# Form CRS Relationship Summary; Amendments to Form ADV

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2019-12376

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** July 12, 2019
- **Citation:** 84 FR 33492

## Text

SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 200, 240, 249, 275, and 279
[Release Nos. 34-86032; IA-5247; File No. S7-08-18]
RIN 3235-AL27
Form CRS Relationship Summary; Amendments to Form ADV

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

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

DATES:

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

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

FOR FURTHER INFORMATION CONTACT:

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

SUPPLEMENTARY INFORMATION:

The Commission is adopting new rule 17 CFR 275.204-5 [rule 204-5] under the Investment Advisers Act of 1940 [15 U.S.C. 80b]
1

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

under the Securities

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

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

2
15 U.S.C. 78a. Unless otherwise noted, when we refer to the Exchange Act, or any paragraph of the Exchange Act, we are referring to 15 U.S.C. 78a, at which the Exchange Act is codified, and when we

refer to rules under the Exchange Act, or any paragraph of these rules, we are referring to Title 17, part 240 of the Code of Federal Regulations [17 CFR 240], in which these rules are published.

Table of Contents

I. Introduction

II. Form CRS Relationship Summary

A. Presentation and Format

1. Limited Prescribed Wording

2. Standard Question-and-Answer Format and Other Presentation Instructions

3. Electronic and Graphical Formats, and Layered Disclosure

4. Conversation Starters

5. Presentation of Relationship Summaries by Dual Registrants and Affiliated Firms

B. Items

1. Introduction

2. Relationships and Services

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

4. Disciplinary History

5. Additional Information

6. Proposed Items Omitted in Final Instructions

C. Filing, Delivery, and Updating Requirements

1. Definition of Retail Investor

2. Filing Requirements

3. Delivery Requirements

4. Updating Requirements

D. Transition Provisions

E. Recordkeeping Amendments

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

IV. Economic Analysis

A. Introduction

B. Baseline

1. Providers of Financial Services

2. Investor Perceptions about the Marketplace for Financial Services and Disclosures

3. Investor Responses to Disclosures About Financial Professionals and Firms

C. Broad Economic Considerations

D. Economic Effects of the Relationship Summary

1. Retail Investors

2. Broker-Dealers and Investment Advisers (Registrants)

3. Impact on Efficiency, Competition, and Capital Formation

4. Alternatives to the Relationship Summary

V. Paperwork Reduction Act Analysis

A. Form ADV

1. Respondents: Investment Advisers and Exempt Reporting Advisers

2. Changes in Average 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 Exchange Act Rule 17a-3

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

1. Changes in Burden Estimates and New Burden Estimates

2. Revised Annual Burden Estimates

VI. Final Regulatory Flexibility Analysis

A. Need for and Objectives of the Amendments

B. Significant Issues Raised by Public Comments

C. Small Entities Subject to the Rule and Rule Amendments

1. Investment Advisers

2. Broker-Dealers

D. Projected Reporting, Recordkeeping, and Other Compliance Requirements

1. Initial Preparation and Filing of the Relationship Summary

2. Delivery and Updating Requirements Related to the Relationship Summary

3. Recordkeeping Requirements Related to the Relationship Summary

E. Agency Action To Minimize Effect on Small Entities

VII. Statutory Authority

Text of the Rule and Form

I. Introduction

Individual investors rely on the services of broker-dealers and investment advisers when making and implementing investment decisions. Research continues to show that retail investors are confused about the services, fees, conflicts of interest, and the required standard of conduct for particular firms, and the differences between broker-dealers and investment advisers.
3

We are adopting a new set of disclosure requirements designed to reduce retail investor confusion in the marketplace for brokerage and investment advisory services and to assist retail investors with the process of deciding whether to engage, or to continue to engage, a particular firm
4

or financial professional and whether to establish, or to continue to maintain, an investment advisory or brokerage relationship.
5

Firms will deliver to retail investors a customer or client relationship summary (“relationship summary” or “Form CRS”) that provides succinct information about the relationships and services the firm offers to retail investors, fees and costs that retail investors will pay, specified conflicts of interest and standards of conduct, and disciplinary history, among other things.
6

The relationship summary will also link to
Investor.gov/CRS
on the Commission's investor education website,
Investor.gov
, which offers educational information to investors about investment advisers, broker-dealers, and individual financial professionals and other materials.

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

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

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

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

We proposed a version of a relationship summary on April 18, 2018.
7

The proposed relationship summary would have required information separated into the following sections: (i) Introduction; (ii) the relationships and services the firm offers to retail investors; (iii) the standard of conduct applicable to those services; (iv) the fees and costs that retail investors will pay; (v) comparisons of brokerage and investment advisory services (for standalone broker-dealers and investment advisers);
8

(vi) conflicts of

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

7

See
Proposing Release,
supra
footnote 5.

8
We proposed definitions for “standalone investment adviser” and “standalone broker-dealer”.
See
Proposed General Instruction 9.(f) to Form CRS. Given the streamlining and other revisions to the Form CRS instructions relative to the proposal, we believe that these proposed definitions are no longer needed and therefore are not adopting them. We use the terms throughout this release, however, for the avoidance of doubt, to indicate broker-dealers and investment advisers that are not dual registrants. We are adopting the

proposed definition for “dual registrant” substantially as proposed. We are adding language in the definition of dual registrant in the final instructions to clarify that a dually registered firm is not considered a dual registrant for purposes of Form CRS and the final instructions if the dually registered firm does not provide both investment advisory and brokerage services to retail investors.
See
General Instruction 11.C to Form CRS;
see infra
footnotes 201-202 and accompanying text.

To better understand retail investors' views about the disclosures designed for them, the Commission engaged in broad outreach to investors and other market participants. As described further throughout the release, the Commission received substantial feedback on the proposed relationship summary in several forms. We received comment letters in connection with the Proposing Release from a variety of commenters including individual investors, consumer advocacy groups, financial services firms, investment professionals, industry and trade associations, state securities regulators, bar associations, and others.
9

Several of those commenters provided alternative mock-ups to illustrate their suggestions. Additionally, some commenters submitted reports of surveys or studies that they had conducted or engaged third parties to conduct in connection with the proposal. The Commission also received input and recommendations from its Investor Advisory Committee (“IAC”) on the proposed relationship summary to improve its effectiveness.
10

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

10

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

The Commission also solicited comments from individual investors through a number of forums in addition to the traditional requests for comment in the Proposing Release. The Commission used a “feedback form” designed specifically to solicit input from retail investors with a set of questions requesting both structured and narrative responses, and received more than 90 responses from individuals who reviewed and commented on the sample proposed relationship summaries published in the proposal.
11

Seven investor roundtables were held in different locations across the country to solicit further comment from individual investors on the proposed relationship summary, and we received in-person feedback from almost 200 attendees in total.
12

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

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

Further, the Commission's Office of the Investor Advocate engaged the RAND Corporation (“RAND”) to conduct investor testing of the proposed relationship summary.
13

RAND conducted a survey of over 1,400 individuals through a nationally representative panel to collect information on the opinions, preferences, attitudes, and level of self-assessed comprehension regarding the sample dual-registrant relationship summary in the proposal. RAND also conducted qualitative interviews of a smaller sample of individuals to ascertain comprehension of the relationship summary and gain feedback from interview participants, which allowed RAND to obtain insights to complement its survey.
14

On November 7, 2018, the Office of the Investor Advocate made the report on that testing available in the comment file to allow the public to consider and comment on the supplemental information.
15

The Commission received several letters in response to the inclusion of the RAND 2018 report in the comment file.
16

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

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

15

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

16

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

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

larger sample sizes—one based on the sample proposed dual-registrant relationship summary
17

and another based on the proposed sample standalone investment adviser relationship summary.
18

A group of commenters submitted two reports of usability testing of the sample proposed dual-registrant relationship summary based on a small number of long-form interviews.
19

One of the two surveys, and the two interview-based studies, included questions designed to ascertain comprehension and tested alternate relationship summary designs with changes to some of the proposed prescribed wording and presentation from the proposal.
20

Finally, two different commenters submitted surveys of retail investors' views about disclosure communications provided by firms and their relationships with financial professionals, which did not test any version of the proposed relationship summary.
21

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

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

19
Kleimann Communication Group, Inc.,
Final Report on Testing of Proposed Customer Relationship Summary Disclosures, Submitted to AARP, Consumer Federation of America, and Financial Planning Coalition
(Sept. 10, 2018),
available at

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

20

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

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

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

Overall, we believe that feedback we have received from or on behalf of retail investors through the RAND 2018 report, surveys and studies submitted by commenters, and input received at roundtables and on Feedback Forms, demonstrate that the proposed relationship summary would be useful for retail investors and provide information,
e.g.,
about services, fees and costs, and standard of care, that would help investors to make more informed choices when deciding among firms and account options. For example, among the RAND 2018 survey respondents, nearly 90% said that the relationship summary would help them make more informed decisions about types of accounts and services and more than 80% said it would help them compare accounts offered by different firms.
22

RAND 2018 survey participants rated information about the firm's relationship and services and fees and costs to be among the most informative.
23

In other surveys, large majorities of respondents also reacted positively to the relationship summary and the types of information that would be provided.
24

In the RAND 2018 qualitative interviews, it was observed that participants could learn new information from the proposed relationship summary.
25

Similarly, other surveys and studies that assessed investor comprehension observed that investors learned important information by reviewing the relationship summary.
26

Over 70% of individuals submitting Feedback Forms commented that they found the relationship summary to be “useful,” with more than 80% rating the relationship summary sections describing relationships and services, obligations, and fees and costs as “very useful” or “useful.”
27

Investor roundtable participants also reacted

positively and indicated that they found the relationship summary to be useful.
28

A significant percentage of RAND 2018 survey participants agreed that the relationship summary would facilitate conversations between retail investors and their financial professionals, and other surveys and studies reported similar observations.
29

Investor roundtable participants and comments on Feedback Forms also indicated that the relationship summary could facilitate conversations between retail investors and their financial professionals in a beneficial way.
30

22
RAND 2018,
supra
footnote 13.

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

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

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

26

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

27

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

28

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

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

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

Many other commenters supported the concept of a short disclosure document for retail investors that would serve as part of a layered disclosure regime,
31

and agreed that that the relationship summary would facilitate conversations between retail investors and their financial professionals in a beneficial way.
32

However, some commenters argued that the relationship summary is duplicative of other disclosures and is unnecessary.
33

Others cautioned against over-reliance on disclosure efforts to address all issues related to the different business models and the applicable standard of conduct for broker-dealers and investment advisers.
34

31

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

32

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

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

34

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

Nearly all commenters (including commenters on Feedback Forms) and investors participating in roundtables, suggested modifications to the proposed relationship summary, as did observations reported in the RAND 2018 report and surveys and studies submitted to the comment file. Suggested changes generally pertained to: Appropriate placement of educational material; length and format; use of prescribed wording; comprehensibility; additional flexibility for firms; and delivery requirements (including electronic delivery). For example, some commenters and observations from the RAND 2018 survey and other surveys and studies indicated that the proposed relationship summary could be difficult to understand, particularly the proposed disclosures on fees, conflicts of interest, and standards of conduct.
35

Many commenters preferred a shorter, one-to-two page document relying more heavily on layered disclosure, such as by using more hyperlinks and other cross-references to more detailed disclosure.
36

Many commenters from both industry and investor groups argued that some of the prescribed wording would not be accurate or applicable in relation to the different services and business models of all firms or could lead to confusing or

misleading disclosures.
37

Various commenters advocated for more flexibility for firms to use their own wording to describe their services more accurately.
38

Many commenters favored the use of a question-and-answer format, suggesting, for example, that focusing a document on investors' questions helps them to feel that the document is relevant to them and encourages them to read it.
39

Some commenters viewed parts of the relationship summary as educational, such as the sections comparing broker-dealers and investment advisers, describing the applicable standard of conduct, and containing key questions investors should ask, and advocated that the Commission should develop and provide educational material separately from firm-specific disclosures, such as in an additional disclosure layer or on the Commission's website.
40

Several individuals submitting Feedback Forms also were supportive of links to additional educational information.
41

35

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

36

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

37

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

38

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

39

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

40

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

41

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

Although some commenters argued that the relationship summary is duplicative of other disclosures and is unnecessary,
42

we believe that the relationship summary has a distinct purpose and will provide a separate and important benefit relative to other disclosures. The relationship summary is designed to help retail investors select or determine whether to remain with a firm or financial professional by providing better transparency and summarizing in one place selected information about a particular broker-dealer or investment adviser. The format of the relationship summary also allows for comparability among the two different types of firms in a way that is distinct from other required disclosures. Both broker-dealers and investment advisers must provide disclosures on the same topics under standardized headings in a prescribed order to retail investors, which should benefit retail investors by allowing them to more easily compare services by comparing different firms' relationship summaries.
43

We do not believe that existing disclosures provide this level of transparency and comparability across investment advisers, broker-dealers, and dual registrants. The relationship summary also encourages retail investors to ask questions and highlights additional sources of information. All of these features should make it easier for investors to get the facts they need when deciding among investment firms or financial professionals and the accounts and services available to them. As noted above, the relationship summary will complement additional rules and guidance that the Commission is adopting concurrently to enhance protections for retail investors and is not designed to address all investor protection issues related to different business models and legal obligations of broker-dealers and investment advisers.
44

42

See supra
footnote 33.

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

44

See supra
footnote 34.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

47

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

Some commenters responding to the RAND 2018 report noted that the RAND 2018 survey and qualitative interviews did not objectively test investor comprehension, and they pointed to observations from RAND 2018 interviews that suggested that some interview participants failed to understand differences in the legal standards that apply to brokerage and advisory accounts and did not understand the meaning of the word “fiduciary” for example.
48

They argued that we should conduct more usability testing before adopting Form CRS and Regulation Best Interest.
49

48

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

49

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

We disagree. The amount of information available from the various investor surveys and investor testing described in this release, including those submitted by commenters, as well as the comment letters and other input submitted to the Commission for this rulemaking, is extensive. We considered all of this information thoroughly, leveraging our decades of experience with investor disclosures, when evaluating changes to the relationship summary from the proposal. The perceived usefulness of the relationship summary, as shown by observations in the RAND 2018 report, surveys and studies submitted by commenters, and input from individual investors at our roundtables and in Feedback Forms, demonstrates that, even as proposed, the relationship summary would benefit investors by providing information that would help investors make more informed choices when deciding among firms and account options.
50

Large majorities of participants in the RAND 2018 survey and in other surveys supported the specific topics, such as services, fees, conflicts and standards of conduct, that we require firms to address in the relationship summary.
51

Even though the RAND 2018 qualitative interviews and another interview-based study observed that interview participants could have some gaps in understanding, these studies still observed that interview participants could learn new important information from the relationship summary as proposed.
52

50

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

51

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

52

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

In addition, as noted above and discussed in further detail below, we are making a number of modifications designed to improve the relationship summary relative to the proposal, which are informed by these and other observations reported by RAND 2018 and other surveys and studies, as well as by investor feedback at roundtables and in Feedback Forms and the other comment letters we have received. For example, we are substantially revising our approach to disclosing standard of conduct and conflicts of interest to make this information clearer to retail investors, including (among other changes) eliminating the word “fiduciary” and requiring firms—whether broker-dealers, investment advisers, or dual registrants—to use the term “best interest” to describe their applicable standard of conduct.
53

Further, as compared to the proposal, modifications adopted in the final relationship summary instructions require less prescribed wording, and instead, firms will generally use their own wording to address required topics, which creates flexibility in providing accurate information to investors. We believe that this modification substantially limits the practicability and benefit of additional usability testing because there is no single version of the relationship summary (or a limited set of form versions) that may be used to gauge investor comprehension given firms' flexibility to tailor their relationship summary.

54

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

53

See infra,
Section II.B.3.

54
In this regard, the RAND 2018 report and surveys and studies submitted by commenters generally were based on sample versions of the relationship summary that we included in the proposal. Alternate designs tested by commenters generally used the all of the same topics (
e.g.,
a description of service and the relationship, fees and

costs, standard of care, conflicts, additional information and key questions) as the proposed sample versions, with changes using different versions of prescribed wording and formatting designed to be more appealing to readers.
See
Kleimann II,
supra
footnote 19 (describing alternative Form CRS design assumptions) and Betterment Letter I (Hotspex)
supra
footnote 18 (describing approach to optimizing the Form CRS). Given modifications that we are adopting to the Form CRS instructions that provide firms more flexibility to use their own wording to describe service offerings, fees and costs and their conflicts of interest and more flexibility in formatting as compared to the proposal, we are not preparing sample or illustrative versions of the relationship summary that could be used to repeat such surveys and testing, and we do not believe that we would be able to develop sample versions that would be representative given the diversity among firms in their service and product offerings.

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

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

II. Form CRS Relationship Summary

A. Presentation and Format

The relationship summary is designed to be a short and accessible disclosure for retail investors that helps them to compare information about firms' brokerage and/or investment advisory offerings and promotes effective communication between firms and their retail investors.
55

The proposed instructions included requirements on length, formatting, and content. The proposal also provided three examples of what a relationship summary might look like for a standalone broker-dealer, standalone investment adviser, and dual registrant. In providing feedback on the proposed sample relationship summaries, commenters on Feedback Forms and participants in the RAND 2018 survey and other surveys and studies provided by commenters indicated that the proposed relationship summary could be too dense and difficult to read.
56

They suggested using simpler terms and more white space, among other changes.
57

Commenters also encouraged the use of design principles that would result in a more visually appealing and accessible disclosure.
58

In addition, the IAC recommended, through a majority vote, uniform, simple, and clear summary disclosures to retail investors.
59

We have incorporated many of these suggestions into the instructions.

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

56

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

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

58

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

59

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

We are changing the instructions to require a question-and-answer format, give additional support for electronic formats, provide guidance that firms should include white space, and implement other design features to make the relationship summary easier to read.
60

We are requiring firms to use standardized headings in a prescribed order to preserve comparability, while permitting greater flexibility in other aspects of the relationship summary's wording and design to enhance the relationship summary's accuracy, usability, and effectiveness.
61

The final instructions will require limited prescribed wording compared to the

proposal and will permit firms to use their own wording to describe most topics. We also are not requiring firms to discuss the sub-topics required within each section in a prescribed order, as proposed.
62

Dual registrants
63

and affiliated brokerage and investment advisory firms also will have flexibility to decide whether to prepare separate or combined relationship summaries. These changes are intended to enhance the relationship summary's clarity, usability, and design, and to promote effective communication and understanding between retail investors and their firms and financial professionals. We describe these changes in more detail below.

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

61

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

62

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

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

We are also adopting some parts of the instructions that address presentation and formatting as proposed. The instructions state that the relationship summary should be concise and direct, and firms must use plain English and take into consideration retail investors' level of financial experience, as proposed.
64

Firms also are not permitted to use multiple negatives, or legal jargon or highly technical business terms unless firms clearly explain them, as proposed. In a change from the proposal, the instructions will not permit use of legal jargon or technical terms without explaining them in plain English, even if the firm believes that reasonable retail investors will understand those terms.
65

Several commenters suggested that the relationship summary avoid the use of jargon (
e.g.,
terms like “asset-based fee” and “load” in the fees section),
66

and several roundtable participants and participants in the RAND 2018 interviews and another study said that they did not understand certain technical terms.
67

Roundtable participants and commenters on Feedback Forms asked that the relationship summary include definitions or a glossary.
68

In addition, the IAC recommended that a document such as the relationship summary use plain English and a concise format.
69

As a result, we are instructing firms to avoid using legal jargon and highly technical terms in the relationship summary unless they are able to explain the terms in the space of the relationship summary. We believe this simpler approach obviates the need for firms to justify what they believe a reasonable retail investor would or would not understand. Firms would have the flexibility to use their own wording, including legal or highly technical terms as long as they explain them, or may prefer to use simpler terms, given the space limitations of the relationship summary. Additionally, we have added a cover page for Form CRS under the Exchange Act (17 CFR 249.640) only, displaying a currently valid OMB control number and including certain statements relating to federal information law and requirements, and the SEC's collection of information.
70

64

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

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

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

67

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

68

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

69

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

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

1. Limited Prescribed Wording

The proposed instructions would have required firms to include prescribed wording throughout many sections of the relationship summary. In particular, the fees and costs, standard of conduct, and the comparison section for standalone broker-dealers and investment advisers included a number of required statements, many that differed for broker-dealers, investment advisers, and dual registrants.
71

The introduction, conflicts of interest, and key questions sections also included some required statements.
72

In response to comments (as described more fully below) we are largely eliminating the prescribed wording and replacing those statements with instructions that generally allow firms to describe their own offerings with their own wording.

71

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

72

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

For example, the proposed instructions would have required broker-dealers to state, “If you open a brokerage account, you will pay us a transaction-based fee, generally referred to as a commission, every time you buy or sell an investment” and “The fee you pay is based on the specific transaction and not the value of your account.”
73

Broker-dealers also would have stated “The more transactions in your account, the more fees we charge you. We therefore have an incentive to encourage you to engage in transactions.”
74

Instead the final instructions will require broker-dealers to describe the principal fees and costs that retail investors will incur, including their transaction-based fees, and summarize how frequently the fees are assessed and the conflicts of interest they create.
75

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

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

75

See
Items 3.A. through 3.C. of Form CRS.

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

Some

argued that the mix of prescribed and firm-authored wording required by the proposed instructions would be inaccurate, contribute to investor confusion, or be ineffective for investors, particularly language that some commenters considered “boilerplate.”
77

Observations reported in the RAND 2018 qualitative interviews and other surveys and studies also showed that investors had difficulty understanding, were confused by, or misinterpreted some of the prescribed wording.
78

A range of commenters asserted that the proposed prescribed wording could be inaccurate or inapplicable.
79

For example, various providers of insurance products explained that references to brokerage or investment advisory accounts were not consistent with their business models and could confuse retail investors because customers generally purchase insurance products directly from the issuer, without needing to open a brokerage account.
80

One commenter expressed concern that some of the prescribed wording could constitute impermissible compelled speech that could raise First Amendment concerns.
81

That same commenter, with others, also opposed providing firms with more flexibility than proposed to implement the relationship summary, arguing that more flexibility could impair comparability.
82

76

See, e.g.,
IAA Letter I; Comment Letter of Massachusetts Mutual Life Insurance Company (Aug. 7, 2018) (“MassMutual Letter”); Comment Letter of the Association for Advanced Life Underwriting (Aug. 7, 2018) (“AALU Letter”); Comment Letter of Prudential Financial, Inc. (Aug. 7, 2018) (“Prudential Letter”); Comment Letter of Mutual of America Life Insurance Company (Aug. 3, 2018) (“Mutual of America Letter”); Comment Letter of John Hancock Life Insurance Company (U.S.A.) (Aug. 3, 2018) (“John Hancock Letter”); ACLI Letter; Comment Letter of New York Life Insurance Company (Aug. 7, 2018) (“New York Life Letter”); Comment Letter of Transamerica (Aug. 7, 2018) (“Transamerica Letter”); Vanguard Letter.
See also
Betterment Letter I,
supra
footnote 18 (arguing that investor survey conducted by Hotspex showed that its more customized version of the relationship summary facilitated investor understanding). Some individuals submitting Feedback Forms also preferred more firm-specific information.
See, e.g.,
Anonymous 13 Feedback Form (“Firm-specific info would be nice on this document.”); Bhupalam Feedback Form (“I would like to see additional

information regarding specific firm rather than a general description.”); Christine Feedback Form (“I'm interested in my individual advisor's orientation—small cap, mid cap, large cap or mix growth vs. value foreign, domestic or mix fundamental or quantitative long term or short term”).

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

78

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

79

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

80

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

81

See
CFA Letter I,
supra
footnote 37.

82

See
AFL-CIO, CFA Letter.

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

Although we are allowing more flexibility so that firms can describe their offerings more accurately, firms still will be required to discuss required topics within a prescribed order, as discussed below.
83

This approach will facilitate transparency, consistency, and comparability of information across the relationship summaries of different firms, helping retail investors to focus on information that we believe would be particularly helpful in deciding among firms, financial professionals, services, and accounts—namely: Relationships and services; fees, costs, conflicts, and required standard of conduct; disciplinary history; and how to get additional information. We believe that more tailored, specific, and distinct information in the required topic areas also will better serve the educational purpose by facilitating more robust substantive comparisons across firms.

83

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

This approach addresses—and mitigates—First Amendment concerns. Generally, the instructions no longer require any specific speech.
84

Rather, they permit firms to use their own words to impart accurate information to investors. In certain circumstances, however, we are continuing to require firms to use prescribed wording. For example, the final instructions require firms to use standardized headings and conversation starters, which are in the form of questions that investors are encouraged to ask.
85

These elements are organizational (the headings) or intended to prompt a discussion by the investor (the conversation starters).
86

The final instructions also require firms to include prescribed statements describing their required standard of conduct when providing recommendations or advice.
87

Requiring firms to provide a consistent articulation of their required legal obligations in this regard will reduce and minimize investor confusion, as compared with allowing firms to state their required standard of conduct using their own wording.
88

These statements are designed to require the disclosure of purely factual information about the standard of conduct that applies to the provision of recommendations by broker-dealers and the provision of advice by investment advisers under their respective legal regimes.
89

Finally, the instructions require firms to include a prescribed, factual statement regarding the impact of fees and costs on investments, and a prescribed statement encouraging retail investors to understand what fees and costs they are paying.
90

As explained further below,

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

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

85

See infra
Sections II.A.2 and II.A.4.

86

See infra
Sections II.A.2. and II.A.4.

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

88

See infra
Sections II.A.2 and II.B.3.b.

89

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

90

See
Item 3.A.(iii) of Form CRS (requiring firms to state, “You will pay fees and costs whether you make or lose money on your investments. Fees and costs will reduce any amount of money you make

on your investments over time. Please make sure you understand what fees and costs you are paying.”).
See also infra
footnotes 424-425 and accompanying text.

91

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

As in the proposal, the final instructions include parameters for the scope of information expected within the relationship summary, though we are modifying the requirements to clarify the scope further in light of commenter concerns. First, all information in the relationship summary must be true and may not omit any material facts necessary in order to make the disclosures, in light of the circumstances under which they were made, not misleading.
92

The proposed instructions required all information in the relationship summary to be true and prohibited firms from omitting any material facts necessary to make the disclosures required by the instructions and the applicable item not misleading, but did not include the clause “in light of the circumstances under which they were made.”
93

Commenters raised concerns with respect to the applicability of this standard to a short document with strict page limits that is meant to provide only a brief summary of information.
94

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

93
Proposed General Instruction 3 to Form CRS.

94

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

We continue to believe that firms should include only as much information as is necessary to enable a reasonable investor
95

to understand the information required by each item.
96

As discussed below, we believe that investors will benefit from receiving a relationship summary containing high-level information that they will be more likely to read and understand, with the ability to access more detailed information.
97

As a result, we recognize a firm's relationship summary by itself is a summary of the information required to inform retail investors about the services a firm provides along with its fees, costs, conflicts of interest, and standard of conduct. We also believe that the disclosure provided in the relationship summary should be responsive and relevant to the topics covered by the final instructions,
98

and not omit information that is required to be disclosed or necessary to make the required disclosure not misleading.
99

We are sensitive to commenters' concerns, however, regarding expectations for the scope of required information within page limits. In this regard, the instructions continue to provide, as proposed, that firms may not include a disclosure in the relationship summary other than a disclosure that is required or permitted by the instructions and the applicable item,
100

and that all the information contained in the relationship summary must be true.
101

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

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

97

See infra
Section II.A.3.

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

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

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

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

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

in light of the circumstances under which they were

made,

not misleading.
102

We have added the phrase “in light of the circumstances under which they were made” to clarify that the content included or not included in the relationship summary should be viewed, for example, in light of the fact that the disclosure is intended to be a summary, that firms must adhere to the page limit, and that there will be links to additional information. Any information contained in the relationship summary or omitted facts will not be viewed in isolation in respect of determining whether such information would have been viewed by a reasonable investor as having significantly altered the total mix of information available.
103

As discussed below, firms will provide additional detail and context through layered disclosure. For example, the instructions require firms to include specific references or a link to additional information as part of the relationships and services and fees and conflicts sections.
104

In other instances, the instructions encourage firms to reference or link to additional information to supplement their required disclosures.
105

While this change from the proposal is drawn from other areas of the federal securities laws,
106

Form CRS is not intended to create a private right of action.

102

Id.

103

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

104

See infra
Section II.A.3.

105

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

106

See supra
footnotes 99 and 103 and accompanying text.

Second, firms may omit or modify required disclosures or conversation starters that are inapplicable to their business, or specific wording required by the final instructions that is inaccurate.
107

The proposed instructions permitted firms to omit or modify required disclosures that were inapplicable to their business or would be misleading to a reasonable retail investor.
108

We modified the proposed instruction to provide a more concrete requirement allowing firms to omit or modify prescribed wording, rather than using a broader standard referencing a reasonable retail investor. This instruction is intended to ensure that no statements are misleading or inaccurate in the context of a firm's particular services or business. Rather, the objective of the Commission is to ensure that required disclosures are purely factual and provide investors with an accurate portrayal of the firm's services and operations.

107
General Instruction 2.B. to Form CRS.

108

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

Finally, given that firms will use mostly their own wording, we are adding instructions that remind firms that their responses must be factual and provide balanced descriptions to help retail investors evaluate the firm's services.
109

For example, firms may not include exaggerated or unsubstantiated claims, vague and imprecise “boilerplate” explanations, or disproportionate emphasis on possible investments or activities that are not made available to retail investors.
110

The relationship summary is designed to serve as disclosure, rather than marketing material, and should not unduly emphasize aspects of firms' offerings that may be favorable to investors over those that may be unfavorable.

109
General Instruction 2.C. to Form CRS.

110
General Instruction 2.C. to Form CRS.

2. Standard Question-and-Answer Format and Other Presentation Instructions

As with the proposed instructions, the final instructions require firms to present information under standardized headings and to respond to all the items in the final instructions in a prescribed order.
111

Instead of using declarative headings as proposed, however, the headings will be in the form of questions.
112

This change responds to feedback from surveys and studies
113

and commenters,
114

including many submitting their own mock-ups of the relationship summary that suggested or used a question-and-answer format in their own documents. Several commenters noted that the question-and-answer format is a more effective design for consumer disclosures because it focuses on questions to which a consumer wants answers and allows a consumer to skim quickly and understand where to get more information.
115

Based on consideration of these comments, we are both incorporating the format generally and are utilizing several of the question headings suggested by commenters in mock-ups, as discussed in each item below.

111
General Instruction 1.B. to Form CRS.

112

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

113

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

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

115

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

In addition to the standardized headings, we continue to believe that a prescribed order of topics facilitates comparability of different firms' relationship summaries. Commenters generally supported or did not oppose the premise of a prescribed order of topics.
116

Some commenters did, however, suggest changes to the organization or inclusion of topics, either explicitly in their comment letters, implicitly by the design of their own mock-ups, or both.
117

Results of

surveys and studies that assessed comprehension of the sample proposed relationship summaries demonstrated the importance of context and revealed confusion caused by the placement of some information. For example, the RAND 2018 qualitative interviews suggested that investors were confused by and had difficulty reconciling the conflicts and standard of conduct sections, which were separated by the fees and comparisons sections.
118

Another study suggested that the appearance of fee information in three separate sections and separation of the fees and conflicts sections by the comparisons section inhibited understanding of the connection between fees and conflicts.
119

As discussed further below, we are combining the proposed Fees and Costs, Conflicts of Interest, and Standard of Conduct sections into one, to address these comments.
120

In addition, in response to suggestions that we provide more flexibility for how firms describe their services so that they can more accurately convey the information, the final instructions do not require firms to present the information within each section in the order listed.
121

Therefore, firms are free to discuss the required sub-topics within each item in an order that they believe best promotes accurate and readable descriptions of their business.

116

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

117

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

section forward.
See
Durgin Feedback Form, Salkowitz Feedback Form, Starmer2 Feedback Form, Anonymous14 Feedback Form, and a few suggested changes to the order of discussion of obligations and conflicts. See Anonymous28 Feedback Form, Asen Feedback Form, Lee2 Feedback Form.

118

See
RAND 2018,
supra
footnote 13.

119

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

120

See
Item 3 of Form CRS.

121

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

The final instructions provide for page limits to promote brevity, as proposed. The proposed instructions limited the length of the relationship summary to four pages for both standalone firms and dual registrants.
122

The final instructions provide that for dual registrants that include their brokerage services and advisory services in a single relationship summary, the relationship summary must not exceed four pages in paper format, or the equivalent if delivered electronically.
123

For broker-dealers
124

and investment advisers
125

a relationship summary in paper format must not exceed two pages, or the equivalent if delivered electronically.
126

Dual registrants that prepare separate relationship summaries for their brokerage and advisory services are limited to two pages each, or the equivalent if delivered electronically.
127

Unlike the proposed instructions, the final instructions do not prescribe paper size, font size, and margin width, providing instead that they should be reasonable.
128

For example, we believe that 8
1/2
″ x 11″ paper size, at least an 11 point font size, and a minimum of 0.75″ margins on all sides, as proposed, could be considered reasonable, but other parameters could also be reasonable. The objective of the proposed paper, font, and margin size limitations was to make the relationship summary easy to read. We expect that a visually engaging and effective design, including in electronic format, could achieve the same objective without the prescriptive limitations.

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

123
General Instruction 1.C. to Form CRS.

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

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

126
General Instruction 1.C. to Form CRS.

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

128
General Instruction 1.C. to Form CRS.

Many commenters preferred a shorter, one-to-two page document more heavily relying on layered disclosure with increased use of hyperlinks and other cross-references to more detailed disclosure.
129

Commenters also said that investors are more likely to read a shorter document.
130

Several commenters submitted mock-ups that were shorter than four pages.
131

Others indicated that the length of Form CRS was acceptable but should not exceed four pages.
132

On the other hand, certain commenters suggested that the length of the relationship summary may be too short to appropriately describe firms' insurance services or products.
133

One commenter said that it would be challenging for dual registrants to summarize all of their offerings within the four-page limit

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2019-12376. Public record. Not legal advice.