerage account, investment advisory account, or both at the same time.”

Finally, all firms would be required to include: “This document gives you a summary of the types of services we provide and how you pay. Please ask us for more information. There are some suggested questions on page [ ].”

Proposed Item 1.B. of Form CRS.

Proposed Item 1.C. of Form CRS.

Proposed Item 1.D. of Form CRS.

Proposed Items 1.B.—1.D. of Form CRS.

The proposed introductory paragraph sets up a key theme of the relationship summary—helping retail investors to understand and make choices among account types and services. For example, some retail investors want to receive periodic recommendations while others prefer ongoing advice and monitoring. Some retail investors wish to pursue their own investment ideas and direct their own transactions, while others seek to delegate investment discretion to the firm. Emphasizing that there are different types of accounts and services from which a retail investor may choose would help the retail investor make an informed choice about whether the firm provides services that are the right fit for his or her needs and help the retail investor to choose the right firm or account type. Although the disclosures are intentionally simplified and generalized, we believe they would help retail investors to obtain more detailed information.

We request comment generally on the proposed requirement for firms to include specific information in the introduction.

• In addition to the title, firm name and SEC registration status, and date, is there other information that we should require at the beginning of the relationship summary? Should we instead require a cover page? Are the titles we proposed in the Instructions appropriate? What alternatives should we consider? Should we allow firms to select their own title for the relationship summary?

• Should we require firms to include the prescribed wording, as proposed, or should we allow more flexibility in the words they use? Should we modify the prescribed wording? Does the proposed wording capture the range of business models among investment advisers and broker-dealers? Would the prescribed wording require a firm to provide any inaccurate information given that firm's circumstances? Instead of the proposed prescriptive wording, should the Commission permit or require a more open-ended narrative?

• Is there additional information we should require in the introduction?

• Should we require that standalone brokerage and investment advisory firms include a statement that the retail investor may instead prefer investment advisory or brokerage services, respectively? Why or why not?

2. Relationships and Services

After the introduction, the proposed relationship summary would provide information about the relationships between the firm and retail investors and the investment advisory account services and/or brokerage account services the firm provides to retail investors.

The section would begin with the heading “Relationships and Services” for a standalone broker-dealer or investment adviser.

A dual registrant would use the heading “Types of Relationships and Services,” followed by this statement: “Our accounts and services fall into two categories.”

Each firm would discuss specific information about the nature, scope, and duration of its relationships and services, including the types of accounts and services the firm offers, how often it offers investment advice, and whether the firm monitors the account.

Proposed Item 2 of Form CRS.

Proposed Item 2.A. of Form CRS.

Id.

This item requires firms to provide specific information with a mix of prescribed wording and short narrative statements. As discussed above, if a prescribed statement is not applicable to the firm's business or would be misleading to a reasonable retail investor, the firm would be permitted to omit or modify that statement.

We have designed these requirements to provide retail investors with consistent, concise, and meaningful information about the services they would receive from a firm and help them to ask relevant questions, compare firms' services against each other, and make more informed choices about the services they choose.

See supra

note 58 and accompanying text.

We considered an approach whereby firms would be required to complete a prescribed checklist of common characteristics of brokerage and advisory accounts, indicating which characteristics applied to their accounts and services. This approach could improve comparability among firms. We are concerned, however, that this approach would not be sufficiently flexible to accommodate the variety of business models and services that broker-dealers and advisers provide, and that a mix of prescribed wording and narrative format would help investors better understand the firm's services. We believe that our proposed approach provides enough information to help retail investors understand and choose between investment advisory accounts and brokerage accounts without overwhelming them with too much information.

Brokerage Account Services.

We propose requiring broker-dealers to summarize the principal brokerage services that they provide to retail investors.

First, broker-dealers would include the following wording to explain the transaction-based nature of their fees (emphasis required): “If you open a brokerage account, you will pay us a

transaction-based fee,

generally referred to as a commission, every time you buy or sell an investment.”

Even though a separate section of the relationship summary would discuss a firm's fees, we believe it is important for broker-dealers to explain transaction-based fees at the beginning of the

disclosure because these types of fees are typically a critical distinction between brokerage and investment advisory accounts.

Proposed Item 2.B. of Form CRS.

Proposed Item 2.B.1. of Form CRS.

See infra

note 126 (discussing our use of the term “transaction-based fees” in the relationship summary).

Next, broker-dealers that offer accounts in which they offer recommendations to retail investors would state that the retail investor may select investments or the broker-dealer may recommend investments for the retail investor's account, but that the retail investor will make the ultimate investment decision regarding the investment strategy and the purchase or sale of investments.

Broker-dealers that offer accounts in which they do not offer recommendations to retail investors (

e.g.,

execution-only brokerage services) would state that the retail investor will select the investments and make the ultimate investment decision regarding the investment strategy and the purchase or sale of investments.

Starting with a clear description of the services provided in a brokerage account by a broker-dealer—including the retail investor's choice of receiving recommendations or self-directing his or her investments, and the fact that the retail investor will make the ultimate investment decision—would help address confusion about the services that broker-dealers offer to retail investors.

This language also highlights differences from the services that investment advisers would describe, discussed below.

Proposed Item 2.B.2. of Form CRS.

Id.

We believe that retail investors have the ultimate investment decision for their investment strategy and the purchase or sale of investments, even if the broker-dealer has temporary or limited discretion over retail investors' accounts.

See

Regulation Best Interest Proposal,

supra

note 24, at section II.F.

Next, we propose requiring broker-dealers to state if they offer additional services to retail investors, including, for example: (a) Assistance with developing or executing the retail investor's investment strategy (

e.g.,

the broker-dealer discusses the retail investor's investment goals or designs with the retail investor a strategy to achieve the retail investor's investment goals); or (b) monitoring the performance of the retail investor's account.

They would also state that a retail investor might pay more for these additional services, if applicable.

Broker-dealers that offer performance monitoring as part of the standard brokerage account services would indicate how frequently they monitor the performance.

While broker-dealers do not undertake to provide investment strategy and performance monitoring services when they give recommendations, we recognize that many broker-dealers offer these services to retail investors as part of their account agreement. We believe that retail investors would benefit from disclosure that such services exist, and that broker-dealers might charge higher fees for these services. Broker-dealers would also be required to briefly describe any regular communications they have with retail investors, such as providing account statements, giving an overview of transactions during a period, or evaluating the account's performance.

Firms would include the frequency (

e.g.,

at least quarterly) and the method (

e.g.,

by email, phone or in person) of the communications.

Proposed Item 2.B.3. of Form CRS.

Id.

Broker-dealers that monitor the performance of the retail investor's account, as market and customer conditions demand (rather than on a specific time schedule), could state so.

Id.

We are proposing the same requirement for investment advisers, described below.

See infra

note 102 and accompanying text.

Finally, broker-dealers would be required to include the following if they significantly limit the types of investments available to retail investors in any accounts: “We offer a limited selection of investments. Other firms could offer a wider range of choices, some of which might have lower costs.”

A broker-dealer would significantly limit the types of investments if, for example, the firm only offers one type of asset (

e.g.,

mutual funds, exchange-traded funds, or variable annuities), the firm only offers mutual funds or other investments sponsored or managed by the firm or its affiliate (

i.e.,

proprietary products), or the firm only offers a small choice of investments.

In addition, if the limitations only apply to some of the accounts the firm offers, such as, for example, limiting the types of investments for retail investors within different asset tiers, then the firm would have to identify those accounts.

Proposed Item 2.B.4. of Form CRS.

Id.

Limitations on investments offered could have a significant effect on investor choice and performance of the account over time. In particular, firms that offer proprietary products exclusively preclude investor access to competing products that could offer lower fees or result in better performance over time. As a result, retail investors should understand these limitations before they enter into a relationship with a firm.

Advisory Account Services.

We propose requiring investment advisers that offer investment advisory accounts to retail investors to summarize the principal investment advisory services provided to retail investors.

First, investment advisers would be required to state the type(s) of fee they receive as compensation if a retail investor opens an investment advisory account.

For example, an investment adviser would state if it charges an on-going asset-based fee based on the value of the cash and investments in the advisory account, a fixed fee, or some other fee arrangement. A standalone adviser would also state how frequently it assesses the fee.

Similar to the requirement for broker-dealers,

we are proposing to require a statement about how investment advisers charge fees up-front because of the importance that investors understand how they will pay for services and to highlight this critical distinction between brokerage and advisory accounts. We are proposing to require that firms describe additional fees associated with these services in the discussion of fees and costs. Because the fees charged by each investment adviser may differ, we are not prescribing specific wording and instead are allowing firms flexibility in choosing the exact wording to use for this disclosure. Advisers would, however, emphasize the type of fee in bold and italicized font.

Proposed Item 2.C. of Form CRS.

Proposed Item 2.C.1. of Form CRS. The relationship summary would refer to “account advisory services” and “opening an account” to simplify the explanations for retail investors. When an investment adviser provides investment advisory services, the client may have a custodial account with another firm, such as a broker-dealer or bank. A dual registrant may maintain custody for an advisory client's assets as broker-dealer. We are not proposing to require that firms include these nuances in the discussion of relationships and services.

Id.

See supra

note 82 and accompanying text.

Proposed Item 2.C.1 of Form CRS.

Next, investment advisers would state that they offer advice on a regular basis, or, if they do not offer advice on a regular basis, they would state how frequently they offer advice.

100

They would also state the services they offer to retail investors including, for example, (a) assistance with developing the retail investor's investment strategy (

e.g.,

the investment adviser discusses the retail investor's investment goals or designs with the retail investor a strategy to achieve the retail investor's investment goals), or (b) how frequently

they monitor the retail investor's accounts.

101

Similar to broker-dealers, advisers would include the frequency (

e.g.,

at least quarterly) and the method (

e.g.,

by email, phone or in person) of the communications.

102

We believe that the regularity of advice and other services that investment advisers commonly provide, including, as applicable—discussions with the retail investor, designing a strategy to achieve investment goals, monitoring, and reporting on performance—are key aspects of services that advisers commonly provide.

103

As discussed above with respect to broker-dealers, these services can distinguish advisory accounts from brokerage accounts and therefore the disclosure will help retail investors determine which type of account best suits their needs.

100

Proposed Item 2.C.2. of Form CRS.

101

Id.

102

Id.

103

An agreement for advisory services typically defines the scope and specific types of services provided.

Additionally, investment advisers would state if they offer advisory accounts for which they exercise investment discretion (

i.e.,

discretionary accounts), accounts for which they do not exercise investment discretion (

i.e.,

non-discretionary accounts), or both.

104

For purposes of this Item in the relationship summary, investment advisers generally should use the same definition of “discretionary authority” as in Form ADV, which is the authority to decide which securities to purchase and sell for the client, or the authority to decide which investment advisers to retain on behalf of the client.

105

If an investment adviser offers a discretionary account, the relationship summary would state that a discretionary advisory account allows the firm to buy and sell investments in the retail investor's account, without asking the retail investor in advance. For a non-discretionary advisory account, the relationship summary would state that the firm gives advice and the retail investor decides what investments to buy and sell.

106

104

Proposed Item 2.C.3. of Form CRS. Investment advisers would be required to emphasize the type of account (discretionary and non-discretionary) in bold and italicized font.

105

Term 12 of Glossary of Terms to Form ADV.

106

Proposed Item 2.C.3. of Form CRS.

We believe it is important for retail investors considering an advisory account to understand the difference between discretionary services and non-discretionary services, as that distinction would affect the degree of control the retail investor would provide to the adviser. Discretionary advice is also a common feature of many investment advisory accounts,

107

so explaining discretion would benefit a retail investor in choosing between brokerage and investment advisory services, as well as between different types of advisory accounts.

107

In 1992, only approximately three percent of SEC-registered advisers had discretionary authority over client assets; as of March 31, 2018, according to data collected on Form ADV, 91 percent of SEC-registered advisers have that authority.

Finally, as we are proposing for broker-dealers, investment advisers that significantly limit the types of investments available to retail investors in any accounts would include the same statement that broker-dealers would be required to include, and if such limits only apply to certain accounts, the investment adviser would identify those accounts, for the same reasons discussed above.

108

Proposed Item 2.C.4. of Form CRS. The required statement would be “Our investment advice will cover a limited selection of investments. Other firms could provide advice on a wider range of choices, some of which might have lower costs.” Also consistent with the requirements for broker-dealers, such limitations could include, for example, only offering a selection of mutual funds, equities, or proprietary products.

Affiliate Services.

We recognize that many investment advisers and broker-dealers that are not dual registrants nonetheless have affiliates that are broker-dealers or investment advisers, respectively. Often, these standalone firms offer their affiliates' services to retail investors. For example, an affiliated sub-adviser also may manage a portion of a retail investor's portfolio or an investment adviser may effect trades for client accounts through an affiliated broker-dealer. We would allow these firms to state that they offer retail investors their affiliates' brokerage or advisory services, as applicable.

109

We believe that the inclusion of this disclosure could make clear the choice investors have within affiliated firms and give financial professionals an opportunity to discuss these services.

109

Proposed Item 2.D. of Form CRS. This disclosure only applies in the context of an affiliate of the firm. This is not intended to describe disclosure of a financial professional's outside business activities, such as an outside investment advisory business of a broker-dealer registered representative.

We request comment generally on the proposed requirement for firms to include specific information about the relationships and services offered in their advisory and brokerage accounts.

• Would the proposed summary of relationships and services help retail investors to make informed choices about whether investment advisory or brokerage services better suit their needs? If not, how should we revise it?

• Would the proposed requirements result in disclosure that is clear, concise, and meaningful to retail investors? Would this information help retail investors to better understand the general differences in the services that investment advisers and broker-dealers provide? Are there other differences in the services provided by investment advisers and broker-dealers that we should require firms to discuss in this section? If so, should we permit or require information about those differences in the summary of services? Are there any common misconceptions about services provided by broker-dealers, investment advisers, or dual registrants that the relationship summary should specifically seek to clarify or correct?

• Would more or less information about a firm's services be helpful for retail investors? Are there any elements of the proposed requirements that firms should or should not include? If so, why? Should any of the required disclosures be included in a different section of the relationship summary? Is the proposed order of the information appropriate, or should it be modified? If so, how should it be modified? Should we allow firms the flexibility to present this information in a different order if doing so makes their relationships and services more understandable to retail investors?

• Is the proposed heading and the introductory wording for firms clear and useful to retail investors? Are there alternative headings we should consider?

• Does the mix of prescribing wording for some information and requiring brief narratives for other information strike the right balance between having similar, neutral wording to promote comparisons and permitting firms to conform the language to reflect the services they offer? Should the Commission instead require more prescribed wording in this Item? Conversely, is there prescribed wording we have proposed that we should modify or replace with a more general instruction that allows firms to use their own description?

• Does the prescribed wording we are proposing capture the range of business models of investment advisers and broker-dealers? Would the prescribed wording require any firm to state something inaccurate in the relationship summary? Should we instead provide more flexibility to change the prescribed wording?

• Should we require broker-dealers to include prescribed wording about transaction-based fees and investment advisers to state the type of fee for an advisory account at the beginning of this

section, or should fees only be discussed in the fee section?

• How should broker-dealers describe execution-only accounts, sometimes referred to as “discount” brokerage, and accounts in which they provide recommendations concerning securities, sometimes referred to as “full-service” brokerage? Should we, as proposed, require that broker-dealers offering recommendations to retail investors state that the retail investor may select investments or the broker-dealer may recommend investments, but the retail investor will make the ultimate investment decision? Should we also, as proposed, require that broker-dealers only offering discount brokerage accounts to retail investors state that the retail investor will select the investments and make the ultimate investment decision? Should we require prescribed language about these accounts, or should we permit a brief narrative as proposed? Should firms be permitted or required to use the terms “full-service” accounts and “discount” brokerage accounts, or other terms, so long as they are likely to be understood? Do investors understand the meanings of these terms?

• Should investment advisers that provide investment advisory services be required to discuss both discretionary and non-discretionary account services, regardless of whether they offer both discretionary and non-discretionary accounts? Should they instead be permitted to describe only the service they offer? Do firms offer accounts that involve limited discretionary services that would not be covered in the proposed discussions of discretionary and non-discretionary accounts? If so, how should the requirements be changed to reflect these accounts? Should we also require investment advisers to state that they offer advice on a regular basis, or, if not on a regular basis, state how frequently they offer advice? Should we require the disclosure of any additional information about the advice an investment adviser provides?

• We are proposing to require firms to disclose if they offer certain additional services, such as assistance with developing or executing the retail investor's investment strategy, and performance monitoring, and to briefly describe any regular communications they have with retail investors. Are there services in addition to those in the Instructions that broker-dealers and investment advisers also should disclose? Should we require disclosure of the same types of additional services for both broker-dealers and investment advisers?

• We understand that, to some extent, all firms limit the investments offered to retail investors. Would other disclosures regarding a firm's product offering limitations be helpful to investors, in addition to the proposed disclosures for firms that significantly limit the types of investments that are available? Why or why not? Should we, for example, require firms that only offer proprietary investments to also state that the only investments available to a retail investor are investments that the firm or its affiliates issue, sponsor, or manage? How feasible would this disclosure be for a firm that has several account types? Should we consider other alternatives?

• Is it clear what we mean by “significantly limit” with regard to the requirement to disclose limitations on investment choices? Should we provide additional examples or more prescriptive instructions regarding when firms must disclose such limitations? Are there other ways a firm may significantly limit the types of investments that should be captured by this instruction?

• Should we permit firms to prepare different relationship summaries for different types of services and lines of business, particularly where the firm offers a broad array of accounts and services? Would separate relationship summaries still promote comparability across firms and the ability to understand the differences between advisory and brokerage services?

• Would the proposed summary of services allow retail investors to easily compare the services provided by different firms? If not, what changes to the requirements should we make to increase comparability?

• Would other disclosures about a firm's services be more helpful for retail investors? Should we permit or require firms to describe services they offer to retail investors, in addition to brokerage and advisory services, such as insurance services? Would such disclosure about other services give retail investors a more complete overview of a firm's offerings, or would it detract from the other disclosures, for example, by overwhelming the more important information about a firm's brokerage and advisory services?

• Should we require firms to include more details about the specific services provided for each type of advisory account or brokerage account that they offer? Should the relationship summary help investors to choose among a variety of account options that the firm offers, rather than providing more summary information about the advisory and brokerage services that are offered?

• Some dual registrants have implemented a default relationship for retail investors, where, for example, the firm will act as a broker-dealer with respect to the account unless specifically stated otherwise. Should we require these firms to disclose that they are acting as a broker-dealer (or investment adviser, as applicable) with respect to the account unless the firm specifically states otherwise?

• Should we, as proposed, allow firms with affiliated broker-dealers or investment advisers to state that they offer retail investors additional brokerage or advisory services, as applicable, through their affiliates? Should we require such statements, if applicable? Should we permit or require firms to expand on the different types of services available to their retail investors through the firm's affiliates? Should affiliates be required or permitted to use a single relationship summary that describes the services of all affiliates? If not, why not? What are the advantages and disadvantages to the retail investor?

• Should we also permit or require disclosure regarding a firm's relationships with other third parties, such as where the registered representatives of a broker-dealer are also investment adviser representatives of an unaffiliated investment adviser or where an investment adviser uses a single unaffiliated broker-dealer to provide execution and custody and generally does not consider execution through other firms?

• Should we require investment advisers and broker-dealers to disclose whether they have a minimum account size and state that minimum (or range of minimums) if the account minimum varies by account? If applicable, should we require disclosure that the selection of investments or services is limited by account size? Would this help investors understand whether they are eligible for certain accounts or certain services and understand the ways in which their investment choices may be limited? Are there any drawbacks to requiring such disclosure?

• So-called robo-advisers and online broker-dealers represent a fast-growing trend within the brokerage and investment advisory industries. They employ a wide range of business models. For example, differences among robo-advisers and online broker-dealers include: The degree of reliance on computer algorithms (as opposed to individualized human judgment) to generate financial advice; the level of human interaction between the client or customer and firm personnel; and the use of the internet to communicate with

clients and customers. Are the Instructions pertaining to relationships and services sufficient and appropriate to capture the business models of robo-advisers and online broker-dealers? For example, would it be appropriate to require or permit descriptions regarding the degree of human involvement in the oversight and management of individual client accounts, how computer algorithms are used in generating investment advice, and the availability of financial professionals to answer retail investors' questions? Do the requirements with respect to the content and delivery of the relationship summary, as further discussed below, allow retail investors to make informed decisions about entering into a relationship with a robo-adviser, other type of investment adviser, or broker-dealer?

3. Obligations to the Retail Investor—Standard of Conduct

Following the relationships and services section, the relationship summary would include a brief section, using prescribed wording, to describe the firm's legal standard of conduct to the retail investor.

110

The section would begin with the heading “Our Obligations to You” and the following language: “We must abide by certain laws and regulations in our interactions with you.” Firms would then use prescribed wording describing the standard of conduct applicable to investment advisers and/or broker-dealers.

111

As with certain other sections of the relationship summary, dual registrants would provide this information in tabular format to facilitate comparison.

110

Proposed Item 3.A. of Form CRS.

111

Proposed General Instruction 1.(e) to Form CRS.

We understand that the standard of conduct that applies to firms and financial professionals has been a source of investor confusion.

112

For example, the 913 Study noted that retail investors were not clear about the specific legal duties of broker-dealers and investment advisers.

113

We believe that providing a brief overview of the standards of conduct to which broker-dealers and investment advisers must adhere, including the differences between the standards of care of broker-dealers and investment advisers, could help alleviate this confusion. We further believe that providing this overview, in combination with the key question about the financial professional's legal obligations discussed below, would encourage a conversation between the retail investor and the financial professional about applicable legal obligations.

114

We also believe that prescribing language is appropriate to promote consistency in communicating these standards to retail investors.

115

112

See, e.g.,

Siegel & Gale Study,

supra

note 5; and RAND Study,

supra

note 5.

See also

CFA Survey,

supra

note 5.

113

See

913 Study,

supra

note 3, at v.

See also

Rand Study,

supra

note 5.

114

See infra

at Section II.B.8. Similarly, certain DOL regulations already obligate firms and financial professionals to acknowledge fiduciary status when they provide certain advisory type services to workplace retirement plans subject to ERISA and to IRAs.

See, e.g.,

29 CFR 2550.408g-1(b)(7)(i)(G) (regulation under statutory exemption for participant advice requires fiduciary advisers to plans and IRAs seeking exemptive relief to provide advice and receive compensation to acknowledge fiduciary status); 29 CFR 2550.408b-2(c)(1)(iv)(B) (regulation under statutory exemption for reasonable service arrangements requires certain ERISA-covered plan service providers to state, if applicable, that the service provider will provide or reasonably expects to provide services as a “fiduciary” as defined by ERISA). Similarly, the DOL's BIC Exemption,

see infra

note 504, would require an investment advice fiduciary that seeks to rely on that exemption to receive compensation in connection with investment recommendations to state in writing that it is acting as a fiduciary under ERISA or the Code.

115

As noted above, if a prescribed statement is inapplicable to a firm's business or would be misleading to a reasonable retail investor, the firm may omit or modify that statement, as further discussed below. Proposed General Instruction 3 to Form CRS.

See supra

note 58.

Broker-Dealers.

We are proposing a required description of the standard of conduct for broker-dealers based on the proposed standards in Regulation Best Interest, as well as existing obligations of broker-dealers when they provide services to customers. First, a broker-dealer that provides recommendations subject to Regulation Best Interest

116

would include the following wording: “We must act in your best interest and not place our interests ahead of yours when we recommend an investment or an investment strategy involving securities.”

117

Execution-only broker-dealers and other broker-dealers that do not provide such recommendations would not be required to include this sentence. We believe retail investors receiving recommendations that are subject to Regulation Best Interest would benefit from understanding the new obligation.

116

Regulation Best Interest Proposal,

supra

note 24.

117

Proposed Item 3.B.1. of Form CRS. This wording assumes Commission adoption of Regulation Best Interest. As noted above (

see supra

note 29 and accompanying text), the proposed definition of “retail customer,” to whom Regulation Best Interest would apply, differs from the proposed definition of “retail investor” under Form CRS. The relationship summary is intended for a broader range of investors than the intended focus of Regulation Best Interest. Accordingly, the proposed Regulation Best Interest standard may not apply to the recommendations of all retail investors receiving the relationship summary from broker-dealers. The Instructions for proposed Item 3.B.1 recognizes this possibility and seeks to ensure that broker-dealers provide accurate disclosure to their retail investors, even if the broker-dealer is not providing a recommendation subject to Regulation Best Interest.

Second, all broker-dealers providing services to retail investors would state, “When we provide any service to you, we must treat you fairly and comply with a number of specific obligations.” This would inform retail investors that broker-dealers have a duty of fair dealing under the federal securities laws and self-regulatory organization rules, as well as other obligations and standards to which they must adhere.

118

See

Report of the Special Study of Securities Markets of the Securities and Exchange Commission, H.R. Doc. No. 88-95, at 238 (1st Sess. 1963); In the Matters of Richard N. Cea,

et al.,

Exchange Act Release No. 8662 (Aug. 6, 1969), at 18 (“Release 8662”) (involving excessive trading and recommendations of speculative securities without a reasonable basis); In the Matter of Mac Robbins & Co. Inc., Exchange Act Release No. 6846 (Jul. 11, 1962).

See also

FINRA Rule 2111.01 (Suitability) (“Implicit in all member and associated person 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. The suitability rule is fundamental to fair dealing and is intended to promote ethical sales practices and high standards of professional conduct”);

see also

FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade) (requiring a member, in the conduct of its business, to observe high standards of commercial honor and just and equitable principles of trade).

Finally, broker-dealers would be required to state, “Unless we agree otherwise, we are not required to monitor your portfolio or investments on an ongoing basis.” This sentence reflects that neither Regulation Best Interest nor existing broker-dealer standards oblige the broker-dealer to monitor the performance of retail investor's accounts,

119

while making clear that broker-dealers could agree to provide monitoring as an additional service. We are proposing this wording because we believe that the episodic, rather than ongoing, nature of broker-dealers' standard of conduct in Regulation Best Interest is a distinction from investment advisers' obligations to clients that retail investors should be

aware of from the outset of a relationship.

119

References to “monitoring” relate to monitoring the performance of a portfolio or investments, and are not intended to alter or diminish broker-dealers' current supervisory obligations under the Exchange Act and detailed self-regulatory organization 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 self-regulatory rules.

See

section 15(b)(4)(E) of the Exchange Act; FINRA Rule 3110.

After the description of the standard of conduct, broker-dealers would be required to state: “Our interests can conflict with your interests.” If the broker-dealer provides to retail investors recommendations that are subject to Regulation Best Interest, it would also include the language, “When we provide recommendations, we must eliminate these conflicts or tell you about them and in some cases reduce them.”

120

These statements reflect proposed requirements in Regulation Best Interest that broker-dealer would need to establish, maintain, and enforce reasonably designed policies and procedures relating to material conflicts of interest, including those arising from financial incentives, associated with recommendations to retail customers. While we are not using the exact words of the proposed standard, we believe that this information, in combination with the conflicts section below, can make the retail investor aware that conflicts exist and that the broker-dealer has obligations regarding disclosure, mitigation, or elimination of conflicts when the broker-dealer is subject to Regulation Best Interest. We believe this could help prompt a conversation between retail investors and their financial professionals about both the conflicts the firm and financial professional have and what steps the firm takes to reduce the conflicts.

121

120

Proposed Item 3.B.2. of Form CRS. This wording assumes Commission adoption of the Regulation Best Interest.

121

See

discussion of the proposed conflicts of interest disclosure in the relationship summary,

infra

Section II.B.6.

Investment Advisers.

We propose to require that investment advisers state the standard of conduct that applies to them as an investment adviser by including the following wording: “We are held to a fiduciary standard that covers our entire investment advisory relationship with you.” In addition, unless the investment adviser does not provide ongoing advice (for example, provides only a one-time financial plan), the investment adviser would also state, “For example, we are required to monitor your portfolio, investment strategy and investments on an ongoing basis.”

122

While we are not proposing to include a specific definition of fiduciary, we believe that the proposed wording that the relationship covers the “entire investment advisory relationship” and wording regarding the ongoing duty to monitor would provide retail investors with information about aspects of the fiduciary duty that can help the retail investor understand the standard.

123

Additionally, as with the proposed standard of conduct disclosure for broker-dealers, we believe that the ongoing, as opposed to episodic, nature of investment advisers' standard of conduct is a distinction from broker-dealers' typical obligations when providing recommendations that retail investors should be aware of from the outset of a relationship.

122

Proposed Item 3.C.1. of Form CRS.

123

We are concurrently publishing for comment a proposed interpretation of the standard of conduct for investment advisers under the Advisers Act.

See

Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers; Request for Comment on Enhancing Investment Adviser Regulation, Investment Advisers Act Release No. IA-4889 (Apr. 18, 2018) (“Fiduciary Duty Interpretive Release”).

After the description of the standard of conduct, investment advisers would then be required to state, “Our interests can conflict with your interests. We must eliminate these conflicts or tell you about them in a way you can understand, so that you can decide whether or not to agree to them.” As with broker-dealers, we believe that this information, in combination with the conflicts section below, can make retail investors aware that conflicts exist and that investment advisers, as part of their fiduciary duty, have obligations regarding conflicts.

124

We believe this could help prompt a conversation between retail investors and their financial professionals about both the conflicts the firm and financial professional have and what steps the firm takes to reduce the conflicts.

124

See, e.g.,

General Instruction 3 to Form ADV, Part 2.

We request comment generally on the proposed standard of conduct descriptions, and in particular on the following issues:

• Should we require, as proposed, that all firms include a brief prescribed statement about the legal standards of conduct that apply to them under the federal securities laws, including the new standard proposed in Regulation Best Interest and an investment adviser's fiduciary duty? Is such disclosure likely to be meaningful to retail investors? Does the prescribed wording capture what retail investors should or want to understand about broker-dealers' and investment advisers' standards of conduct? Would the prescribed wording require any firm to provide any inaccurate information? Are there modifications to the proposed wording or alternative wording that would make the legal standards more clear in a succinct way? Should we require or permit additional information, and if so, what? Alternatively, would a briefer statement be appropriate? Are there any common misconceptions about broker-dealers' and investment advisers' standard of conduct that the relationship summary should specifically seek to clarify or correct?

• Should we require or permit broker-dealers to include additional detail about the best interest standard proposed in Regulation Best Interest or their duty of fair dealing? Would this or other disclosure provide retail investors with useful information? Should we provide flexibility in how broker-dealers describe the best interest standard or duty of fair dealing?

• We are proposing to require that broker-dealers state that they must comply with a number of specific obligations when providing any service to customers. Should we permit or require more detailed disclosure about these obligations? For example, should we permit or require broker-dealers to disclose their obligations to make sure that the prices a customer receives when a trade is executed are fair and reasonable, and to make sure that the commissions and fees the customer pays are not excessive?

• Should we require disclosure that further describes the investment adviser fiduciary standard, including any additional details described in the proposed interpretation? If so, what wording should we require? Should we provide flexibility in describing the fiduciary standard?

• For dual registrants, would the side-by-side descriptions of the standards of conduct for broker-dealers and investment advisers assist retail investors in understanding the differences between these standards? Are there modifications we can make to the wording or the presentation to facilitate this comparison?

• Should we permit or require firms to disclose additional information about the legal differences between broker-dealers and investment advisers, such as explaining that broker-dealers are subject to regulation by self-regulatory organizations in addition to the SEC? Should we permit or require firms to disclose the differences in licensing requirements for financial professionals of broker-dealers and investment advisers, such as the frequency of licensing or qualifications examinations? Would such disclosure about financial professionals fit within this section of the relationship summary that focuses on the firm? What information would be most relevant to retail investors?

• We understand that state laws and other regulations,

125

also may require broker-dealers and advisers to affirmatively acknowledge fiduciary status. Should we provide firms flexibility to include language in a relationship summary consistent with or to satisfy these other regulatory requirements? Would such flexibility enhance or potentially reduce the effectiveness of the relationship summary?

125

See. e.g., supra

note 114.

4. Summary of Fees and Costs

We are proposing to require broker-dealers and investment advisers to include an overview of specified types of fees and expenses that retail investors will pay in connection with their brokerage and investment advisory accounts. This section would include a description of the principal type of fees that the firm will charge retail investors as compensation for the firm's advisory or brokerage services, including whether the firm's fees vary and are negotiable, and the key factors that would help a reasonable retail investor understand the fees that he or she is likely to pay.

126

Investment advisers that provide advice to retail investors about investing in “wrap fee programs” would include an overview of the fees associated with those wrap fee programs.

127

Both broker-dealers and investment advisers would state that some investments impose fees that will reduce the value of a retail investor's investment over time, and would provide examples relevant to the firm's business.

128

In addition, each firm would include the incentives it and its financial professionals have to put their own interests ahead of their retail investors' interests based on the account fee structure,

129

and would state that depending on an investor's investment strategy, retail investors may prefer paying a different type of fee in certain specified circumstances.

130

Having a clear, simple explanation of the fees a retail investor would pay firms for advisory accounts versus brokerage accounts, and the incentives that such fees create, would help the retail investor to understand the types of fees that they will pay and make a more informed choice about which account is right for them. As with other sections of the relationship summary, dual registrants would provide this information in tabular format to facilitate comparison.

131

126

Proposed Item 4 of Form CRS. A broker-dealer would describe transaction-based fees as its principal type of fee, using prescribed wording.

See

proposed Item 4.B.1 of Form CRS. We use the term “transaction-based fees” in the relationship summary for plain language purposes to refer generally to broker-dealer compensation such as commissions, mark-ups, mark-downs, sales loads or similar fees, including 12b-1 fees, tied to specific transactions. An investment adviser would summarize the principal fees and costs that align with the type of fee(s) the adviser reports in response to Item 5.E. of Form ADV Part 1A that are applicable to retail investors.

See

proposed Item 4.C. of Form CRS. Investment advisers and associated persons that receive compensation in connection with the purchase or sale of securities should carefully consider the applicability of the broker-dealer registration requirements of the Exchange Act.

127

Proposed Items 4.C.3., 4.C.7., 4.C.9. and 4.C.10. of Form CRS.

128

Proposed Items 4.B.2.b. and 4.C.4. of Form CRS.

129

Proposed Items 4.B.5. and 4.C.8. of Form CRS.

130

Proposed Items 4.B.6. and 4.C.10. of Form CRS. Dual registrants would make these disclosures under the heading “Fees and Costs,” whereas standalone investment advisers and broker-dealers would make certain of these disclosures under the heading “Fees and Costs,” and certain of these disclosures under the heading, as applicable “Compare with Brokerage Accounts” or “Compare with Advisory Accounts,” as described below. Proposed Items 5.A.4. and 5.B.6. of Form CRS.

131

Proposed General Instruction 1.(e) to Form CRS.

Fees and costs are important to retail investors,

132

but many retail investors are uncertain about the fees they will pay.

133

Many commenters have stressed the importance of clear fee disclosure to retail investors, including disclosure about differences between advisory and brokerage fees.

134

Accordingly, the proposed relationship summary is intended to provide investors greater clarity concerning certain categories of fees they should expect to pay, how the types of fees affect the incentives of the firm and their financial professionals, and certain other fees and expenses that will reduce the value of the retail investor's investment. The proposed relationship summary would focus on certain general types of fees, rather than describe all fees or provide a comprehensive schedule of fees. Specifically, the proposal would highlight certain differences in how broker-dealers and investment advisers charge for their services.

132

See

917 Financial Literacy Study,

supra

note 20, at iv (“With respect to financial intermediaries, investors consider information about fees, disciplinary history, investment strategy, conflicts of interest to be absolutely essential.”).

133

See

Rand Study,

supra

note 5, at xix (“In fact, focus-group participants with investments acknowledged uncertainty about the fees they pay for their investments, and survey responses also indicate confusion about the fees.”). In addition, we have brought enforcement actions against advisers providing inaccurate disclosure of all of the fees and costs that retail investors pay.

See, e.g.,

In the Matter of Robert W. Baird & Co. Inc., Investment Advisers Act Release No. 4526 (Sept. 8, 2016) (settled action) (“In re Robert W. Baird”); In the Matter of Raymond James & Associates, Inc., Investment Advisers Act Release No. 4525 (Sept. 8, 2016) (settled action) (“In re Raymond James”); In the Matter of Barclays Capital Inc., Investment Advisers Act Release No. 3929 (Sep. 23, 2014) (settled action) (“Release 3929”).

134

See, e.g.,

Kiley 2017 Letter (recommending that investors receive disclosures about the differences in advisory and brokerage fees, and brokers' specific fee and commission structure); Stifel 2017 Letter (recommending that firms explain the differences between brokerage and advisory accounts with the goal of improving understanding of a firm's different service models, compensation arrangements, and conflicts of interests); Equity Dealers of America 2017 Letter (recommending disclosure of aspects of advisory and brokerage accounts, including the type of fees charged, to facilitate investors' selection of an account type); Wells Fargo 2017 Letter; ACLI 2017 Letter; FSR 2017 Letter; SIFMA 2017 Letter; UBS 2017 Letter; Comment letter of the Investment Company Institute (Aug. 7, 2017) (“ICI 2017 Letter”); State Farm 2017 Letter; IAA 2017 Letter; Bernardi Securities 2017 Letter; Fidelity 2017 Letter; Vanguard 2017 Letter.

We are not proposing a requirement that firms personalize the fee disclosure for their retail customers, or provide a comprehensive fee schedule, as some commenters had proposed.

135

A personalized fee disclosure could be expensive and complex for firms to provide in a standardized presentation across all of their accounts and in a way that captures all fees, including embedded fees in various investments (which will vary for each investor depending on their portfolio). Many firms likely would seek to implement systems to automate the disclosure for each of their existing and prospective retail investors, and if such systems were expensive, some firms could choose to reduce the products and services that they offer as a result of the additional costs. Our proposal would encourage retail investors to ask financial professionals about their fees and request personalized information about the specific fees and expenses associated with their current or prospective accounts. As further discussed in Section II.B.8 below, one of the proposed questions for a retail investor to ask a financial professional is to “do the math for me,” and specifically encourages retail investors to ask about the amount that they would pay per year for the account, what would make the fees more or less, and the services included in those fees.

136

Additionally, the beginning of the Fees and Costs section of the relationship summary would state: “Please ask your financial professional to give you personalized information on fees and

costs that you will pay.”

137

We believe that financial professionals are well positioned to provide individualized fee information to their retail investors upon request. During the account opening process, for example, generally the relevant financial professional would have access to personalized information about the retail investor's account and can put together personalized fee information estimates during the process.

135

See, e.g.,

Comment letter of Mark J. Flannery, BankAmerica Professor of Finance, University of Florida (Jul. 27, 2017) (“Flannery 2017 Letter”); Pefin 2017 Letter (recommending that clients should receive information on a quarterly basis on fees charged to their account, the calculation used to determine fees, and a breakdown of the charges by category).

136

See infra

Section II.B.8.;

infra

notes 299-303 and accompanying text; proposed Item 8 of Form CRS.

137

Proposed Item 4.A. of Form CRS.

Likewise, we believe that requiring a comprehensive fee schedule in the relationship summary also could be more complex than a retail investor would find useful for an overview disclosure such as this. However, we believe our proposed layered disclosure would achieve similar results in a less costly and complex manner. The relationship summary would provide required information about fees, and a later section titled “Additional Information” would provide references and links to other disclosures where interested investors can find more detailed information.

138

As discussed below, investment advisers would be required to direct retail investors to additional information in the firm's Form ADV Part 2 brochure and any brochure supplement provided by a financial professional to the retail investor.

139

An adviser's Form ADV Part 2 contains more detailed information about the firm's fees. Broker-dealers would likewise be required to direct retail investors to additional information at BrokerCheck, the firm's website, and the retail investor's account agreement.

140

Up-to-date fee disclosures may appear on broker-dealers' websites or in the retail investors' account agreements, if applicable, where we understand broker-dealers typically provide information about fees, including, in some cases, comprehensive fee schedules.

141

138

Proposed Item 7 of Form CRS.

139

Proposed Item 7.E.2. of Form CRS. Investment advisers that do not have a public firm website or do not maintain their current Form ADV brochure on its public website would be required to include a link to

adviserinfo.sec.gov

. Advisers that do not have a public firm website would also be required to include a toll-free telephone number where retail investors can request up-to-date information.

140

Proposed Item 7.E.1. of Form CRS. Broker-dealers that do not have a public firm website would be required to include a toll-free telephone number where retail investors can request up-to-date information.

141

Under Regulation Best Interest, broker-dealers would also be required to disclose the material facts relating to the scope and terms of the relationship, which would include disclosure of fees and charges that apply to a customer's transactions, holdings and accounts. Regulation Best Interest Proposal,

supra

note 24, at section II.D.1.a.

We are also not proposing to require firms to include examples of how fees could affect a retail investor's investment returns. We recognize that the Commission has required firms to disclose examples showing the effects of fees and other costs in certain contexts. For example, we have required mutual funds to provide in their summary prospectuses an example that is intended to help investors compare the cost of investing in the mutual fund with the cost of investing in other mutual funds.

142

While we continue to believe that examples of the effect of fees on returns could be helpful to retail investors, they could also fail to capture the effect of a firm's fees on a particular retail investor's account. Transactional fees, in particular, can vary widely based on a number of circumstances, and it could be potentially misleading to present a typical example showing how sample transaction fees apply to a sample account over time. We believe requiring firms to provide an example for each type of account that would show the effect of fees on a sample account could overwhelm investors due to the number and variability of assumptions that would need to incorporated, explained, and understood in order for the example to be meaningful, and would not necessarily promote comparability. If the assumptions were standardized, such examples might not be useful, or might even be potentially misleading, to the retail investor, whose circumstances may be different from the assumptions used.

142

See

Item 3 of Mutual Fund Summary Prospectus; Enhanced Mutual Fund Disclosure Adopting Release,

supra

note 47, at section III.A.3.b (“The fee table and example are designed to help investors understand the costs of investing in a fund and compare those costs with the costs of other funds.”).

Some commenters suggested requiring that a firm disclose the types of compensation firms and their financial professionals receive, including from third parties, in connection with providing investment recommendations.

143

A few commenters suggested requiring disclosure of how much the firm and its financial professionals receive in fees, including commissions and fees from third parties.

144

We agree with commenters that it is important to make investors aware of such fees and compensation because they create conflicts of interest for firms and financial professionals making investment recommendations for retail investors. We are proposing to require that firms disclose commissions and certain third-party fees related to mutual funds in this section, and certain compensation-related conflicts (

e.g.,

conflicts related to revenue sharing) in the conflicts section of the relationship summary, as discussed in Section II.B.6 below.

143

See, e.g.,

SIFMA 2017 Letter; UBS 2017 Letter; ICI 2017 Letter; State Farm 2017 Letter; Bernardi Securities 2017 Letter; Fidelity 2017 Letter.

144

See, e.g.,

Flannery 2017 Letter; Pefin 2017 Letter.

Heading.

To emphasize the importance of fees, all firms would be required to include the following statement at the beginning of this section under the heading “Fees and Costs”: “Fees and costs affect the value of your account over time. Please ask your financial professional to give you personalized information on the fees and costs that you will pay.”

145

We are proposing this precise wording because we believe it is applicable to retail investors regardless of any differences among the accounts and their fees. Understanding that fees and costs affect investment value over time would help retail investors to understand why they should review and understand this information. This introductory language also would highlight that retail investors could get more personalized information from the firm's financial professionals.

145

Proposed Item 4.A. of Form CRS.

Brokerage Account Fees and Costs.

Broker-dealers would be required to summarize the principal fees and costs that retail investors will incur.

146

First, we are proposing prescribed language that describes the transactional nature of many brokerage fees.

147

We are proposing different wording for dual registrants than for standalone broker-dealers to facilitate the side-by-side comparison with the description of the advisory fee in the dual registrant's relationship summary. Specifically, dual registrants that offer retail investors both investment advisory accounts and brokerage accounts would include the following wording to assist with the side-by-side comparison with investment advisers: “

Transaction-based fees.

You will pay us a fee every time you buy or sell an investment. This fee, commonly referred to as a commission, is based on the specific transaction and not the value of your account.”

148

A standalone broker-dealer

would include the following: “The fee you pay is based on the specific transaction and not the value of your account.”

149

146

Proposed Item 4.B. of Form CRS.

147

As discussed above, we use the term “transaction-based fees” to refer to broker-dealer compensation such as commissions, mark-ups, mark-downs, sales loads or similar fees, including 12b-1 fees, tied to specific transactions.

See supra

note 126.

148

Proposed Item 4.B.1. of Form CRS. As discussed further below, dual registrants would include a parallel statement regarding their investment advisory account fees. Proposed Item 4.C.1. of Form CRS.

149

Proposed Item 4.B.1. of Form CRS. As discussed above, standalone broker-dealers would be required to include wording that a transaction-based fee is generally referred to as a commission in the Relationships and Services section of the relationship summary.

See

proposed Item 2.B.1. of Form CRS.

In addition, both standalone and dual registrant broker-dealers would include the following (emphasis required): “With stocks or exchange-traded funds, this fee is usually a separate commission. With other investments, such as bonds, this fee might be part of the price you pay for the investment (called a “

mark-up”

or “

mark down”

). With mutual funds, this fee (typically called a “

load”

) reduces the value of your investment.”

150

Because of the importance of these transaction-based fees to brokerage services, as well as the variety of forms that such fees can take, we believe it will benefit investors to have specific examples to illustrate transaction-based fees with standardized, concise wording. We are proposing to require the example of mutual fund loads because they are common indirect fees associated with investments that compensate the broker-dealer.

150

Proposed Item 4.B.2.a. of Form CRS.

We are not proposing to require broker-dealers to provide the range of their transaction-based fees. We understand that these fees vary widely based on the specific circumstances of a transaction. For example, a broker-dealer that transacts in only one type of security—such as equities—can have a wide range of transaction fees for such securities, depending on factors such as the size of the transaction, the type of investment purchased, the type of account and services provided, and how retail investors place their orders (for example, online, telephone or with the assistance of a financial professional). A broker-dealer that transacts in multiple types of securities—for example, equities and real estate investment trusts (REITs)—could have an even wider range of transaction fees. Given this variability, and our intent that the relationship summary be short and that it be provided in addition to, and not in lieu of, other disclosure, we believe that requiring firms to provide a range of transaction-based fees in the relationship summary could be confusing or provide limited benefit to retail investors.

Following the examples of transaction-based fees, broker-dealers would be required to state that some investments impose additional fees that will reduce the value of retail investors' investments over time, and provide examples of such investments that they offer to retail investors.

151

Mutual funds, variable annuities and exchange-traded funds are common examples, as well as any other investment that incurs fund management, 12b-1, custodial or transfer agent fees, or any other fees and expenses that reduce the value of the investment over time.

152

Broker-dealers also would be required to state that a retail investor could be required to pay fees when certain investments are sold, for example, surrender charges for selling variable annuities.

153

We believe that it is important to highlight for investors the costs associated with particular investments in addition to describing the transaction-based fee for brokerage services. Retail investors may not appreciate that they will bear costs for some investments in addition to the transaction-based brokerage fee they pay to their financial professional or firm.

154

In addition, the investment fees and expenses we are proposing to require that firms disclose are ones that we believe are among the most common and can have a substantial impact on an investor's return from a particular investment.

151

Proposed Item 4.B.2.b. of Form CRS. Investment advisers would also be required to make this disclosure.

See

proposed Item 4.C.4. of Form CRS.

152

We acknowledge that some fees, such as 12b-1 fees, could be a broker-dealer's principal fee for their brokerage services and are also fees that reduce the return on an investment. In such a case, the broker-dealer would describe transaction-based fees as its principal fees and costs pursuant to proposed Item 4.B.1, and would also describe these fees as additional fees that will reduce the return on an investor's investments pursuant to proposed Item 4.B.2.b. of Form CRS.

153

Proposed Item 4.B.2.b. of Form CRS. Investment advisers would also be required to make this disclosure.

See

proposed Item 4.C.4. of Form CRS.

154

See, e.g.,

Enhanced Disclosure and New Prospectus Delivery Option For Registered Open-End Management Investment Companies, Investment Company Act Release No. 28064 (Nov. 21, 2007) [72 FR 67790 (Nov. 30, 2007)], at n.49 and accompanying text (“In recent years, we have taken significant steps to address concerns that investors do not understand that they pay ongoing costs every year when they invest in mutual funds, including requiring disclosure of ongoing costs in shareholder reports.”).

Requiring the disclosure of these investment fees and expenses, sometimes described as “indirect fees,” follows commenters' recommendations that investment advisers and broker-dealers disclose certain indirect costs to retail investors.

155

We are not proposing a requirement that firms disclose the amount or range of mutual fund fees or other third-party fees that retail investors may pay related to their underlying investments, as a few commenters recommended.

156

These expenses vary so greatly that attempts to quantify them or describe their range likely would not be useful to retail investors or would provide limited benefit to retail investors given that the relationship summary is designed to be short disclosure provided in addition to, and not in lieu of, other disclosures.

157

Instead, we intend that our proposed summary disclosure would effectively highlight these costs in a simple, understandable way.

155

See, e.g.,

State Farm 2017 Letter; Bernardi Securities 2017 Letter; Pefin 2017 Letter; Flannery 2017 Letter; Comment letter of Dan Keppel (Jun. 5, 2017); Comment letter of Edward H. Weyler (Jun. 8, 2017).

156

See

Flannery 2017 Letter; Pefin 2017 Letter.

157

See

Amendments to Form ADV, Investment Advisers Act Release No. 3060 (Jul. 28, 2010) [75 FR 49233 (Aug. 12, 2010)] (“Brochure Adopting Release”); Amendments to Form ADV, Investment Advisers Act Release No. 2711 (Mar. 3, 2008) [73 FR 13958 (Mar. 14, 2008)] (“2008 Brochure Proposing Release”).

Additionally, broker-dealers would be required to state whether or not the fees they charge retail investors for their brokerage accounts vary and are negotiable, including a description of the key factors that they believe would help a reasonable retail investor understand the fee that he or she is likely to pay for the firm's services.

158

Such factors could include, for example, how much the retail investor buys or sells, what type of investment the retail investor buys or sells, and what kind of account the retail investor has with the broker-dealer. We believe investors would benefit from knowing at account opening whether they have the ability to negotiate the fees they pay.

158

Proposed Item 4.B.3. of Form CRS.

Broker-dealers would next be required to state, if applicable, that a retail investor will also pay other fees in addition to the firm's transaction-based fee, and to list those fees, including account maintenance fees, account inactivity fees, and custodian fees.

159

We believe that it is important to highlight for investors the fees associated with an account that they will pay in addition to the principal type of fee that the firm charges retail investors for their brokerage account because these fees are common and they can have an impact on a retail investor's return.

159

Proposed Item 4.B.4. of Form CRS.

Broker-dealers would then be required to disclose certain specified incentives they have to put their own interests ahead of retail investors' interests based on charging transaction-based fees for brokerage accounts.

160

They would be required to include the following: “The more transactions in your account, the more fees we charge you. We therefore have an incentive to encourage you to engage in transactions.”

161

We believe this information would help retail investors understand how the fee structures for brokerage accounts could affect their investments and the incentives that firms and financial professionals have to place their interests ahead of retail investors' interests by encouraging retail investors to engage in transactions to increase their fees.

162

We are proposing to prescribe wording because we believe these particular incentives and considerations generally apply to most brokers that offer retail investors brokerage accounts, and using uniform wording would promote consistency. We believe that retail investors would benefit from understanding these incentives when they are considering broker-dealers. Additionally, we believe this disclosure would reinforce a key theme of the relationship summary, which is choice across account types and services.

160

Proposed Item 4.B.5. of Form CRS.

161

Id.

162

Pursuant to the federal securities laws, broker-dealers can violate the federal antifraud provisions by engaging in excessive trading that amounts to churning, switching, or unsuitable recommendations. Churning occurs when a broker-dealer, exercising control over the volume and frequency of trading in a customer account, abuses the customer's confidence for personal gain by initiating transactions that are excessive in view of the character of the account and the customer's investment objectives. Excessive trading is an excessive level of trading unjustified in light of the customer's investment objectives.

See Mihara

Dean Witter & Co., Inc.,

619 F.2d 814, 821 (9th Cir. 1980);

Carras

Burns,

516 F.2d 251, 258 (4th Cir. 1975).

See also

Regulation Best Interest Proposal,

supra

note 24, at section II.D.2.c.

Finally, dual registrants would be required to include the following with respect to brokerage services: “From a cost perspective, you may prefer a transaction-based fee if you do not trade often or if you plan to buy and hold investments for longer periods of time.”

163

We believe that these factors—cost, trading frequency, and the desire to “buy and hold”—are important for retail investors to consider when determining whether to use brokerage services or advisory services.

164

We are proposing to prescribe the wording because we believe these factors reflect common circumstances in which a brokerage account could be more cost-effective for a retail investor than an advisory account, and using uniform wording would promote consistency. We believe this disclosure, in conjunction with the corresponding disclosure regarding advisory accounts that would appear next to it, would help retail investors to compare the two services and make an informed choice about the account type that is the right fit for them based on their goals and preferences.

163

Proposed Item 4.B.6. of Form CRS.

164

See e.g.,

Comment letter of The Capital Group Companies, Inc. (Mar. 12, 2018) (discussing considerations for buy and hold investors choosing among commission-based and fee-based arrangements). Standalone broker-dealers and standalone investment advisers would also be required to include similar wording under the headings “Compare with Typical Advisory Accounts” and “Compare with Typical Brokerage Accounts,” as applicable.

See

proposed Items 5.B.5 and 5.A.4 of Form CRS. Dual-registrants, standalone broker-dealers, and standalone investment advisers would also be required to include a statement that retail investors may prefer an asset-based fee in certain circumstances, and that an asset-based fee may cost more than a transaction-based fee.

See

proposed Items 4.C.10, 5.B.5 and 5.A.4 of Form CRS.

Investment Advisory Account Fees and Costs.

Investment advisers that offer advisory accounts to retail investors would be required to summarize the principal fees and costs that retail investors will incur.

165

Dual registrants that charge ongoing asset-based fees for their advisory services would state the following: “

Asset-based fees.

You will pay an on-going fee [at the end of each quarter] based on the value of the cash and investments in your advisory account.”

166

replacing, as needed, the bracketed wording with how often they assess the fee. If the dual registrant charges another type of fee for advisory services, it would briefly describe that fee and how often it is assessed.

167

Standalone investment advisers would state the following: “The amount paid to our firm and your financial professional generally does not vary based on the type of investments we select on your behalf.”

168

Standalone investment advisers that charge an ongoing asset-based fee would also state “The asset-based fee reduces the value of your account and will be deducted from your account.”

169

Standalone investment advisers that charge another type of fee would succinctly describe how the fee is assessed and the impact it has on the value of the retail investor's account.

170

165

Proposed Item 4.C. of Form CRS. An investment adviser would summarize the principal fees and costs that align with the type of fee(s) the adviser reports in response to Item 5.E. of Form ADV Part 1A that are applicable to retail investors.

166

Proposed Item 4.C.1. of Form CRS.

167

Id.

Some investment advisers report on Form ADV Item 5.E that they receive “commissions.” These “commissions” may include deferred sales loads, including fees for marketing and service, as well as commissions as understood in the broker-dealer context. As a form of deferred sales load, all payments of ongoing sales charges to intermediaries would constitute transaction-based compensation. Intermediaries receiving those payments should consider whether they need to register as broker-dealers under section 15 of the Exchange Act.

168

Proposed Item 4.C.2. of Form CRS. We recognize that, in some cases, the amount paid to the advisory firm and the financial professional can vary based on the type of investment selected (

e.g.,

advisory firms and financial professionals may recommend certain mutual funds that pay the adviser or the financial professional 12b-1 fees out of fund assets).

169

Id.

170

Proposed Item 4.C.2. of Form CRS. Investment advisers that offer retail investors advisory accounts sometimes charge fees that are not ongoing, asset based fees. A financial planner, for example, sometimes charges a one-time fixed fee to prepare a plan.

These requirements are consistent with the current fee disclosure requirements for the Form ADV brochure and how investment advisers typically describe asset-based fees, and we believe that retail investors would find this type of disclosure helpful.

171

We are not proposing to require that investment advisers provide the range of fees, as ranges an investment adviser charges can vary based on a number of factors individual to the retail investor and the services they choose. Additionally, although we do not believe that ranges for investment advisers' asset based fees vary as much as broker-dealers' transaction-based fees, we recognize that requiring firms to provide a fee range for advisory accounts and not brokerage accounts could cause confusion among retail investors and be of limited benefit when comparing advisory and brokerage services. However, we recognize that providing such a range could promote comparability between different advisers, and we request comment below on whether we should require disclosure of the adviser's range of principal fees charged.

171

As discussed above, when completing Form CRS, investment advisers should generally consider achieving consistency with the type(s) of fee(s) that the investment adviser reports on Item 5.E. of Form ADV Part 1A.

See supra

note 126.

An investment adviser that provides advice to retail investors about investing in a wrap fee program would be required to include specified language about the program fees.

172

A “wrap fee program” would be defined as an advisory program that charges a specified fee not based directly upon transactions in the account for investment advisory services and the execution of transactions.

173

The advisory services may include portfolio management or advice concerning selection of other advisers.

174

investment adviser that provides advice to retail investors about investing in a wrap fee program and does not also offer another type of advisory account would be required to include the following (emphasis required): “We offer advisory account programs called

wrap fee programs.

In a

wrap fee program,

the asset-based fee will include most transaction costs a

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