Document ID: SEC-2013-0439-0001
Agency: sec
Document Type: Notice
Title: Duties of Brokers, Dealers, and Investment Advisers
Posted Date: 2013-03-07T05:00Z

[Federal Register Volume 78, Number 45 (Thursday, March 7, 2013)]
[Notices]
[Pages 14848-14866]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-05222]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69013; IA-3558; File No. 4-606]

Duties of Brokers, Dealers, and Investment Advisers

AGENCY: Securities and Exchange Commission.

ACTION: Request for data and other information.

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SUMMARY: The Securities and Exchange Commission is requesting data and 
other information, in particular quantitative data and economic 
analysis, relating to the benefits and costs that could result from 
various alternative approaches regarding the standards of conduct and 
other obligations of broker-dealers and investment advisers. We intend 
to use the comments and data we receive to inform our consideration of 
alternative standards of conduct for broker-dealers and investment 
advisers when providing personalized investment advice about securities 
to retail customers. We also will use this information to inform our 
consideration of potential harmonization of certain other aspects of 
the regulation of broker-dealers and investment advisers.

DATES: Comments should be received on or before July 5, 2013.

ADDRESSES: Comments may be submitted by any of the following methods:
    Electronic Submission:
     Use the Commission's Internet comment form (http://www.sec.gov/rules/other.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number 4-606 in the subject line.
    Paper Submission:
     Send paper submissions in triplicate to Elizabeth M. 
Murphy, Secretary, Securities and Exchange Commission, 100 F Street 
NE., Washington, DC 20549-1090. All submissions should refer to File 
Number 4-606. This file number should be included on the subject line 
if email is used. To help us process and review your comments more 
efficiently, please use only one method. The Commission will post all 
submissions of data on the Commission's Internet Web site (http://www.sec.gov). Comments are also available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. All comments received will be posted without 
change; we do not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. Please refer to the Appendix at the end of this 
release for instructions on submitting data and other information.

FOR FURTHER INFORMATION CONTACT: Jennifer Marietta-Westberg, Assistant 
Director, Matthew Kozora, Financial Economist, Division of Risk, 
Strategy and Financial Innovation, at (202) 551-6655; David W. Blass, 
Chief Counsel, Lourdes Gonzalez, Assistant Chief Counsel--Sales 
Practices, Emily Westerberg Russell, Senior Special Counsel, Daniel 
Fisher, Branch Chief, Leila Bham, Special Counsel, Division of Trading 
and Markets, at (202) 551-5550; Office of Chief Counsel, at (202) 551-
6825 and Office of Investment Adviser Regulation, at (202) 551-6787, 
Division of Investment Management; Securities and Exchange Commission, 
100 F Street NE., Washington, DC 20549-1090.

Discussion

I. Introduction

A. Background

    Today, broker-dealers and investment advisers routinely provide to 
retail customers \1\ many of the same services, and engage in many 
similar activities related to providing personalized investment advice 
about securities to

[[Page 14849]]

retail customers.\2\ While both investment advisers and broker-dealers 
are subject to regulation and oversight designed to protect retail and 
other customers, the two regulatory schemes do so through different 
approaches notwithstanding the similarity of certain services and 
activities.
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    \1\ For the purposes of this request for comment, and as noted 
in Part III below, the term ``retail customer'' has the same meaning 
as in Section 913 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act. Public Law 111-203, 124 Stat. 1376 (2010). 
Specifically, it means ``a natural person, or the legal 
representative of such natural person, who (A) receives personalized 
investment advice about securities from a broker, dealer or 
investment adviser; and (B) uses such advice primarily for personal, 
family, or household purposes.'' 15 U.S.C. 80b-11(g)(2).
    \2\ In 2006, the SEC retained the RANDCorporation's Institute 
for Civil Justice (``RAND'') to conduct a survey, which concluded 
that the distinctions between investment advisers and broker-dealers 
have become blurred, and that market participants had difficulty 
determining whether a financial professional was an investment 
adviser or a broker-dealer and instead believed that investment 
advisers and broker-dealers offered the same services and were 
subject to the same duties. RAND noted, however, that generally 
investors they surveyed as part of the study were satisfied with 
their financial professional, be it a representative of a broker-
dealer or an investment adviser. Angela A. Hung, et al., RAND 
Institute for Civil Justice, Investor and Industry Perspectives on 
Investment Advisers and Broker-Dealers (2008) (``RAND Study'').
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    Investment advisers are fiduciaries to their clients, and their 
regulation under the Investment Advisers Act of 1940 (``Advisers Act'') 
is largely principles-based. In contrast, a broker-dealer is not 
uniformly considered a fiduciary to its customers.\3\ Broker-dealer 
conduct is subject to comprehensive regulation under the Securities 
Exchange Act of 1934 (``Exchange Act'') and the rules of each self-
regulatory organization (``SRO'') to which the broker-dealer belongs. 
Both broker-dealers and investment advisers also are subject to 
applicable antifraud provisions and rules under the federal securities 
laws.
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    \3\ A broker-dealer may have a fiduciary duty under certain 
circumstances. This duty may arise under state common law, which 
varies by state. Generally, courts have found that broker-dealers 
that exercise discretion or control over customer assets, or have a 
relationship of trust and confidence with their customers, are found 
to owe customers a fiduciary duty similar to that of investment 
advisers. See, e.g., United States v. Skelly, 442 F.3d 94, 98 (2d 
Cir. 2006); United States v. Szur, 289 F.3d 200, 211 (2d Cir. 2002); 
Associated Randall Bank v. Griffin, Kubik, Stephens & Thompson, 
Inc., 3 F.3d 208, 212 (7th Cir. 1993); MidAmerica Fed. Savings & 
Loan Ass'n v. Shearson/American Express Inc., 886 F.2d 1249, 1257 
(10th Cir. 1989); Leib v. Merrill Lynch, Pierce, Fenner & Smith, 
Inc., 461 F. Supp. 951, 953-954 (E.D. Mich. 1978), aff'd, 647 F.2d 
165 (6th Cir. 1981). For the staff's discussion of relevant case law 
see Study, infra note 10, at 54-55. See also A Joint Report of the 
SEC and the CFTC on Harmonization of Regulation (Oct. 2009), 
available at http://www.sec.gov/news/press/2009/cftcjointreport101609.pdf at 8-9 and 67.
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    Studies suggest that many retail customers who use the services of 
broker-dealers and investment advisers are not aware of the differences 
in regulatory approaches for these entities and the differing duties 
that flow from them.\4\ Some of these regulatory differences primarily 
reflect the different functions and business activities of investment 
advisers and broker-dealers (for example, rules regarding underwriting 
or market making). Other differences reflect statutory differences,\5\ 
particularly when broker-dealers and investment advisers engage in the 
same or substantially similar activity (for example, providing 
personalized investment advice, including recommendations, about 
securities to retail customers).
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    \4\ See, e.g., RAND Study.
    \5\ Advisers Act Section 202(a)(11) defines ``investment 
adviser'' to mean ``any person who, for compensation, engages in the 
business of advising others, either directly or through publications 
or writings, as to the value of securities or as to the advisability 
of investing in, purchasing, or selling securities, or who, for 
compensation and as part of a regular business, issues or 
promulgates analyses or reports concerning securities.'' Advisers 
Act Section 202(a)(11)(C) excludes from the investment adviser 
definition any broker or dealer (i) whose performance of its 
investment advisory services is ``solely incidental'' to the conduct 
of its business as a broker or dealer; and (ii) who receives no 
``special compensation'' for its advisory services. Broker-dealers 
providing investment advice in accordance with this exclusion are 
not subject to the fiduciary duty under the Advisers Act.
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    Over the decades since the Advisers Act and Exchange Act were 
enacted, we have observed that the lines between full-service broker-
dealers and investment advisers have blurred.\6\ Investment advisers 
and broker-dealers, for example, provide investment advice both on an 
episodic and on an ongoing basis.\7\ We have expressed concern when 
specific regulatory obligations depend on the statute under which a 
financial intermediary is registered instead of the services 
provided.\8\
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    \6\ See Certain Broker-Dealers Deemed Not to be Investment 
Advisers, Exchange Act Release No. 51523 at 3 and 37 (Apr. 12, 2005) 
(``Release 51523''). Many financial services firms may offer both 
investment advisory and broker-dealer services. According to data 
from the Investment Adviser Registration Depository as of November 
1, 2012, approximately 5% of Commission-registered investment 
advisers reported that they also were registered as a broker-dealer, 
and 22% of Commission-registered investment advisers reported that 
they had a related person that was a broker-dealer. As of October 
31, 2012, 755 firms registered with FINRA as a broker-dealer, or 
approximately 17.4% of broker-dealers registered with FINRA, were 
also registered as an investment adviser with either the Commission 
or a state. See Letter from Angela Goelzer, FINRA, to Lourdes 
Gonzalez, Assistant Chief Counsel, Securities and Exchange 
Commission (Nov. 16, 2012). Further, as of mid-November 2012, 
approximately 41% of FINRA-registered broker-dealers had an 
affiliate engaged in investment advisory activities. Id. Many of 
these financial services firms' personnel may also be dually 
registered as investment adviser representatives and registered 
representatives of broker-dealers. As of October 31, 2012, 
approximately 86% of investment adviser representatives were also 
registered representatives of a FINRA-registered broker-dealer. Id.
    \7\ A broker-dealer that receives special compensation for the 
provision of investment advice would not be excluded from the 
definition of investment adviser. See supra note 5.
    \8\ In Release 51523, we engaged in an analysis and discussion 
of the history of the Exchange Act and Advisers Act. We explained 
that the Advisers Act was intended to regulate what, at the time 
that Act was enacted, was a largely unregulated community of persons 
engaged in the business of providing investment advice for 
compensation. See Release 51523 at 22.
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    In a staff study (the ``Study'') required by Section 913 of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the 
``Dodd-Frank Act''),\9\ our staff made recommendations to us that the 
staff believed would enhance retail customer protections and decrease 
retail customers' confusion about the standard of conduct owed to them 
when their financial professional provides them personalized investment 
advice.\10\ The staff made two primary recommendations in the Study. 
The first recommendation was that we engage in rulemaking to implement 
a uniform fiduciary standard of conduct for broker-dealers and 
investment advisers when providing personalized investment advice about 
securities to retail customers. The second recommendation was that we 
consider harmonizing certain regulatory requirements of broker-dealers 
and investment advisers where such harmonization appears likely to 
enhance meaningful investor protection, taking into account the best 
elements of each regime.\11\
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    \9\ Publci Law 111-203, 124 Stat. 1376. Section 913 of the Dodd-
Frank Act, among other things, required a study of the effectiveness 
of the existing legal or regulatory standards of care that apply 
when broker-dealers and investment advisers (and persons associated 
with them) provide personalized investment advice and 
recommendations about securities to retail customers. It also 
required the identification of any legal or regulatory gaps, 
shortcomings, or overlaps in legal or regulatory standards in the 
protection of retail customers relating to the standards of care for 
providing personalized investment advice about securities to retail 
customers that should be addressed by rule or statute.
    \10\ Staff of the U.S. Securities and Exchange Commission, Study 
on Investment Advisers and Broker-Dealers As Required by Section 913 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Jan. 2011) (``Study''), available at www.sec.gov/news/studies/2011/913studyfinal.pdf. The views expressed in the Study were those of 
the staff and do not necessarily reflect the views of the Commission 
or the individual Commissioners. See also Statement by SEC 
Commissioners Kathleen L. Casey and Troy A. Paredes (Jan. 21, 2011) 
(``Statement'') (opposing the Study's findings and, among other 
things, stating that ``stronger analytical and empirical foundation 
than provided by the Study is required before regulatory steps are 
taken that would revamp how broker-dealers and investment advisers 
are regulated'').
    \11\ As discussed in more detail below, we have a variety of 
options relating to the staff's recommendations; we could take no 
action with regard to either, or could take action to implement one 
or both recommendations, either partially or wholly. The choice of 
whether and how to take an action with respect to the 
recommendations would consider the facts and circumstances of the 
marketplace at the time of the potential action, as well as the 
regulatory landscape existing at such time (including, if 
applicable, any prior or contemporaneous actions which would impact 
the recommendations).

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[[Page 14850]]

    The staff explained that its recommendations were intended to 
address, among other things, retail customer confusion about the 
obligations broker-dealers and investment advisers owe to those 
customers, and to preserve retail customer choice without decreasing 
retail customers' access to existing products, services, service 
providers or compensation structures.\12\ The staff stated in the Study 
that retail customers should not have to parse legal distinctions to 
determine whether the advice they receive from their financial 
professional is provided in their best interests, and stated that 
retail customers should receive the same or substantially similar 
protections when obtaining the same or substantially similar services 
from financial professionals.\13\ The staff further noted that the 
Commission could consider harmonization as part of the implementation 
of the uniform fiduciary standard or as separate initiatives.\14\
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    \12\ Study at viii, x, 101, 109, and 166.
    \13\ Study at viii and 101.
    \14\ Study at 129.
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    In preparing the Study's discussion of the benefits and costs of 
aspects of the staff's recommendations, the staff, among other things, 
considered comment letters that we received in response to an earlier 
request, and reiterated this request when meeting with interested 
parties, in order to better inform the Study.\15\ Few commenters, 
however, provided data regarding the benefits and costs of the current 
regulatory regime or the benefits and costs likely to be realized if we 
were to exercise the authority granted in Section 913. This may be 
because most comments were made in advance of the Study's publication 
and could not be informed by the staff's specific recommendations.\16\ 
Of the relatively few comments received after publication of the Study, 
one commenter expressed support for further economic analysis of the 
Study's recommendations and other approaches for Commission rulemaking, 
and offered to provide data and other information relating to 
implementing a uniform fiduciary standard of conduct.\17\
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    \15\ Study Regarding Obligations of Brokers, Dealers, and 
Investment Advisers, Exchange Act Release No. 62577 (July 27, 2010) 
(requesting comment from the public to inform the preparation of the 
Study). The Commission received over 3,500 comment letters before 
and after publication of the Study. The comment letters are 
available at www.sec.gov/comments/4-606/4-606.shtml.
    \16\ Before the Study was published, we received a comment 
describing results of a survey that had been conducted based on 
certain assumptions about a potential change in the standard of 
conduct, which differ from those set out in this request for 
information and data. The survey, for example, assumed that under a 
new standard of conduct, broker-dealer firms would no longer charge 
commissions and instead would only maintain fee-based accounts. See 
Oliver Wyman and Securities Industry and Financial Markets 
Association, Standard of Care Harmonization Impact Assessment for 
SEC (Oct. 27, 2010).
    \17\ Comment Letter from Ira D. Hammerman, Senior Managing 
Director and General
    Counsel, Securities Industry and Financial Markets Association 
(July 14, 2011) (``SIFMA Letter'') at 2. But see, Comment Letter 
from Barbara Roper, Director of Investor Protection, Consumer 
Federation of America, et al., (Mar. 28, 2012) (``Roper Letter'') 
(asserting adoption of a uniform standard could be implemented in a 
way that does not lead to reduced investor choice or product 
access).
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    The Study recommended that we engage in rulemaking using the 
authority provided to us in Section 913 of the Dodd-Frank Act. The 
section grants us discretionary rulemaking authority under the Exchange 
Act and Advisers Act to adopt rules establishing a uniform fiduciary 
standard of conduct for all broker-dealers and investment advisers when 
providing personalized investment advice about securities to retail 
customers.\18\ That section further provides that such standard of 
conduct ``shall be to act in the best interest of the customer without 
regard to the financial or other interest of the broker, dealer, or 
investment adviser providing the advice'' and that the standard ``shall 
be no less stringent than the standard applicable to investment 
advisers under Sections 206(1) and 206(2) of the Advisers Act when 
providing personalized investment advice about securities.''
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    \18\ See Section 15(k) of the Exchange Act and Section 211(g) of 
the Advisers Act, each as added by Section 913 of the Dodd-Frank 
Act. Section 913 of the Dodd-Frank Act also added Section 15(l) of 
the Exchange Act and Section 211(h) of the Advisers Act to add 
discretionary authority to promulgate rules prohibiting or 
restricting certain broker-dealer and investment adviser sales 
practices, conflicts of interests, and compensation schemes that the 
Commission deems contrary to the public interest and the protection 
of investors. See Exchange Act each as added by Section 913 of the 
Dodd-Frank Act.
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    The Commission recognizes that Section 913 of the Dodd-Frank Act 
does not mandate that we undertake any such rulemaking, and the 
Commission has not yet determined whether to commence a rulemaking. We 
expect that the data and other information provided to us in connection 
with this request will assist us in determining whether to engage in 
rulemaking, and if so, what the nature of that rulemaking ought to be. 
Among other considerations, we are sensitive to the fact that changes 
in existing legal or regulatory standards could result in economic 
costs and benefits and believe that such costs and benefits must be 
considered in the economic analysis that would be part of any 
rulemaking under the discretionary authority provided by Section 913 of 
the Dodd-Frank Act. In considering the options for a potential standard 
of conduct applicable to broker-dealers and investment advisers 
providing personalized investment advice to retail customers, we will 
take into account existing regulatory obligations that apply today to 
broker-dealers and investment advisers.
    If we determine to engage in rulemaking, furthermore, the 
rulemaking process would provide us the opportunity to request further 
data and other information on the range of complex considerations 
associated with any proposal implementing such a standard, including 
any potential costs and benefits associated with the rulemaking. The 
rulemaking process would also allow commenters to address the extent to 
which any proposal would further the goals highlighted by Section 913, 
including (1) preserving retail customer choice with respect to, among 
other things, the availability of accounts, products, services, and 
relationships with investment advisers and broker-dealers, and (2) not 
inadvertently eliminating or otherwise impeding retail customer access 
to such accounts, products, services and relationships (for example, 
through higher costs). We may also consider reassessing and potentially 
harmonizing certain of the other regulatory obligations that apply to 
broker-dealers and investment advisers where such harmonization is 
consistent with the mission of the Commission.

B. Overview of the Request for Additional Data and Other Information

    We are requesting below additional public input to assist us in 
evaluating whether and how to address certain of the standards of 
conduct for, and regulatory obligations of, broker-dealers and 
investment advisers. Since publishing the Study, the staff has 
continued to review current information and available data about the 
current marketplace for personalized investment advice and the 
potential economic impact of the staff's recommendations to inform its 
consideration of any potential rulemaking with respect to the Study's 
recommendations. While we and our staff have extensive experience in 
the regulation of broker-dealers and investment advisers, the public 
can provide further data and other information to assist us in 
determining whether or not to use the authority

[[Page 14851]]

provided under Section 913 of the Dodd-Frank Act.
    Data and other information from market intermediaries and others 
about the potential economic impact of the staff's recommendations, 
including information about the potential impact on competition, 
capital formation, and efficiency, may particularly help inform any 
action we may or may not take in this area. We also especially welcome 
the input of retail customers.
    We are specifically requesting quantitative and qualitative data 
and other information and economic analysis (herein ``data and other 
information'') about the benefits and costs of the current standards of 
conduct of broker-dealers and investment advisers when providing advice 
to retail customers, as well as alternative approaches to the standards 
of conduct, including a uniform fiduciary standard of conduct 
applicable to all investment advisers and broker-dealers when providing 
personalized investment advice to retail customers. We recognize that 
retail customers are unlikely to have significant empirical and 
quantitative information. We welcome any information they can provide.
    In this release, we discuss a potential uniform fiduciary standard 
of conduct and alternatives to that standard of conduct. A uniform 
fiduciary standard of conduct can be understood quite differently by 
various parties. In fact, public comments on such a standard have made 
widely varying assumptions about what a fiduciary duty would require. 
Comments have assumed, for example, that a uniform fiduciary duty would 
require all firms to, among other things: provide the lowest cost 
alternative; stop offering proprietary products; charge only asset-
based fees, and not commissions; and continuously monitor all 
accounts.\19\ These outcomes would not necessarily be the case. By 
contrast, many of the rules or other obligations discussed over the 
years for potential regulatory harmonization, such as recordkeeping, 
advertising, pay to play, and other obligations that currently apply to 
broker-dealers and investment advisers, are more specific. Accordingly, 
we believe that consideration of a uniform fiduciary standard of 
conduct would benefit from a set of assumptions and other parameters 
that commenters can use and critique in order to generate meaningful 
data and other information. The identification of particular 
assumptions or parameters, however, does not suggest our policy view or 
the ultimate direction of any action proposed by us.
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    \19\ See also SIFMA Letter, supra note 17, at 7 and 10 
(recommending, among other things, that the Commission articulate a 
new uniform standard of conduct, applicable to both broker-dealers 
and investment advisers, to ``act in the best interest of the 
customer,'' while applying existing case law, guidance, and other 
legal precedent developed under Section 206 of the Advisers Act only 
to investment advisers, not broker-dealers) compared with the Roper 
Letter at 2 (recommending, among other things, that rather than 
replacing the current Advisers Act standard with something new and 
different, the Commission should extend the existing Advisers Act 
standard (currently applicable to investment advisers) to broker-
dealers, while clarifying its applicability in the context of 
broker-dealer conduct).
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    We also request comment in this release on whether or to what 
extent we should consider making other adjustments to the regulatory 
obligations of broker-dealers and investment advisers, including 
regulatory harmonization. While this release addresses both a potential 
uniform fiduciary standard of conduct and regulatory harmonization more 
generally, and at times, discusses and requests comment relating to the 
potential interrelationship of the two, harmonization beyond a uniform 
fiduciary standard of conduct could be considered separately. As noted 
below, there are a variety of options relating to whether and how to 
act with respect to a potential uniform fiduciary standard of conduct 
or potential regulatory harmonization, including taking no action, 
taking action to implement one (either partially or wholly) and not the 
other, or taking action to implement both (again, either partially or 
wholly). In order to inform our consideration of all of these options, 
this release discusses both a potential uniform fiduciary standard of 
conduct and regulatory harmonization and encourages comment on the 
potential practical, regulatory, and economic effects that action or 
inaction with respect to one or both may have. For example, we request 
comment on the extent to which regulatory harmonization might address 
customer confusion about the obligations owed to them by broker-dealers 
and not investment advisers (or by investment advisers and not broker-
dealers) even if a uniform fiduciary standard of conduct is 
implemented. We also request comment on the extent to which regulatory 
harmonization might result in additional investor confusion or 
otherwise negatively impact investors.
    We request data and other information relating to the provision of 
personalized investment advice about securities to retail customers to 
better understand the relationship between standards of conduct and the 
experiences of retail customers. In particular, we seek data and other 
information regarding: (a) Investor returns generated under the 
existing regulatory regimes; (b) security selections of broker-dealers 
and investment advisers as a function of their respective regulatory 
regimes; (c) characteristics of investors who invest on the basis of 
advice from broker-dealers, invest on the basis of advice from an 
investment adviser, or invest utilizing both channels; (d) investor 
perceptions of the costs and benefits under each regime; and (e) 
investors' ability, and the associated cost to investors, to bring 
claims against their broker-dealer or investment adviser under their 
respective regulatory regimes.\20\ We are also particularly interested 
in the activities, conflicts of interest\21\ and disclosure practices 
of investment advisers and broker-dealers, as well as the economics of 
the investment advice industry and characteristics of the current 
marketplace. We also are asking for data and other information about 
the benefits and costs of the current set of regulatory obligations 
that apply to broker-dealers and investment advisers, and the benefits 
and costs of different approaches to harmonizing particular areas of 
broker-dealer and investment adviser regulation.
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    \20\ See Statement.
    \21\ In this request for information and data, we use the term 
``conflict of interest'' to mean a material conflict of interest.
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C. Suggested Guidelines and Considerations for Submissions of Data and 
Other Information

    The data and other information requested in this document have the 
potential to be instructive in our determination of which, if any, new 
approach or approaches to consider implementing with respect to the 
regulatory obligations of investment advisers and broker-dealers. We 
welcome any relevant data and other information, as well as comment, in 
response to our inquiries below. Responsive data and other information 
would be more useful to us, however, if they are prepared and submitted 
in a consistent fashion. We set forth suggested guidelines 
(``Guidelines'') in the Appendix to this request for commenters to 
follow, where possible, in submitting data and other information. In 
particular, through the Guidelines, we request broker-dealers, 
investment advisers, and dually registered investment adviser/broker-
dealers submitting comments to provide specific data and other 
information describing their businesses, retail customers, and retail 
customer

[[Page 14852]]

accounts. We also request that other commenters (e.g., retail 
customers, academics, trade associations, and consumer groups) provide 
the information requested in the Guidelines to the extent applicable or 
appropriate. We especially welcome the input of retail customers.\22\
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    \22\ This includes, where possible, information and data 
focusing on accounts that receive non-discretionary advice because 
they are most likely to be impacted by changes in the standard of 
conduct. See Guidelines in the Appendix.
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    We are particularly interested in receiving data and other 
information that are empirical and quantitative in nature. We encourage 
all interested parties, however, to submit their comments, including 
qualitative and descriptive analysis of the benefits and costs of 
potential approaches and guidance. As stated above, we recognize that 
retail customers are unlikely to have significant empirical and 
quantitative information. We welcome any information they can provide. 
In addition, if commenters prefer to respond to only some of the 
requests for comment, they are welcome to do so.
    We describe throughout this request for data and other information 
a series of assumptions that commenters may use in order to facilitate 
our ability to compare, reproduce, and otherwise analyze responses to 
our questions in a robust fashion. The discussion of these assumptions 
does not suggest our policy view or the ultimate direction of any 
proposed action proposed by us. If commenters believe that we should 
make additional or different assumptions as a further analytical step 
we invite them to do so and explain clearly the additional or different 
assumptions made, address why such assumptions are appropriate, and 
compare and contrast results obtained under such assumptions with 
results obtained under the assumptions specified in this request. If 
commenters wish to submit multiple sets of comments resting on 
different sets of assumptions, they may do so. Although we seek to 
obtain responses that we can compare, reproduce, and otherwise analyze 
in a robust fashion, we also wish to emphasize that commenters have 
flexibility to provide whatever data and other information they believe 
is important to provide.
    Examples of data and other information sought include empirical 
data, detailed datasets on a particular topic, economic analysis, legal 
analysis, statistical data such as survey and focus group results, and 
any other observational or descriptive data and other information. Such 
data and other information can be quantitative, qualitative, or 
descriptive. Again, commenters are invited to provide any other 
information that they believe would be useful to us as we consider our 
options in this area.
    Commenters should only submit data and other information that they 
wish to make publicly available. Commenters concerned about making 
public proprietary or other highly sensitive data and other information 
may wish to pool their data with others (e.g., through a trade 
association, law firm, consulting firm or other group) and submit 
aggregated data in response to this request. While we request that 
commenters provide enough data and other information to allow us to 
compare, replicate, and otherwise analyze findings, commenters should 
remove any personally identifiable information (e.g., of their 
customers) before submitting data and other information in response to 
this request.\23\
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    \23\ Cf. 17 CFR 248.3(u)(1) (defining for purposes of Regulation 
S-P, ``personally identifiable financial information'' as ``any 
information: (i) A consumer provides to you to obtain a financial 
product or service from you; (ii) About a consumer resulting from 
any transaction involving a financial product or service between you 
and a consumer; or (iii) You otherwise obtain about a consumer in 
connection with providing a financial product or service to that 
consumer.'').
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II. Request for Data and Other Information Relating to the Current 
Market for Personalized Investment Advice

    We are requesting data and other information about the specific 
costs and benefits associated with the current regulatory regimes for 
broker-dealers and investment advisers\24\ as applied to particular 
activities as a baseline for comparison, as described below. 
Accordingly, and in addition to the request for data and other 
information which follows in Parts III and IV below, we request data 
and other information relating to the economics and characteristics of 
the current regulatory regime, and other data and other information 
relating to investment adviser and broker-dealer conflicts of interest 
and the cost and effectiveness of disclosure. Many of the requests ask 
commenters to provide data and other information describing retail 
customer demographics and accounts; broker-dealer or investment adviser 
services offered to retail customers; security selections by or for 
retail customers; and the claims of retail customers in dispute 
resolution. We request commenters refer to the Appendix for the 
specific characteristics of each of these topics that are important to 
include when submitting data and other information. We also request 
commenters refer to other guidelines in the Appendix, particularly the 
request to provide background information and documentation to support 
any economic analysis.
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    \24\ Please see our staff's discussion in the Study about the 
existing regulatory structures for investment advisers and broker-
dealers, and the general differences and similarities between the 
regulatory regimes. See Study at 14-46 (discussing investment 
adviser obligations) and 46-83 (discussing broker-dealer 
obligations).
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    To assist us in our analysis, we request that commenters provide 
the following:
    1. Data and other information, including surveys of retail 
customers, describing the characteristics of retail customers who 
invest through a broker-dealer as compared to those who invest on the 
basis of advice from an investment adviser as well as retail customer 
perceptions of the cost/benefit tradeoffs of each regulatory 
regime.\25\ Provide information describing retail customer accounts at 
broker-dealers and investment advisers, and the manner in which broker-
dealers and investment advisers provide investment advice (e.g., 
frequency, coverage (i.e., account-by-account or relationship), and 
solicited or unsolicited). How do firms that offer both brokerage and 
advisory accounts advise retail customers about which type of account 
they should open? What are the main characteristics of each type of 
account? If possible, associate retail customer demographic information 
with account descriptions.
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    \25\ See Statement.
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    2. Data and other information describing the types and availability 
of services (including advice) broker-dealers or investment advisers 
offer to retail customers, as well as any observed recent changes in 
the types of services offered. Provide information as to why services 
offered may differ or have changed. Have differences in the standards 
of conduct under the two regulatory regimes contributed to differences 
in services offered or any observed changes in services offered? If 
possible, differentiate by retail customer demographic information.
    3. Data and other information describing the extent to which 
different rules apply to similar activities of broker-dealers and 
investment advisers, and whether this difference is beneficial, harmful 
or neutral from the perspectives of retail customers and firms. Also, 
provide data and other information describing the facts and 
circumstances under which broker-dealers have fiduciary obligations to 
retail customers under applicable law, and how frequently such 
fiduciary

[[Page 14853]]

obligations arise. If possible, differentiate by retail customer 
demographic information.
    4. Data and other information describing the types of securities 
broker-dealers or investment advisers offer or recommend to retail 
customers. To the extent commenters believe that differences in the 
standards of conduct under the two regulatory regimes contribute to 
differences in the types of securities offered or recommended, provide 
data and other information as to why the types of securities offered or 
recommended may differ. If possible, differentiate by retail customer 
demographic information.
    5. Data and other information describing the cost to broker-dealers 
and investment advisers of providing personalized investment advice 
about securities to retail customers, as well as the cost to retail 
customers themselves of receiving personalized investment advice about 
securities. Describe costs in terms of dollars paid and/or time spent. 
Do differences in the standards of conduct under the two regulatory 
regimes contribute to differences in the cost of providing or receiving 
services? If possible, separate costs by service type, and 
differentiate by retail customer demographic and account information.
    6. Data and other information describing and comparing the security 
selections of retail customers who are served by financial 
professionals subject to the two existing regulatory regimes.\26\ If 
possible, associate retail customer demographic and account information 
with security selections, and identify whether initial retail customer 
ownership took place prior to opening the account and whether security 
selections were solicited or unsolicited.
---------------------------------------------------------------------------

    \26\ Id.
---------------------------------------------------------------------------

    7. Data and other information describing the extent to which 
broker-dealers and investment advisers engage in principal trading with 
retail customers, including data and other information regarding the 
types of securities bought and sold on a principal basis, the volume, 
and other relevant data points. For each type of security, compare 
volume and percentage of trades made on a principal basis against the 
volume and percentage of trades made on a riskless principal basis. 
Also, provide data and other information on the benefits and costs to 
broker-dealers and investment advisers of trading securities on a 
principal basis with retail customers, as well as the benefits and 
costs to retail customers to buying securities from or selling 
securities to a broker-dealer or an investment adviser acting in a 
principal capacity. To the extent possible, describe costs and benefits 
in terms of dollars paid and/or time spent (e.g., any difference in 
price for a customer between a principal trade and a trade executed on 
an agency basis). Do differences in the two regulatory regimes 
contribute to any differences in the cost of trading securities on a 
principal basis? If possible, differentiate by retail customer 
demographic and account information.
    8. Data and other information describing and analyzing retail 
customer returns (net and gross of fees, commissions, or other charges 
paid to a broker-dealer or investment adviser) generated under the two 
existing regulatory regimes.\27\ If possible, provide security returns, 
associate retail customer demographic and account information with 
security positions, and identify whether the retail customer held these 
security positions prior to account opening and identify whether 
security selections were solicited or unsolicited. If security returns 
are not available, describe the type of securities held in the account 
and total account returns, including changes in account value and 
account inflows/outflows.
---------------------------------------------------------------------------

    \27\ Id.
---------------------------------------------------------------------------

    9. Data and other information related to the ability of retail 
customers to bring claims against their financial professional under 
each regulatory regime, with a particular focus on dollar costs to both 
firms and retail customers and the results when claims are brought.\28\ 
We especially welcome the input of persons who have arbitrated, 
litigated, or mediated claims (as a retail customer, broker-dealer or 
investment adviser), their counsel, and any persons who presided over 
such actions. In particular, describe the differences between claims 
brought against broker-dealers and investment advisers with respect to 
each of the following:
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    \28\ Id.
---------------------------------------------------------------------------

    a. The differences experienced by retail customers, in general, 
between bringing a claim against a broker-dealer as compared to 
bringing a claim against an investment adviser;
    b. any legal or practical barriers to retail customers bringing 
claims against broker-dealers or investment advisers;
    c. the disposition of claims;
    d. the amount of awards, if any;
    e. costs related to the claim forum, as it affects retail 
customers, firms, and associated persons of such firms;
    f. time to resolution of claims;
    g. the types of claims brought against broker-dealers (we welcome 
examples of mediation, arbitration and litigation claims);
    h. the types of claims brought against investment advisers (we 
welcome examples of mediation, arbitration and litigation claims);
    i. the nature of claims brought against broker-dealers as compared 
to the nature of claims brought against investment advisers (e.g., 
breach of fiduciary duty, suitability, breach of contract, tort); and
    j. the types of defenses raised by broker-dealers and investment 
advisers under each regime.
    If possible, differentiate by retail customer demographic and 
account information.
    10. Data and other information describing the nature and magnitude 
of broker-dealer or investment adviser conflicts of interest and the 
benefits and costs of these conflicts to retail customers. Also provide 
data and other information describing broker-dealer or investment 
adviser actions to eliminate, mitigate, or disclose conflicts of 
interest. Describe the nature and magnitude of broker-dealer or 
investment adviser conflicts of interest with the type and frequency of 
activities where conflicts are present, and describe the effect actions 
to mitigate conflicts of interest have on firm business and on the 
provision of personalized investment advice to retail customers.
    11. Data and other information describing broker-dealer or 
investment adviser costs from providing mandatory disclosure to retail 
customers about products and securities. Describe costs in terms of 
dollars and, where cost estimates are not available, estimate time 
spent. If possible, differentiate by the form of disclosure (oral or 
written) and the amount of information the disclosure presents. Also, 
if possible, separate disclosure costs by associated activity.
    12. Data and other information describing the effectiveness of 
disclosure to inform and protect retail customers from broker-dealer or 
investment adviser conflicts of interest. Describe the effectiveness of 
disclosure in terms of retail customer comprehension, retail customer 
use of disclosure information when making investment decisions, and 
retail customer perception of the integrity of the information. Please 
provide specific examples. If possible, differentiate by the form of 
disclosure (oral or written), the amount of information the disclosure 
presents, and retail customer demographic and account information. 
Also, if possible, measure disclosure effectiveness by associated 
activity.

[[Page 14854]]

    13. Identification of differences in state law contributing to 
differences in the provision of personalized investment advice to 
retail customers. Provide data and other information describing 
differences across states with respect to retail customer brokerage or 
advisory account characteristics, broker-dealer or investment adviser 
services offered and the types of securities they offer or recommend, 
and the cost of providing services to retail customers. Do differences 
in state law contribute to differences in the recovery of claimants? Do 
differences in state law contribute to differences in the mitigation or 
elimination of conflicts of interest? Provide information describing 
why. If possible, associate retail customer demographic information 
with account descriptions.
    14. Data and other information describing the extent to which 
retail customers are confused about the regulatory status of the person 
from whom they receive financial services (i.e., whether the party is a 
broker-dealer or an investment adviser). Provide data and other 
information describing whether retail customers are confused about the 
standard of conduct the person providing them those services owes to 
them. Describe the types of services and/or situations that increase or 
decrease retail customers' confusion and provide information describing 
why. Describe the types of obligations about which retail customers are 
confused and provide information describing why.
    Provide explanations describing why responses to particular 
questions are not possible. Are there operational or cost constraints 
that make the data and other information unavailable? If so, please 
explain what they are. Also provide data and other information on other 
factors important in describing the current market for personalized 
investment advice that may aid or guide us in future analysis.

III. Request for Data and Other Information Relating to a Uniform 
Fiduciary Standard of Conduct and Alternative Approaches

    We discuss below potential alternative approaches to establishing a 
uniform fiduciary standard of conduct for broker-dealers and investment 
advisers and request data and other information with respect to those 
approaches and their potential implications for the marketplace.\29\ To 
be clear, the discussion of these potential approaches--including the 
identification of particular assumptions or alternatives--does not 
suggest our policy view or the ultimate direction of any proposed 
action by us. Furthermore, the approaches presented here are non-
exclusive. As discussed above, this description of potential approaches 
is instead intended to (1) assist commenters in providing more concrete 
empirical data and other information and more precise comment in 
response to this request and (2) assist us in more readily comparing, 
reproducing, and otherwise analyzing data and other information 
provided by commenters.
---------------------------------------------------------------------------

    \29\ In Part IV, we discuss certain possible approaches for 
harmonizing certain other aspects of the regulation of broker-
dealers and investment advisers.
---------------------------------------------------------------------------

    We recognize that commenters may be able to provide additional data 
and other information that may be helpful to us under assumptions and 
alternatives that are different from, or in addition to, those 
presented under the various approaches described below. We invite 
commenters to explain clearly the different or additional assumptions 
and alternatives they provide, address why such assumptions and 
alternatives are appropriate, and compare and contrast results obtained 
under such assumptions and alternatives with results obtained under the 
assumptions or alternatives specified in this request.
    We intend to use the data and other information provided to inform 
us about the current market for personalized investment advice about 
securities and how different approaches to establishing a uniform 
fiduciary standard of conduct on broker-dealers and investment advisers 
may impact retail customers, investment advisers and broker-dealers.

A. Initial Clarification and Assumptions

    As an initial matter, to provide clarity to commenters and 
establish a common baseline of assumptions, we indicate that commenters 
should make the assumptions set forth below in considering our 
subsequent description of a possible uniform fiduciary standard of 
conduct when a broker-dealer or investment adviser provides 
personalized investment advice to a retail customer. However, as 
described above in the introduction to this Part III, the 
identification of particular assumptions does not suggest our policy 
view or the ultimate direction of any proposed action by us. We invite 
comment based on other assumptions chosen by commenters, and we invite 
comparisons between analyses made under assumptions chosen by 
commenters and analyses made under the assumptions--particularly 
alternatives to Assumption 1 and Assumption 8 below--we have set forth 
below.
    1. Assume that the term ``personalized investment advice about 
securities'' would include a ``recommendation,'' as interpreted under 
existing broker-dealer regulation,\30\ and would include any other 
actions or communications that would be considered investment advice 
about securities under the Advisers Act (such as comparisons of 
securities or asset allocation strategies). It would not include 
``impersonal investment advice'' as that term is used for purposes of 
the Advisers Act.\31\ The term ``personalized investment advice'' would 
also not include general investor educational tools, provided those 
tools do not constitute a recommendation under current law.\32\
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    \30\ See Study at 124-125 (staff's discussion of what 
constitutes a ``recommendation'' under the broker-dealer regulatory 
regime).
    \31\ We have defined ``impersonal investment advice'' for 
certain purposes under the Advisers Act to mean ``investment 
advisory services provided by means of written material or oral 
statements that do not purport to meet the objectives or needs of 
specific individuals or accounts.'' 17 CFR 275.203A-3(a)(3)(ii). See 
also 17 CFR 275.206(3)-1; Study at 123 (staff's discussion of what 
constitutes ``impersonal investment advice'').
    \32\ See Study at 125 (staff's discussion of communications that 
generally would not constitute a ``recommendation'' under existing 
broker-dealer regulation).
---------------------------------------------------------------------------

    2. Assume that the term ``retail customer'' would have the same 
meaning as in Section 913 of the Dodd-Frank Act, which is ``a natural 
person, or the legal representative of such natural person, who (1) 
receives personalized investment advice about securities from a broker 
or dealer or investment adviser; and (2) uses such advice primarily for 
personal, family, or household purposes.''\33\
---------------------------------------------------------------------------

    \33\ Sec. 913, Public Law 111-203, 124 Stat. 1376; 15 U.S.C. 
80b-11(g)(2). See also supra note 1.
---------------------------------------------------------------------------

    3. Assume that any action would apply to all SEC-registered broker-
dealers and SEC-registered investment advisers. To the extent 
commenters are of the view that the duty should be limited to a 
particular subset of SEC-registered broker-dealers or SEC-registered 
investment advisers or expanded to include all broker-dealers or 
investment advisers, commenters should explain how and why it should be 
limited or expanded, and include any relevant data and other 
information to support such an application.
    4. Assume that the uniform fiduciary standard of conduct would be 
designed to accommodate different business models and fee structures of 
firms, and would permit broker-dealers to continue to receive 
commissions; firms would not be required to charge an asset-based fee. 
As provided in Section 913, ``[t]he receipt of compensation based on 
commissions, fees or other standard

[[Page 14855]]

compensation for the sale of securities, for example, would not, in and 
of itself, be considered a violation'' of the uniform fiduciary 
standard of conduct.\34\ Broker-dealers also would continue to be 
permitted to engaged in, and receive compensation from, principal 
trades. To satisfy the uniform fiduciary standard of conduct, however, 
assume that at a minimum a broker-dealer or investment adviser would 
need to disclose material conflicts of interest, if any, presented by 
its compensation structure.\35\
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    \34\ See 15 U.S.C. 78o(k)(1); 15 U.S.C. 80b-11(g)(1).
    We also note that nothing in Section 206(1) and 206(2) of the 
Advisers Act prohibits the receipt of transaction-based 
compensation, such as commissions. A person engaged in the business 
of effecting transactions in securities for the account of others, 
would however, absent an available exemption, be required to 
register as a broker-dealer. See Exchange Act Sections 3(a)(4) and 
15(a); 15 U.S.C. 78c(a)(4) and 78o(a). See also SEC v. Hansen, [1984 
Transfer Binder] Fed. Sec. L. Rep. (CCH) ] 91,426 (S.D.N.Y. 1984) 
(stating that receiving transaction-based compensation is among the 
activities that indicate a person may be acting as a broker); Mutual 
Fund Distribution Fees; Confirmations, Exchange Act Release No. 
62544 (July 21, 2010) (proposing rules governing ongoing mutual fund 
asset-based sales charges), n. 168 (``As a form of deferred sales 
load, all payments of ongoing sales charges to intermediaries would 
constitute transaction-based compensation. Intermediaries receiving 
those payments thus would need to register as broker-dealers under 
Section 15 of the Exchange Act unless they can avail themselves of 
an exception or exemption from registration. Marketing and service 
fees paid to an intermediary may similarly require the intermediary 
to register under the Exchange Act.'').
    \35\ See discussion infra Part III.B.1.
---------------------------------------------------------------------------

    5. Assume that the uniform fiduciary standard of conduct would not 
generally require a broker-dealer or investment adviser to either (i) 
have a continuing duty of care or loyalty to a retail customer after 
providing him or her personalized investment advice about securities, 
\36\ or (ii) provide services to a retail customer beyond those agreed 
to between the retail customer and the broker-dealer or investment 
adviser. Assume that the question of whether a broker-dealer or 
investment adviser might have a continuing duty, as well as the nature 
and scope of such duty, would depend on the contractual or other 
arrangement or understanding between the retail customer and the 
broker-dealer or investment adviser, including the totality of the 
circumstances of the relationship and course of dealing between the 
customer and the firm, including but not limited to contractual 
provisions, disclosure and marketing documents, and reasonable customer 
expectations arising from the firm's course of conduct.\37\ Similarly, 
the uniform fiduciary standard of conduct would apply within the 
context of the scope of services agreed to between the customer and the 
broker-dealer or investment adviser, and would not generally require 
the broker-dealer or investment adviser to provide services beyond 
those agreed to through a contractual or other arrangement or 
understanding with the retail customer.
---------------------------------------------------------------------------

    \36\ See 15 U.S.C. 78o(k)(1) (``Nothing in this section 
[authorizing a uniform standard of conduct for the provision of 
personalized investment advice] shall require a broker or dealer or 
registered representative to have a continuing duty of care or 
loyalty to the customer after providing personalized investment 
advice about securities.'').
    \37\ We understand that market participants generally have taken 
the view that the extent to which a continuing duty of loyalty or 
care exists under the Advisers Act depends on the scope of the 
relationship with the customer. They believe, for example, that 
investment advisers who act as financial planners generally would 
not have a continuing duty to a customer after providing the 
financial plan.
---------------------------------------------------------------------------

    6. As discussed below, assume that the offering or recommending of 
only proprietary or a limited range of products would not, in and of 
itself, be considered a violation of the uniform fiduciary standard of 
conduct.\38\
---------------------------------------------------------------------------

    \38\ See 15 U.S.C. 78o(k)(2) (``The sale of only proprietary or 
other limited range of products by a broker or dealer shall not, in 
and of itself, be considered a violation of the [uniform standard of 
conduct for the provision of personalized investment advice.]'').
---------------------------------------------------------------------------

    7. Assume that Section 206(3) and Section 206(4) of the Advisers 
Act and the rules thereunder would continue to apply to investment 
advisers, and would not apply to broker-dealers.\39\ Assume that to 
satisfy its obligations under the uniform fiduciary standard of 
conduct, however, a broker-dealer would need to disclose any material 
conflicts of interest associated with its principal trading practices.
---------------------------------------------------------------------------

    \39\ Section 206(4) of the Advisers Act makes it unlawful for an 
investment adviser to ``engage in any act, practice, or course of 
business which is fraudulent, deceptive, or manipulative'' and 
authorizes the Commission ``by rules and regulations [to] define, 
and prescribe means reasonably designed to prevent, such acts, 
practices, and courses of business as are fraudulent, deceptive, or 
manipulative.'' See also infra the discussion of principal trading 
and the inapplicability of Section 206(3) of the Advisers Act in 
Part III.B.1.
    We have authority to adopt rules for broker-dealers that are 
substantially similar to those adopted under Sections 206(3) and 
206(4) of the Advisers Act. For purposes of our request for 
information and data about a uniform fiduciary standard of conduct, 
we request that commenters assume that such rules will not be 
incorporated into such a standard of conduct. However, commenters 
may wish to express their views on whether the Commission should 
engage in rulemaking to impose such rules on broker-dealers as part 
of harmonization of the regulatory obligations of broker-dealers and 
investment advisers. See discussion infra Part IV.
---------------------------------------------------------------------------

    8. Assume that existing applicable law and guidance governing 
broker-dealers, including SRO rules and guidance, would continue to 
apply to broker-dealers.

B. Discussion of a Possible Uniform Fiduciary Standard

    Pursuant to Section 913 of the Dodd-Frank Act, ``[t]he Commission 
may promulgate rules to provide that the standard of conduct for all 
brokers, dealers, and investment advisers, when providing personalized 
investment advice about securities to retail customers * * * shall be 
to act in the best interest of the customer without regard to the 
financial or other interest of the broker, dealer, or investment 
adviser providing the advice.'' \40\ We have not yet determined whether 
to exercise this authority. Section 913 also provides that any standard 
of conduct we adopt shall be no less stringent than the standard 
applicable to investment advisers under Sections 206(1) and 206(2) of 
the Advisers Act.\41\ The Supreme Court has construed Advisers Act 
Sections 206(1) and 206(2) as requiring an investment adviser to fully 
disclose to its clients all material information that is intended ``to 
eliminate, or at least expose, all conflicts of interest which might 
incline an investment adviser--consciously or unconsciously--to render 
advice which was not disinterested.'' \42\
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    \40\ 15 U.S.C. 80b-11(g)(1); 15 U.S.C. 78o(k)(1).
    \41\ Id.
    \42\ SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 
194 (1963).
---------------------------------------------------------------------------

    The Study recommended that we should engage in rulemaking to 
implement the uniform fiduciary standard described in Section 913 of 
the Dodd-Frank Act. The staff recommended that, in implementing the 
uniform fiduciary standard, we should address both components of the 
uniform fiduciary standard: a duty of loyalty and a duty of care. The 
staff also supported extending the existing guidance and precedent 
under the Advisers Act regarding fiduciary duty, which has developed 
primarily through Commission and staff interpretive pronouncements 
under the antifraud provisions of the Advisers Act, as well as through 
case law and numerous enforcement actions, to broker-dealers, where 
similar facts and circumstances would make the guidance and precedent 
relevant and justify a similar outcome.\43\
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    \43\ As discussed in more detail below, the Commission 
acknowledges that existing guidance and precedent under the Advisers 
Act regarding fiduciary duty turn on the specific facts and 
circumstances, including the types of services provided and 
disclosures made. Accordingly, the existing guidance and precedent 
may not directly apply to broker-dealers depending on the facts and 
circumstances.

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[[Page 14856]]

    We request data and other information on the benefits and costs of 
implementing the uniform fiduciary standard (as described below), 
entailing two key elements: a duty of loyalty and a duty of care. Our 
description below of a potential uniform fiduciary standard is only one 
example of how we could implement a uniform fiduciary standard designed 
to require broker-dealers and investment advisers to provide advice 
that is in the best interest of the customer. The discussion of the 
uniform fiduciary standard described below and the potential 
alternative approaches does not suggest our policy view or the ultimate 
direction of any proposed action by us. To obtain the most comparable 
and useful data and other information on a uniform fiduciary standard, 
however, we ask commenters to consider the uniform fiduciary standard 
as described below. We also discuss certain potential alternative 
approaches in the discussion below and request comment on those 
alternatives.
    We recognize, among other things, that the list of potential 
options discussed below--including the uniform fiduciary standard of 
conduct, potential alternative approaches to the uniform fiduciary 
standard of conduct, and taking no action at this time--is not 
exhaustive, and that commenters may formulate additional alternative 
approaches. To the extent commenters are of the view that we should 
consider additional alternative approaches, we request they explain 
those approaches, address their reasons for recommending such 
approaches, and compare such approaches to the ones specified in detail 
below.
1. Uniform Fiduciary Standard of Conduct--the Duty of Loyalty
    The duty of loyalty is a critical component of a fiduciary duty. As 
noted above, Dodd-Frank Section 913(g) addresses the duty of loyalty by 
providing: ``[i]n accordance with such rules [that the Commission may 
promulgate with respect to the uniform fiduciary standard] * * * any 
material conflicts of interest shall be disclosed and may be consented 
to by the customer.'' \44\ The uniform fiduciary standard would be 
designed to promote advice that is in the best interest of a retail 
customer by, at a minimum, requiring an investment adviser or a broker-
dealer providing personalized investment advice to the customer to 
fulfill its duty of loyalty. This would be accomplished by eliminating 
its material conflicts of interest, or providing full and fair 
disclosure to retail customers about those conflict of interest.\45\ 
Commenters should assume that we would provide specific detail or 
guidance, summarized below, about complying with the duty of loyalty 
component of the uniform fiduciary duty. As described above in the 
introduction to this Part III, the identification of particular 
assumptions does not suggest our policy view or the ultimate direction 
of any proposed action by us. We invite comment on other assumptions 
and comparisons between analyses made under such other assumptions and 
analyses made under the assumptions set forth below.
---------------------------------------------------------------------------

    \44\ 15 U.S.C. 80b-11(g)(1); 15 U.S.C. 78o(k)(1).
    \45\ The staff made a number of recommendations in the Study for 
the Commission to consider in implementing a duty of loyalty. First, 
the Study recommended that we should facilitate the provision of 
uniform, simple and clear disclosures to retail customers about the 
terms of their relationships with broker-dealers and investment 
advisers, including any material conflicts of interests. The Study 
identified a number of potential disclosures that the Commission 
should consider (e.g., a general relationship guide akin to the new 
Part 2A of Form ADV, the form investment advisers use to register 
with the Commission and states, which is provided to advisory 
clients). See Study at 114-117. Second, the Study recommended that 
we should consider whether rulemaking would be appropriate to 
prohibit certain conflicts, to require firms to mitigate conflicts 
through specific action, or to impose specific disclosure and 
consent requirements. Id. Third, the Study recommended that we 
should address through guidance and/or rulemaking how broker-dealers 
should fulfill the uniform fiduciary standard when engaging in 
principal trading. Id. at 118-120.
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    1. Assume that any rule under consideration would expressly impose 
certain disclosure requirements. Assume that each broker-dealer and 
investment adviser that provides personalized investment advice about 
securities to a retail customer would be required to provide the 
following to that retail customer:
    a. Disclosure of all material conflicts of interest the broker-
dealer or investment adviser has with that retail customer. This 
requirement would reflect an overarching, general obligation to 
disclose all such conflicts of interest. Depending on the nature of the 
conflict and unless otherwise provided, this disclosure largely could 
be made through the general relationship guide described below.
    b. Disclosure in the form of a general relationship guide similar 
to Form ADV Part 2A, to be delivered at the time of entry into a retail 
customer relationship.\46\ The relationship guide would contain a 
description of, among other things, the firm's services, fees, and the 
scope of its services with the retail customer, including: (i) Whether 
advice and related duties are limited in time or are ongoing, or are 
otherwise limited in scope (e.g., limited to certain accounts or 
transactions); (ii) whether the broker-dealer or investment adviser 
only offers or recommends proprietary or other limited ranges of 
products; (iii) whether, and if so the circumstances in which, the 
broker-dealer or investment adviser will seek to engage in principal 
trades with a retail customer. It also could include disclosure of 
other material conflicts of interest, such as conflicts of interest 
presented by compensation structures.\47\
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    \46\ We note that FINRA has requested comment on a concept 
proposal to require the provision of a disclosure statement for 
retail customers at or before commencing a business relationship 
that would include many items of information analogous to what is 
required in Form ADV Part 2. FINRA Regulatory Notice 10-54, 
``Disclosure of Services, Conflicts and Duties'' (Oct. 2010). 
Nothing in this request for information and data suggests that FINRA 
or any other regulatory body could or could not, or should or should 
not adopt rules or requirements that it determines are appropriate 
and that meet applicable legal standards.
    \47\ A general relationship guide could also include other 
disclosures, such as a firm's disciplinary history.
---------------------------------------------------------------------------

    c. Oral or written disclosure at the time personalized investment 
advice is provided of any new material conflicts of interest or any 
material change of an existing conflict.
    2. Assume that any rule under consideration would treat conflicts 
of interest arising from principal trades the same as other conflicts 
of interest. Assume that such a rule would make clear that it would not 
incorporate the transaction-by-transaction disclosure and consent 
requirements of Section 206(3) of the Advisers Act for principal 
trading.\48\ At a minimum, as with other conflicts of interest, the 
broker-dealer would be required to disclose material conflicts of 
interest arising from principal trades with retail customers.\49\
---------------------------------------------------------------------------

    \48\ Assume that the rule would not relieve an investment 
adviser from its obligations under Advisers Act Section 206(3). We 
note that we have the authority to apply similar requirements to 
broker-dealers. Also assume that the rule would not relieve an 
investment adviser who is also registered as a broker-dealer from 
its obligations to comply with Advisers Act Section 206(3) or the 
rules thereunder. See 17 CFR 275.206(3)-3T.
    As stated above, we request that, for purposes of our request 
for information and data about a uniform fiduciary standard of 
conduct, commenters assume that we will not incorporate these 
obligations into the uniform fiduciary standard of conduct. However, 
commenters may wish to express their views, on whether the 
Commission should engage in rulemaking to impose such rules on 
broker-dealers as part of harmonization of the regulatory 
obligations of broker-dealers and investment advisers. See 
discussion infra Part IV.
    \49\ SRO rules currently impose requirements on broker-dealers 
when broker-dealers engage in principal trading. See, e.g., NASD 
Rule 2440 (Fair Prices and Commissions); IM-2440-1 (Mark-Up Policy); 
IM-2440-2 (Mark-Up Policy for Debt Securities); NASD Rule 2310 
(Suitability) (effective until July 9, 2012, when replaced by FINRA 
Rule 2111); NASD Rule 3010 (Supervision); NASD Rule 3012 
(Supervisory Control System). As noted above, these requirements 
would continue to apply to a broker-dealer under a uniform fiduciary 
standard of conduct.

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[[Page 14857]]

    3. Assume that the rule would prohibit certain sales contests. The 
rule would prohibit the receipt or payment of non-cash compensation 
(e.g., trips and prizes) in connection with the provision of 
personalized investment advice about the purchase of securities.
2. Uniform Fiduciary Standard of Conduct--the Duty of Care
    The duty of care is another critical component of the uniform 
fiduciary standard. We would specify, through the duty of care, certain 
minimum professional obligations of broker-dealers and investment 
advisers,\50\ which would be designed to promote advice that is in the 
best interests of the retail customer. Commenters should assume, for 
purposes of this request for data and other information, that we would 
implement the duty of care by imposing on a broker-dealer or investment 
adviser, when providing personalized advice to a retail customer about 
securities, the uniform obligations described below. As described above 
in the introduction to this Part III, the identification of particular 
assumptions does not suggest our policy view or the ultimate direction 
of any proposed action by us. We invite comment based on other 
assumptions chosen by commenters, and we invite comparisons between 
analyses made under assumptions chosen by commenters and analyses made 
under the assumptions we have set forth below.
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    \50\ The staff stated in the Study that the Commission could 
articulate and harmonize such professional standards by referring 
to, and expanding upon, as appropriate, the explicit minimum 
standards of conduct relating to the duty of care currently 
applicable to broker-dealers (e.g., suitability (including product-
specific suitability), best execution, and fair pricing and 
compensation requirements) under applicable rules. See Study at 50-
53.
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    1. Suitability obligations: A duty to have a reasonable basis to 
believe that its securities and investment strategy recommendations are 
suitable for at least some customer(s) as well as for the specific 
retail customer to whom it makes the recommendation in light of the 
retail customer's financial needs, objectives and circumstances; \51\
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    \51\ See Study at 27-28 and 61-64 (discussing investment adviser 
and broker-dealer suitability obligations, respectively).
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    2. Product-specific requirements: Specific disclosure, due 
diligence, or suitability requirements for certain securities products 
recommended (such as penny stocks, options, debt securities and bond 
funds, municipal securities, mutual fund share classes, interests in 
hedge funds and structured products);\52\
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    \52\ See id. at 65-66 (discussing relevant rules imposing 
specific disclosure, diligence and suitability requirements for 
certain securities products).
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    3. Duty of best execution: A duty on a broker-dealer and an 
investment adviser (where the investment adviser has the responsibility 
to select broker-dealers to execute client trades) to seek to execute 
customer trades on the most favorable terms reasonably available under 
the circumstances; \53\ and
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    \53\ See id. at 28-29 and 69-70 (describing investment adviser 
and broker-dealer duties of best execution).
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    4. Fair and reasonable compensation: A requirement that broker-
dealers and investment advisers receive compensation for services that 
is fair and reasonable, taking into consideration all relevant 
circumstances.\54\
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    \54\ See id. at 66-69 (describing broker-dealer obligations to 
charge fair prices, commissions, and other charges and fees).
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3. Uniform Fiduciary Standard of Conduct--Application of Prior Guidance 
and Precedent Regarding Investment Adviser Fiduciary Duty
    In the interests of increasing investor protection and reducing 
investor confusion, the staff recommended in the Study that the uniform 
fiduciary standard be no less stringent than the existing fiduciary 
standard for investment advisers under Advisers Act Sections 206(1) and 
206(2).\55\ Accordingly, the staff recommended that existing guidance 
and precedent under the Advisers Act regarding fiduciary duty should 
continue to apply to investment advisers and be extended to broker-
dealers, as applicable, under a uniform fiduciary standard of conduct.
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    \55\ As explained above, guidance and precedent under Sections 
206(3) and 206(4) of the Advisers Act, and the rules adopted under 
those sections, would not be part of the uniform fiduciary standard 
of conduct.
---------------------------------------------------------------------------

    Application of this guidance and precedent turns on the specific 
facts and circumstances, including the types of services provided and 
disclosures made. We understand, accordingly, that existing guidance 
and precedent may not directly apply to broker-dealers depending on the 
facts and circumstances. Therefore, to aid commenters, we have 
identified below certain fiduciary principles that commenters should 
assume would continue to apply to investment advisers and be extended 
to broker-dealers. We also request commenters to identify specific 
citations to any case law and enforcement actions and other guidance 
under the Advisers Act regarding the fiduciary duty that they believe 
should or should not apply to broker-dealers when providing 
personalized investment advice about securities to retail customers.
    For purposes of this request for data and other information, 
commenters should make the assumptions below regarding the application 
of prior guidance and precedent under a uniform fiduciary standard of 
conduct. As described above in the introduction to this Part III, the 
identification of particular assumptions does not suggest our policy 
view or the ultimate direction of any proposed action by us. We invite 
comment based on other assumptions chosen by commenters, and we invite 
comparisons between analyses made under assumptions chosen by 
commenters and analyses made under the assumptions we have set forth 
below.
    1. Allocation of investment opportunities: A fiduciary's duty of 
loyalty generally would require a firm to disclose to a retail customer 
how it would allocate investment opportunities among its customers,\56\ 
and between customers and the firm's own account; \57\ for example, 
this disclosure could include, among other things, the firm's method of 
allocating shares of initial public offerings, as well as its method 
(e.g., pro rata, ``first in, first out'') of allocating out of its 
principal account to its customers when agency orders are placed on a 
riskless principal basis.
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    \56\ The Commission has brought numerous enforcement actions 
alleging that investment advisers unfairly allocated client trades 
to preferred clients without making adequate disclosure. See, e.g., 
Alpine Woods Capital Investors, LLC and Samuel A. Lieber, Admin. 
Proc. File No. 3-14233 (Feb. 7, 2011) (finding the investment 
adviser violated Advisers Act Section 206(2) when it 
disproportionately allocated shares from an initial public offering 
to the advantage of the firm's two smallest mutual funds); Nevis 
Capital Mgmt., LLC, Investment Advisers Act Release No. 2214 (Feb. 
9, 2004) (settled order); The Dreyfus Corp., et al., Investment 
Advisers Act Release No. 1870 (May 10, 2000) (settled order); 
Account Mgmt. Corp., Investment Advisers Act Release No. 1529 (Sept. 
29, 1995) (settled order).
    \57\ The Commission has brought numerous enforcement actions 
alleging that investment advisers unfairly allocated trades to their 
own accounts and allocated less favorable or unprofitable trades to 
their clients' accounts. See, e.g., Nicholas-Applegate Capital 
Mgmt., Investment Advisers Act Release No. 1741 (Aug. 12, 1998) 
(settled order); Timothy J. Lyons, Investment Advisers Act Release 
No. 1882 (June 20, 2000) (settled order); SEC v. Lyons, 57 SE.C. 99 
(2003); SEC v. Alan Brian Bond, et al., Litigation Release No. 18923 
(Civil Action No. 99-12092 (S.D.N.Y.) (Oct. 7, 2004).
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    2. Aggregation of orders: A firm may aggregate or ``bunch'' orders 
on behalf of two or more of its retail customers, so long as the firm 
does not favor one

[[Page 14858]]

customer over another.\58\ A firm would need to disclose whether and 
under what conditions it aggregates orders; \59\ if the firm does not 
aggregate orders when it has the opportunity to do so, the firm would 
need to explain its practice and describe the costs to customers of not 
aggregating.\60\
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    \58\ The staff takes the position that an investment adviser, 
when directing orders for the purchase or sale of securities, may 
aggregate or ``bunch'' those orders on behalf of two or more of its 
accounts, so long as the bunching is done for the purpose of 
achieving best execution, and no customer is disadvantaged or 
advantaged by the bundling. See SMC Capital, Inc., SEC No-Action 
Letter (Sept. 5, 1995).
    \59\ The staff understands that, consistent with applicable law, 
broker-dealers currently only aggregate orders in limited 
circumstances, such as when orders are received outside of normal 
trading hours and aggregated in anticipation of execution when the 
market re-opens, or when the broker-dealer has discretion over the 
trade. Similarly, the staff recognizes that aggregation of orders 
may not occur frequently with regard to non-discretionary advisory 
accounts.
    \60\ See Item 12 of Form ADV Part 2A.
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C. Alternative Approaches to the Uniform Fiduciary Standard of Conduct

    We identify below alternative approaches to the uniform fiduciary 
standard discussed above. In considering the alternatives, it would be 
helpful to obtain information about whether and, if so, how each 
alternative meets the goals of enhancing retail customer protections 
and decreasing retail customers' confusion about the standard of 
conduct owed to them when their financial professional provides them 
personalized investment advice. It would also be helpful to obtain 
information about the relative costs and benefits of these 
alternatives, including the extent to which one alternative may provide 
(1) greater benefits for the same or lower cost than other alternatives 
or (2) lower benefits for the same or higher cost than other 
alternatives. The identification of particular alternatives does not 
suggest our policy view or the ultimate direction of any proposed 
action by us.
    Keeping in mind these goals, we request comment on the following 
alternative approaches, including the costs and benefits of each 
approach, as well as other approaches. We could:
    1. Apply a uniform requirement for broker-dealers and investment 
advisers to provide disclosure about (a) key facets of the services 
they offer and the types of products or services they offer or have 
available to recommend; and (b) material conflicts they may have with 
retail customers, without imposing a uniform fiduciary standard of 
conduct.
    2. Apply the uniform fiduciary standard of conduct discussed above 
on broker-dealers and investment advisers, but without extending to 
broker-dealers the existing guidance and precedent under the Advisers 
Act regarding fiduciary duty.\61\ The existing guidance and precedent 
under the Advisers Act regarding fiduciary duty would continue to apply 
to investment advisers.
---------------------------------------------------------------------------

    \61\ The Securities Industry and Financial Markets Association 
suggested this approach. See SIFMA Letter, supra note 17.
---------------------------------------------------------------------------

    3. Without modifying the regulation of investment advisers, apply 
the uniform fiduciary standard discussed above, or parts thereof, to 
broker-dealers. This ``broker-dealer-only'' standard could involve 
establishing a ``best interest'' standard of conduct for broker-
dealers, which would be no less stringent than that currently applied 
to investment advisers under Advisers Act Sections 206(1) and 206(2), 
when they provide personalized investment advice about securities to 
retail customers.
    4. Without modifying the regulation of broker-dealers, specify 
certain minimum professional obligations under an investment adviser's 
duty of care (which are currently not specified by rule). As discussed 
above, any rules or guidance would take into account Advisers Act 
fiduciary principles, such as the duty to provide suitable investment 
advice (e.g., with respect to specific recommendations and the client's 
portfolio as a whole) and to seek best execution where the adviser has 
the responsibility to select broker-dealers to execute client trades. 
These requirements could be similar to those rules currently applicable 
to broker-dealers, as described further in the Study.\62\
---------------------------------------------------------------------------

    \62\ For a more detailed description of such requirements, see 
the Study at 61-70.
---------------------------------------------------------------------------

    5. Consider following models set by regulators in other countries. 
For instance, the United Kingdom's Financial Services Authority (FSA) 
requires persons providing personalized investment advice to a retail 
client to act in the client's best interests, and has set limits on how 
investment advisers charge for their services, including prohibiting 
(a) the receipt of ongoing charges unless there are ongoing services, 
and (b) the receipt of commissions from those providing the investment 
advice.\63\ Similarly, the Treasury of Australia imposed a best 
interest obligation on persons providing personal advice that would (a) 
require the provider of the advice to place a retail client's interests 
before its own,\64\ and (b) prohibit the receipt of ``conflicted'' 
remuneration, such as commission payments relating to the provision of 
advice.\65\ Further, the European Securities and Markets Authority 
(ESMA) published guidelines to clarify the application of certain 
aspects of its current Markets in Financial Instruments Directive 
(MiFID) suitability requirements (arising from both MiFID and the MiFID 
Implementing Directive).\66\
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    \63\ See Financial Services Authority Handbook, Conduct of 
Business Sourcebook (``COBS''), 2.1.1, available at http://fsahandbook.info/FSA/html/handbook/COBS/2/1 (FSA's ``client best 
interest rule''). See also COBS, 9.2.1(1), (2); COBS, 9.2.2 
(requiring that a firm's recommendations be suitable and reasonable 
based on the client's risk profile). Effective in 2012, the FSA will 
require firms to disclose to retail clients the type (either 
``independent'' or ``restricted'') and breadth of advice being 
offered (e.g., limited to certain products or a comprehensive, fair 
and unbiased analysis of the relevant market). See COBS, 6.2A.5R, 
6.2A.6R, available at http://fsahandbook.info/FSA/html/handbook/COBS. The Adviser Charging rules, also going into effect in 2012, 
will prohibit receipt of any remuneration for advice that is not 
disclosed and agreed upon in advance of the recommendation. See 
COBS, 6.1A.
    \64\ See The Corporations Amendment (Further Future of Financial 
Advice Measures) Act 2012, (``Financial Advice Measures''), 
available at http://parlinfo.aph.gov.au/parlInfo/download/legislation/bills/r4739_aspassed/toc_pdf/11270b01.pdf;fileType=application%2Fpdf. See also Australian 
Securities & Investments Commission, Regulatory Guide 175: 
Licensing: Financial Product Advisers--Conduct and Disclosure 15 
(2011), available at http://www.asic.gov.au/asic/pdflib.nsf/
LookupByFileName/rg175-010411.pdf/$file/rg175-010411.pdf (discussing 
the implied warranty, under the Australian Securities and 
Investments Commission Act 2001, to render advice through ``due care 
and skill'').
    \65\ See Financial Advice Measures.
    \66\ See Guidelines on certain aspects of the MiFID suitability 
requirements, ESMA, 2012, 387 (July 6, 2012), available at http://www.esma.europa.eu/system/files/2012-387.pdf.
---------------------------------------------------------------------------

    As described above in Part III.B, we invite comment on other 
potential alternative approaches not specified in this request for data 
and other information and comparisons between those alternative 
approaches and the potential uniform fiduciary standard of conduct and 
alternatives we describe above.

D. Preserving Current Standard of Conduct Obligations

    Consistent with our discretionary authority under Section 913, we 
could also determine to take no further action at this time with 
respect to the standards of conduct applicable to broker-dealers and 
investment advisers; existing regulatory requirements would continue to 
apply. We request data and other information relating to the current 
market for personalized investment advice in Part II above. It 
generally would be helpful to obtain information about how taking no 
action would compare to a uniform fiduciary standard

[[Page 14859]]

of conduct and the alternative approaches described above. In 
particular, it would be helpful to obtain information about the costs 
and benefits of the current regulatory regime as compared to the 
uniform fiduciary standard of conduct and the alternative approaches 
described above. Such comparisons would be particularly helpful as 
commenters consider providing data and other information in connection 
with the requests specified in Part III.E below.

E. Request for Data and Other Information Relating to Changes in the 
Marketplace for Personalized Investment Advice Resulting from the 
Uniform Fiduciary Standard of Conduct and Alternative Approaches

    The Commission requests the following data and other information 
relating to changes in the marketplace for personalized investment 
advice for retail customers that might occur as a result of 
implementing the uniform fiduciary standard of conduct and the 
alternative approaches described above. As noted above, in providing 
this data and other information, the Commission believes it would be 
useful to also obtain information about the benefits and costs of 
continuing the current regulatory regime, as requested in Part II 
above, as a baseline for comparing the uniform fiduciary standard of 
conduct and the alternative approaches. Accordingly, to the extent 
applicable, the Commission requests commenters to provide such 
comparisons. As in Part II, many of the requests ask commenters to 
provide data and other information describing retail customer 
demographics and accounts; broker-dealer or investment adviser services 
offered; financial securities; and the claims of retail customers in 
dispute resolution. We request commenters to refer to the Appendix for 
the specific characteristics of each of these topics that are important 
to include when submitting data and other information. We also request 
commenters refer to other guidelines in the Appendix, particularly the 
request to provide background information and documentation to support 
any economic analysis.
    1. Commenters have highlighted several activities of broker-dealers 
and investment advisers that are most likely to be impacted by a 
uniform fiduciary standard for the provision of personalized investment 
advice about securities to retail customers: \67\
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    \67\ The inclusion of activities in this list does not 
necessarily reflect the Commission's belief that these activities 
will be impacted by a uniform fiduciary standard, see the discussion 
of clarifications and assumptions in the introductions to Part III 
and Part III.A.
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     Recommending proprietary products and products of 
affiliates;
     Engaging in principal trades with respect to a recommended 
security (e.g., fixed income products);
     Recommending a limited range of products and/or services;
     Recommending a security underwritten by the firm or a 
broker-dealer affiliate, including initial public offerings;
     Allocating investment opportunities among retail customers 
(e.g., IPO allocation);
     Advising on a trading strategy involving concentrated 
positions;
     Receiving third-party compensation in connection with 
securities transactions or distributions (e.g., sales loads, ongoing 
asset-based fees, or revenue sharing); and
     Providing ongoing, episodic or one-time advice.
    a. Provide comment on this list of activities. Does this list 
capture the activities of broker-dealers and investment advisers that 
would be most impacted by a uniform fiduciary standard of conduct when 
providing personalized investment advice about securities to retail 
customers?
    b. Provide data and other information describing the likely 
benefits and costs for firms and retail customers from firms engaging 
in these activities under the uniform fiduciary standard of conduct and 
each of the alternative approaches discussed above. In particular, 
describe the cost to broker-dealers and investment advisers in terms of 
dollars and time spent from providing these activities to retail 
customers under the uniform fiduciary standard and each of the 
alternative approaches. Also provide data and other information 
describing the benefits and costs to firms and retail customers likely 
to result from voluntary actions firms may take that are not 
necessarily mandated by the relevant standard. If possible, separate 
costs by service type, and differentiate by retail customer demographic 
and account information.
    c. Provide data and other information related to the nature and 
magnitude of conflicts of interest when firms engage in these 
activities under the uniform fiduciary standard and each of the 
alternative approaches discussed above. How would the uniform fiduciary 
standard or each of the alternative approaches increase or decrease 
broker-dealer or investment adviser conflicts of interest?
    2. Provide data and other information describing the types and 
availability of services (including advice) and securities that broker-
dealers or investment advisers would offer or recommend to retail 
customers under the uniform fiduciary standard and each of the 
alternative approaches discussed above. Would the application of a 
particular approach discussed above require a firm, or give a firm an 
incentive, to modify or eliminate current business practices? What 
would be the impact or potential impact of each approach discussed 
above on retail customer cost and access to personalized investment 
advice and to security offerings? How could such impact or costs be 
mitigated? Provide data and other information describing why the 
business practices would be so modified or eliminated, and whether 
retail customer access would change. Indicate whether business 
practices are transaction-specific, account-specific, customer-
specific, or firm-wide. If possible, separate costs by service type and 
differentiate by retail customer demographic and account information.
    3. Provide data and other information describing the security 
selections of retail customers under the uniform fiduciary standard and 
each of the alternative approaches discussed above. If possible, 
associate retail customer demographic and account information with 
security selections.
    4. Provide data and other information related to the ability of 
retail customers to bring claims against their financial professional 
under the uniform fiduciary standard and each of the alternative 
approaches discussed above, with a particular focus on alternative 
forums and dollar costs to both firms and retail customers and the 
results when claims are brought. Describe disposition of claims, costs 
related to claim forum, time to resolution, and awards if any. If 
possible, differentiate by retail customer demographic and account 
information.\68\
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    \68\ See supra Item 9(a)-(j) in Part II of this request for 
information and data.
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    5. Provide information, data and comment on the extent to which the 
uniform fiduciary standard and each of the alternative approaches 
discussed above affect investor protection and confusion investors have 
about the standard of conduct applicable to their financial 
professionals when providing personalized investment advice about 
securities.\69\
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    \69\ See supra note 2.
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    6. Provide information, data and comment on the costs and benefits 
to investment advisers and broker-dealers associated with implementing 
the uniform fiduciary standard and each of

[[Page 14860]]

the alternative approaches discussed above. Discuss any changes 
investment advisers and broker-dealers would need to make to, among 
others, their customer documentation, internal controls, and training 
programs, as well as other changes they would need to make, and why.
    7. Provide data and other information describing to what extent 
firms would rely on disclosure to comply with the uniform fiduciary 
standard and each of the alternative approaches detailed above. How 
would retail customers be expected to react to changes in practice and 
changes in disclosure? How do retail customers choose between a firm 
with disclosed conflicts and a firm whose business model does not 
involve the same conflict(s)?
    8. Provide data and other information on how other aspects of the 
market for personalized investment advice would change if we adopt any 
of the alternative approaches discussed above. In particular, provide 
data about how the alternatives described above would impact the costs 
to retail customers and any associated effect on access to products and 
services. As stated above, specific information about the potential 
economic impact of the staff's recommendations, including information 
about the potential impact on competition, capital formation and 
efficiency, may particularly help inform any action we may take in this 
area.
    9. Provide data and other information describing the benefits and 
costs related to alternative approaches to the standards of conduct 
other than those specified in this request for data and other 
information. Additional approaches and standards of conduct for persons 
providing personalized investment advice include but are not limited to 
those standards established under the laws of other countries.
    10. Provide explanations describing why responses to particular 
questions are not possible.

F. Request for Data and Other Information Relating to Account 
Conversions

    In 2007, as a result of the court decision in Financial Planning 
Association v. SEC \70\ (``FPA''), broker-dealers offering fee-based 
brokerage accounts (i.e., brokerage accounts in which the broker-dealer 
charged a single asset-based fee, instead of commissions, for its 
services) became subject to the Advisers Act with respect to those 
accounts; as such, those client relationships, which had previously 
been primarily subject to Exchange Act and SRO rules, became subject to 
the Advisers Act and the fiduciary duty thereunder. Business practices 
since FPA present an example from which to draw comparative costs and 
benefits differences between retail brokerage and advisory accounts, as 
well as the cost and benefit and potential consequences of imposing a 
fiduciary standard on broker-dealers. In 2007, our staff had estimated 
that there were over one million fee-based brokerage accounts, 
representing approximately $300 billion, many of which were converted 
to advisory accounts \71\ or otherwise were transitioned back to 
traditional commission-based brokerage accounts. Broker-dealers that 
converted fee-based brokerage accounts to advisory accounts (especially 
those that converted to non-discretionary advisory accounts) and retail 
customers whose accounts were converted as a result of FPA are in a 
position to provide comparative cost and benefit data for retail 
brokerage and advisory accounts (for the firm and/or the retail 
customer), and therefore to provide cost and benefit data on the 
imposition of a fiduciary standard generally.
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    \70\ Financial Planning Association v. SEC, 482 F.3d 481 (DC 
Cir. 2007). The court vacated Rule 202(a)(11)-1 under the Advisers 
Act which excepted broker-dealers from being classified as 
investment advisers based solely on their receipt of asset-based 
fees and in effect, exempted broker-dealers that offered these fee-
based accounts from regulation as investment advisers.
    \71\ Temporary Rule Regarding Principal Trades with Certain 
Advisory Clients, Investment Advisers Act Release No. 2653 at 4 
(Sept. 24, 2007).
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    In addition, we are aware that some firms have made the decision to 
convert their retail brokerage accounts to advisory accounts outside of 
the specific context of FPA. We understand such account conversions may 
have occurred for a variety of reasons, including a firm's decision to 
change its business model. We similarly believe that firms that have 
engaged in such account conversions and retail customers whose accounts 
were converted are in a position to provide comparative cost and 
benefit data for retail brokerage and advisory accounts (for the firm 
and/or the retail customer), and therefore to provide cost and benefit 
data on the imposition of a fiduciary standard generally.
    We recognize that any such data and other information relating to 
the conversion of brokerage accounts to advisory accounts, and the 
imposition of a fiduciary standard will only be an approximation of the 
costs and benefits of the uniform fiduciary standard described above. 
Specifically, the uniform fiduciary standard described above does not 
incorporate the entirety of the Advisers Act, whereas any brokerage 
accounts converted to advisory accounts would be subject to the 
Advisers Act as a whole. Accordingly, to the extent possible, we 
request that any such data and other information exclude costs and 
benefits associated with complying with aspects of the Advisers Act not 
included within the uniform fiduciary standard (such as sections 206(3) 
and 206(4) and the rules thereunder) or, if commenters are unable to 
exclude such costs, we request that they indicate that the data and 
other information include costs of complying with such sections and 
rules. Similarly, with respect to broker-dealers that converted fee-
based brokerage accounts to advisory accounts as a result of FPA, we 
request that the data provided exclude to the extent possible, or at a 
minimum identify that, such data include costs (e.g., legal and 
consulting fees, other costs) related to the uncertainty regarding the 
treatment of such accounts immediately following FPA.
    We generally request data and other information on costs and 
benefits from or relating to: (1) Broker-dealers that converted fee-
based brokerage accounts to advisory accounts as a result of FPA; (2) 
firms that independently determined to convert retail brokerage 
accounts to advisory accounts outside of the context of FPA; and (3) 
retail customers whose accounts were converted under either of these 
scenarios.\72\ We also request certain data and other information on 
costs and benefits from firms and retail customers who did not convert 
brokerage to advisory accounts as a result of the FPA decision. In 
addition to the specific requests below, when providing this data and 
other information, we request commenters' responses be made, where 
possible, in compliance with the guidelines set forth in the Appendix, 
and also request commenters provide background information and 
documentation to support any economic analysis. We request commenters 
separate, if possible, all data and other information (including 
associated retail customer demographic information on the accounts) 
based on whether the account conversions resulted from FPA or whether 
the account conversions were voluntary.
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    \72\ We reiterate that the uniform fiduciary standard of conduct 
would not prohibit the receipt of commissions, or require conversion 
of accounts from brokerage to advisory.
---------------------------------------------------------------------------

    1. Provide data and other information describing whether account 
conversions were in response to FPA, or to an independent determination 
by firms or

[[Page 14861]]

retail customers. If the latter, provide data and other information 
describing factors contributing to the conversion of brokerage accounts 
to advisory accounts. Also provide data and other information about 
administrative costs and customer notifications arising from the 
transition from brokerage accounts to advisory accounts.
    2. Provide data and other information describing retail customer 
accounts transitioning from brokerage accounts to advisory accounts 
including the amount of assets and securities held. Also, provide data 
and other information describing factors contributing to retail 
customers' decisions to convert to advisory accounts, including 
perceived costs and benefits of brokerage accounts and advisory 
accounts. If possible, associate retail customer demographic 
information with account descriptions.
    3. Provide data and other information describing the factors 
contributing to broker-dealers' decision not to offer fee-based 
accounts, which would be advisory accounts, in response to FPA. In 
addition, provide data and other information describing retail customer 
accounts that were not transitioned from a brokerage account to an 
advisory account in response to FPA when the firm provided the customer 
the opportunity to transition, including the amount of assets and 
securities held. Also, provide data and other information describing 
factors contributing to retail customers' decisions not to convert to 
advisory accounts, including perceived costs and benefits of brokerage 
accounts and advisory accounts. If possible, associate retail customer 
demographic information with account descriptions.
    4. Provide data and other information describing the impact of the 
account conversion on the types of services and securities dual 
registrants offer to retail customers transitioning from brokerage 
accounts to advisory accounts. Did the application of the Advisers Act 
require a firm, or give a firm an incentive, to modify or eliminate 
then-current business practices? Provide data and other information 
describing why the business practices were so modified or eliminated. 
Indicate whether business practices are transaction-specific, account-
specific, customer specific, or firm-wide, and differentiate by retail 
customer demographic and account information.
    5. Provide data and other information describing changes, if any, 
in the benefits and costs of providing services to retail customers 
transitioning from brokerage accounts to advisory accounts. Did retail 
customers transitioning accounts experience a change in costs? If 
possible, separate costs by service type, and differentiate by retail 
customer demographic and account information.
    6. Provide data and other information describing changes, if any, 
to the security selections of dual registrants and the types of 
securities held by retail customers transitioning from brokerage 
accounts to advisory accounts. Also provide quantitative data and other 
information describing changes, if any, to the security returns (net 
and gross of fees) of retail customers transitioning accounts. If 
security returns are not available, describe total account returns, 
including changes in account value and the amount of account inflows/
outflows. If possible, identify whether initial security ownership took 
place before the account transition and whether account selections were 
solicited or unsolicited, and differentiate by retail customer 
demographic and account information.
    7. Provide data and other information describing changes, if any, 
to the ability of retail customers that transitioned from brokerage to 
advisory accounts to bring claims against their financial professional 
with a particular focus on dollar costs to the retail customer and the 
results when claims are brought. We especially welcome the input of 
persons who have arbitrated, litigated, or mediated claims (as a retail 
customer, broker-dealer or investment adviser), their counsel, and any 
persons who presided over such actions. In particular, describe changes 
for claims brought against broker-dealers and investment advisers with 
respect to each of the following:
    a. the experience of retail customers, in general, between bringing 
a claim against a broker-dealer as compared to bringing a claim against 
an investment adviser;
    b. any legal or practical barriers to retail customers bringing 
claims against broker-dealers or investment advisers;
    c. the disposition of claims;
    d. the amount of awards;
    e. costs related to the claim forum, as it affects retail 
customers, firms, and associated persons of such firms;
    f. time to resolution of claims;
    g. the types of claims brought against broker-dealers (we welcome 
examples of mediation, arbitration and litigation claims);
    h. the types of claims brought against investment advisers (we 
welcome examples of mediation, arbitration and litigation claims);
    i. the nature of claims brought against broker-dealers as compared 
to the nature of claims brought against investment advisers (e.g., 
breach of fiduciary duty, suitability, breach of contract, tort); and
    j. the types of defenses raised by broker-dealers and investment 
advisers under each regime.
    If possible, differentiate by retail customer demographic and 
account information.
    8. Provide data and other information describing changes, if any, 
to the experiences of retail customers that were transitioned from 
brokerage to advisory accounts. Among other things, did retail customer 
satisfaction with their account change? If possible, control for retail 
customer demographic and account information.
    9. Provide other data and other information describing the benefits 
and costs, if any, of transitioning retail customer brokerage accounts 
to advisory accounts. If possible, differentiate by retail customer 
demographic and account information. Also, provide data and other 
information describing the benefits and costs to firms or retail 
customers from the regulations prior to account conversion. Lastly, 
provide explanations describing why responses to particular questions 
are not possible.

IV. Request for Data and Other Information Relating to Potential Areas 
for Further Regulatory Harmonization

    We seek data and other information on the nature and extent to 
which we should consider harmonizing the regulatory obligations of 
broker-dealers and investment advisers other than their standard of 
conduct. As stated above, in the Study the staff recommended that the 
Commission consider harmonizing certain regulatory requirements of 
broker-dealers and investment advisers where such harmonization appears 
likely to add meaningful investor protection, taking into account the 
best elements of each regime. We request that commenters, in 
particular, provide such data and other information regarding 
harmonizing some or all such obligations in situations where a broker-
dealer and an investment adviser perform the same or substantially 
similar function, such as the provision of personalized investment 
advice about securities to retail customers where harmonization is 
consistent with the mission of the Commission.\73\ We also are mindful 
that we should consider changes to the standard of conduct of broker-
dealers and investment advisers within the context of the overall set 
of regulatory obligations that apply to those firms and the potential 
costs and benefits that may be associated with such changes. The extent 
to which the

[[Page 14862]]

standard of conduct changes, for example, could result in certain other 
regulatory requirements no longer being workable in practice, or 
becoming unnecessarily duplicative of current requirements in whole or 
in part. Similarly, if we were to adopt a uniform fiduciary standard of 
conduct for broker-dealers and investment advisers, we should consider 
whether regulatory obligations that apply today to only one registrant 
class or the other would meaningfully enhance investor protections if 
applied uniformly to both.
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    \73\ See Study at 129-139.
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    In the Study, the areas the staff suggested the Commission consider 
for harmonization included advertising and other communications, 
supervision, licensing and registration of firms, licensing and 
continuing education requirements for persons associated with firms, 
books and records, and the use of finders and solicitors. The staff 
stated that this listing was not intended to be a comprehensive or 
exclusive listing of potential areas of harmonization.
    We seek data and other information on these areas of potential 
harmonization, including with respect to the advantages and 
disadvantages of engaging in such harmonization. As we explained in 
Part I.B above, many of the areas the staff identified for potential 
harmonization are more specific than a uniform fiduciary standard of 
conduct. Accordingly, we do not provide an extensive discussion of the 
various options available for considering regulatory harmonization, 
which could generally include:
     Applying certain broker-dealer obligations to investment 
advisers, or vice versa;
     Eliminating certain obligations that apply to broker-
dealers but not investment advisers, or vice versa;
     Creating new obligations that would apply to both broker-
dealers and investment advisers; or
     Taking no further action at this time with respect to 
regulatory harmonization.

As discussed above, we believe that a broad consideration of 
harmonization of regulatory obligations is important in helping us 
assess whether and to what extent we should consider making adjustments 
to the other regulatory obligations of broker-dealers and investment 
advisers. We invite commenters to provide us with their views on the 
benefits and costs for different approaches for potential 
harmonization. For example, we request comment on the extent to which 
regulatory harmonization might address customer confusion about the 
obligations owed to them by broker-dealers and not investment advisers 
(or by investment advisers and not broker-dealers) even if a uniform 
fiduciary standard of conduct is implemented. We also request comment 
on the extent to which regulatory harmonization might result in 
additional investor confusion or otherwise negatively impact investors.

A. Potential Areas for Harmonization

    In the Study, the staff recommended that the Commission consider 
whether to pursue various options for harmonizing investment adviser 
and broker-dealer regulation. As a preliminary matter, and in order to 
continue to evaluate the potential impact of harmonization, we are 
requesting data and other information on the potential harmonization of 
the non-exhaustive areas set forth below. These specific areas of 
potential harmonization largely reflect the areas of harmonization 
recommended by the staff in the Study. The staff's recommendations 
generally focused on adopting the existing elements of each regulatory 
regime that the staff believed are most effective in protecting retail 
customers, and the discussion below largely reflects these 
recommendations. We request comment on which of these areas, if any, 
the Commission should consider for harmonization, what harmonization in 
such areas should entail in practice, and the benefits and costs 
associated with such harmonization, including the extent to which such 
harmonization would increase or reduce retail customer confusion about 
the regulatory obligations of broker-dealer and investment advisers. We 
may consider harmonization of other areas not addressed below. 
Accordingly, we request comment on which areas, if any, the Commission 
should consider for harmonization, and what such harmonization should 
entail.
    The identification of these areas below and the description of how 
harmonization may be accomplished are not intended to suggest a policy 
view of the Commission or the ultimate direction of any proposed action 
by the Commission. Indeed, the description of each area of potential 
harmonization below is but one example of many ways in which the 
Commission may harmonize regulation, should the Commission determine 
such harmonization is appropriate. We are cognizant that the Commission 
may decide not to pursue harmonization, may pursue harmonization in 
different areas, or pursue a different approach to harmonization in the 
areas identified by the Study, and we seek comment on such areas and 
approaches, including the associated benefits and costs.
    We also seek comment as to whether harmonization in each area 
identified below or by a commenter as appropriate for such action 
should involve changing the existing standards of one regime to 
accomplish harmonization, or whether an entirely different requirement 
should be adopted for both investment advisers and broker-dealers.
    We request data and other information, including whether meaningful 
investor protection would be enhanced, on the following potential areas 
of harmonization where existing investment adviser and broker-dealer 
obligations differ: \74\
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    \74\ For more information about the potential harmonization 
areas, see Study at 129-139.
---------------------------------------------------------------------------

    1. Advertising and Other Communications: Advertising and other firm 
communications can have a significant impact on retail customers, as 
they can persuade customers to enter into relationships or engage in 
transactions. As noted in the Study, both investment advisers and 
broker-dealers are subject to general prohibitions on misleading 
communications, but specific content restrictions differ. The Study 
concludes that a significant difference between investment adviser and 
broker-dealer regulation regarding advertisements and other 
communications is that, under certain circumstances, a registered 
principal of the broker-dealer must approve a communication before 
distributing it to the public, and certain communications must be filed 
for review with the applicable regulatory body.\75\
---------------------------------------------------------------------------

    \75\ For the staff's discussion regarding potential 
harmonization of requirements related to advertising and other 
communications, see Study at 130-132.
---------------------------------------------------------------------------

    While the Advisers Act does not specifically prescribe that a 
communication must be approved before distribution to the public, the 
Commission has stated that an adviser's compliance policies and 
procedures, at a minimum, should address, among others, the accuracy of 
disclosures made to investors, clients, and regulators, including 
account statements and advertisements.\76\ We request data and

[[Page 14863]]

other information on the enhancement to meaningful investor protection 
as well as the benefits and costs of harmonizing requirements relating 
to:
---------------------------------------------------------------------------

    \76\ See Compliance Programs of Investment Advisers and 
Investment Companies, Investment Advisers Act Release No. 2204 (Dec. 
17, 2003) (adopting Advisers Act Rule 206(4)-7) (``Compliance 
Rule'') (stating that ``[w]e expect that an adviser's policies and 
procedures, at a minimum, should address the following issues to the 
extent that they are relevant to that adviser: [* * *] [t]he 
accuracy of disclosures made to investors, clients, and regulators, 
including account statements and advertisements; [* * * and] 
[m]arketing advisory services, including the use of solicitors * * 
*''). For this purpose, the Advisers Act requires an adviser to 
designate a chief compliance officer (``CCO''). The Commission has 
stated in the Compliance Rule that the CCO should be knowledgeable 
about the Advisers Act and have the authority to develop and enforce 
appropriate compliance policies and procedures for the adviser.
---------------------------------------------------------------------------

    a. Advertisements and other customer communications, generally.
    b. Developing similar substantive advertising and customer 
communications rules and/or guidance for broker-dealers and investment 
advisers regarding the content of advertisements and other customer 
communications for similar services? Please identify any particular 
rules that could be applied to both broker-dealers and investment 
advisers, and any rules that would not be appropriate to apply to both. 
If a particular rule would not be appropriate for both, why not?
    c. Establishing consistent internal pre-use review requirements for 
investment adviser and broker-dealer advertisements, such as by 
requiring investment advisers to designate employees to review and 
approve communications and advertisements?
    d. Imposing consistent pre- and post-use filing requirements for 
similar investment adviser and broker-dealer advertisements?
    2. Use of Finders and Solicitors: The term ``finder'' is generally 
understood (for purposes of broker-dealer regulation) to mean an 
intermediary who receives a fee for ``finding'' potential investors for 
issuers seeking to sell securities. Similarly, a ``solicitor' is an 
intermediary used by advisers to ``solicit'' clients and prospective 
clients for advisory services. Intermediaries who ``find'' investors 
can have a significant impact on retail customers, as they can persuade 
investors to enter into relationships or engage in transactions. The 
regulation of these intermediaries differs. One who receives 
transaction-based compensation in connection with the sale of 
securities, including a finder, must register as a broker-dealer unless 
an exemption from registration is available. By contrast, while 
solicitors may fall within the definition of ``investment adviser'' 
under the Advisers Act, the Commission has taken the position that a 
solicitor who engages in solicitation activities in accordance with 
Rule 206(4)-3(a)(2)(iii) is an associated person of an investment 
adviser and is not required to register with the Commission as an 
investment adviser solely as a result of those activities.\77\ An 
investment adviser that uses a solicitor's services must treat the 
solicitor as an associated person to the extent the solicitor acts as 
such for the adviser, and the adviser has a responsibility to supervise 
the solicitation activities.\78\ In addition, the Advisers Act 
regulation focuses on disclosure to clients of the solicitor's material 
conflicts of interest.\79\ We request data and other information on the 
enhancement to meaningful investor protection as well as the benefits 
and costs of harmonizing requirements relating to:
---------------------------------------------------------------------------

    \77\ Requirements Governing Payments of Cash Referral Fees by 
Investment Advisers, Investment Advisers Act Release No. 688 (July 
12, 1979).
    \78\ Id. An investment adviser's supervision obligations are 
discussed below.
    \79\ For the staff's discussion regarding potential 
harmonization of requirements related to the use of finders and 
solicitors, see Study at 132-133.
---------------------------------------------------------------------------

    a. Harmonizing the existing regulatory requirements applicable to 
finders and solicitors, generally.
    b. Establishing similar disclosure requirements regarding any 
conflict associated with the solicitor's and finder's receipt of 
compensation for referring a retail customer to an investment adviser 
or broker-dealer?
    3. Supervision: Effective supervisory systems and control 
procedures are important investor protection tools, as they can help 
firms identify and prevent abusive practices. As the Study notes, while 
both broker-dealers and investment advisers are required to supervise 
persons that act on their behalf, broker-dealers are subject to more 
specific supervisory requirements, including rules that expressly 
require broker-dealers to, among other things, establish a supervisory 
system, conduct periodic inspections of branch offices and supervise 
outside business activities and private securities transactions of 
associated persons.\80\ As discussed above, investment advisers are 
also required to adopt compliance policies and procedures, which 
generally would include policies and procedures for the supervision of 
persons associated with an adviser.\81\ Further, the Advisers Act code 
of ethics rules (Advisers Act Rule 204A-1) specifically requires, among 
other things, that an investment adviser pre-approve acquisitions of 
securities in any initial public offerings or in limited offerings by 
certain of its investment advisory personnel. Investment advisers are 
also required to disclose to clients certain material outside business 
activities of their supervised persons.\82\ We request data and other 
information on the enhancement to meaningful investor protection as 
well as the benefits and costs of harmonizing requirements relating to:
---------------------------------------------------------------------------

    \80\ Existing broker-dealer supervisory obligations generally 
require firms to, among other things, establish and maintain a 
supervisory system for their business activities and to supervise 
the activities of their registered representatives, principals and 
other associated persons for purposes of achieving compliance with 
applicable securities regulations, including the rules relating to 
principal trades. See NASD Rule 3010. Moreover, broker-dealers are 
required to ``establish procedures for the review and endorsement by 
a registered principal in writing * * * of all transactions * * * of 
its registered representatives with the public relating to the 
investment banking or securities business of such member.'' NASD 
Rule 3010(d)(1).
    \81\ See supra note 77.
    \82\ See Part 2A of Form ADV.
---------------------------------------------------------------------------

    a. Harmonizing supervisory requirements of investment advisers and 
broker-dealers, generally.
    b. Establishing a single set of universally applicable requirements 
versus scaling requirements based on the size (e.g., number of 
employees or a different metric) and nature of a broker-dealer or an 
investment adviser? Please identify any particular requirements that 
should apply to both broker-dealers and investment advisers, and any 
requirements that should not apply to both, and why or why not. If 
requirements were scaled, what would be appropriate metrics and 
thresholds? \83\
---------------------------------------------------------------------------

    \83\ For the staff's discussion regarding potential 
harmonization of requirements related to supervision, see Study at 
135-136.
---------------------------------------------------------------------------

    4. Licensing and Registration of Firms: Broker-dealers and 
investment advisers register with the Commission and/or states using 
forms that are similar but separate. In addition, broker-dealers must, 
prior to commencing business, satisfy FINRA's membership application 
process, which aims to fully evaluate relevant aspects of applicants 
and to identify potential weaknesses in their internal systems, thereby 
helping to ensure that successful applicants would be capable of 
conducting their business in compliance with applicable regulation. 
Investment advisers are not subject to this type of review by the 
Commission. As stated in the Study, substantive review of investment 
adviser applications could improve investor protection as it could help 
prevent firms that are unprepared to engage in the advisory business or 
to meet the obligations they will be assuming under the federal 
securities laws from entering the advisory business. We request data 
and other information on the enhancement to meaningful investor 
protection as well as the benefits and costs of harmonizing 
requirements relating to:

[[Page 14864]]

    a. Harmonizing the licensing and registration requirements 
applicable to firms, generally.
    b. Harmonizing the disclosure requirements in Form ADV and Form BD 
to the extent they address similar issues.
    c. Imposing a substantive review of investment advisers prior to 
registration similar to, or distinct from, the review applicable to 
broker-dealers.\84\
---------------------------------------------------------------------------

    \84\ For the staff's discussion regarding potential 
harmonization of requirements related to licensing and registration 
of firms, see Study at 136-137.
---------------------------------------------------------------------------

    5. Continuing Education Requirements for Persons Associated with 
Broker-Dealers and Investment Advisers: Associated persons of broker-
dealers are required to fulfill continuing education requirements. No 
such requirement exists for investment adviser personnel at the federal 
level, who instead must disclose to clients their education and 
business background. As noted in the Study, continuing education can 
help to further a regulatory goal that investors are served by 
professionals that are knowledgeable in current industry trends, 
practices and regulations.\85\ We request data and other information on 
the enhancement to meaningful investor protection as well as the 
benefits and costs of harmonizing requirements relating to:
---------------------------------------------------------------------------

    \85\ For the staff's discussion regarding potential 
harmonization of requirements related to continuing education 
requirements, see Study at 138.
---------------------------------------------------------------------------

    a. Harmonizing the continuing education requirements applicable to 
the associated persons of investment advisers and broker-dealers, 
generally.
    b. Requiring associated persons of investment advisers to be 
subject to federal qualification examinations and continuing education 
requirements?
    6. Books and Records: Books and records are important for firms to 
facilitate effective supervision and compliance, and for regulators to 
access information and verify the entity's compliance with applicable 
requirements. Broker-dealers are required to retain all communications 
received and sent, as well as all written agreements (or copies 
thereof), relating to a firm's ``business as such,'' \86\ whereas 
advisers are required to retain a more limited set of records falling 
into specific enumerated categories. As noted in the Study, ''[t]hese 
differences limit the effectiveness of internal supervision and 
compliance structures and the ability of regulators to access 
information and verify the entity's compliance with applicable 
requirements.'' \87\ We request data and other information on the 
enhancement to meaningful investor protection as well as the benefits 
and costs of harmonizing requirements relating to:
---------------------------------------------------------------------------

    \86\ See Exchange Act Rules 17a-4(b)(4) and (b)(7); 17 CFR 
240.17a-4(b)(4) and (b)(7).
    \87\ See Study at 139.
---------------------------------------------------------------------------

    a. Harmonizing the recordkeeping requirements applicable to 
investment advisers and broker-dealers, generally.
    b. Applying the ``business as such'' record retention standard to 
investment advisers?
    7. Other Potential Areas for Harmonization: We request information 
and comment on whether there are other potential areas of harmonization 
where the nature of existing investment adviser and broker-dealer 
obligations differ and investor protection would be meaningfully 
enhanced. In particular, we request data and other information on the 
enhancement to meaningful investor protection as well as the benefits 
and costs of harmonizing requirements relating to:
    a. Harmonizing a set of business conduct rules for both broker-
dealers and investment advisers, where relevant to investment advisers' 
businesses.
    b. Harmonizing other requirements for broker-dealers and investment 
advisers.
    c. Establishing a single set of universally applicable requirements 
versus scaling requirements based on the size (e.g., number of 
employees or a different metric) and nature of a broker-dealer or an 
investment adviser.
    For each other potential area of harmonization addressed, please 
identify any particular requirements that should apply to both broker-
dealers and investment advisers, and any requirements that should not 
apply to both, and why or why not.

B. Request for Data and Other Information Relating to Changes in the 
Marketplace for Personalized Investment Advice Resulting from 
Harmonization

    The Commission requests the following data and other information 
relating to changes in the marketplace for personalized investment 
advice about securities for retail customers as a result of 
implementing each area of harmonization described above. In providing 
such data and other information, we request commenters follow the 
Guidelines found in the Appendix to this request for data and other 
information including the request therein for background information.
    1. Provide data and other information on the benefits and costs to 
firms and retail customers, including synergies (i.e., enhanced cost 
efficiencies for firms), specific examples of effects on investor 
protection, and potential barriers to entry (i.e., cost prohibitions), 
which would result from harmonization of each of the areas identified 
above.
    2. Provide data and other information about alternative approaches 
to harmonization that the Commission should consider, including options 
for reducing costs on broker-dealers and investment advisers while 
increasing the effective protection of retail customers.
    3. Provide data and other information describing the impact or 
potential impact the implementation of the uniform fiduciary standard 
of conduct, or any of the alternative approaches discussed in Part III 
of this request for data and other information, would have on the 
benefits and costs to firms and to retail customers of each area of 
harmonization. Indicate, for example, whether harmonization of a 
particular area of regulation would impact the costs or benefits 
associated with complying with the uniform fiduciary standard and each 
of the alternative approaches discussed above. Also provide comment and 
data on whether the harmonization of one or more of the areas described 
above has any impact (i.e., whether it enhances, detracts, or has no 
impact) on the implementation of the uniform fiduciary standard of 
conduct or any of the other approaches described in Part III of this 
request for data and other information.
    4. For dual registrants, provide data and other information on any 
cost savings and potential retail customer benefit of having a 
consistent set of standards.
    5. Provide data and other information describing the extent to 
which harmonization would increase or reduce retail customers' 
confusion about the regulatory status of the person from whom they 
receive financial services (i.e., whether the party is a broker-dealer 
or an investment adviser) and provide information describing why. 
Provide data and other information describing the extent to which 
harmonization would increase or reduce retail customers' confusion 
about the types of obligations owed to them and provide information 
describing why.

    By the Commission.
    Dated: March 1, 2013.
Elizabeth M. Murphy,
Secretary.

APPENDIX: Suggested Submission Guidelines for Comments

    This Appendix outlines the background and particular data and 
other information we request commenters to provide and the general 
guidelines we request commenters to follow when submitting data and 
other

[[Page 14865]]

information. While we are particularly interested in receiving data 
and other information that is empirical and quantitative in nature, 
we welcome and encourage all interested parties to submit their 
comments, including qualitative and descriptive analysis of the 
benefits and costs of potential approaches and guidance. We ask that 
commenters provide only data and other information that they wish to 
make publicly available, and that commenters who may be concerned 
about making proprietary or other highly sensitive data and other 
information public may wish to pool their data with that of others 
(e.g., through a trade association, law firm, consulting firm or 
other group) and submit aggregated data in response to this request 
for data and other information. While we request commenters to 
provide enough data and other information to allow the Commission to 
replicate findings, commenters should remove any personally 
identifiable information (e.g., of their customers) before 
submitting data and other information in response to this 
request.\88\ Commenters can submit data and other information using 
a sample of retail customers. We ask commenters to sample in a 
manner which is independent of retail customer characteristics, and 
to describe the sampling methodology including sample 
identification, data collection, and any other important factor in 
sample construction. Also, if possible, provide a description of the 
population of retail customers not included in the sample. We also 
ask commenters to provide a variable to allow the Commission to 
distinguish among accounts. The variable should not incorporate 
personally identifiable information, and can be as simple as a 
random number.
---------------------------------------------------------------------------

    \88\ See supra note 23.
---------------------------------------------------------------------------

    We ask commenters to provide a cover letter when submitting data 
files to the Commission. As part of the cover letter, we ask 
commenters to include documentation describing each field in the 
data files including the units of measurement (e.g., percent, 
thousands, thousands of dollars, millions, millions of dollars), 
variable name, general and specific formats (e.g., number, 
character, date, length of character field, format of date), and 
value if missing (e.g., ``.'' or `` ''). Other important 
documentation includes an overall description of the dataset, the 
source of the information, and the time period of observations. We 
ask commenters to send the data on a physical storage medium such as 
a CD ROM or DVD, either in plain text or comma-separated values 
(csv) files. We also ask commenters to clearly label the physical 
storage medium, providing commenter name, date, and a short 
description of the data files. Commenters can submit more than one 
dataset if, for instance, the data is available on different systems 
or in different locations. In this case, we ask commenters to 
provide a variable in each dataset that links account information 
and that allows the Commission to distinguish among accounts. We 
also ask commenters to submit only one copy of the data files.

A. Commenter Identification and Background

    We request commenters to provide background information to add 
context to submissions and improve our understanding of the current 
marketplace:
    1. Indicate your status (or the status of your organization if 
you are writing on behalf of an organization), as applicable, as a 
Commission-registered broker-dealer, Commission-registered 
investment adviser, associated person of a Commission-registered 
broker dealer or Commission-registered investment adviser, dually 
registered entity or individual, retail customer, or other (if 
other, please describe).
    2. If you are (or are writing on behalf of) a broker-dealer, 
investment adviser, or dually registered investment adviser/broker-
dealer, or associated person thereof, describe the firm's business, 
including number and type of business segments, sources and total 
amount of firm revenue, and the proportion of firm revenue 
attributable to retail customers.
    3. If you are (or are writing on behalf of) a broker-dealer, 
investment adviser, or dually registered investment adviser/broker-
dealer, describe the retail customer segment of the firm's business, 
including the number and type of accounts (brokerage or advisory), 
total asset value within each account type, and the proportion of 
retail customers to whom the firm provides personalized investment 
advice. If the firm is dually registered, also indicate the 
proportion of accounts (based on the number of accounts and total 
assets under management) that are advisory accounts and the 
proportion that are brokerage accounts, and of the advisory 
accounts, the proportion that are non-discretionary accounts. Also, 
if the firm is dually registered, indicate the proportion of retail 
customer advisory accounts and the proportion of brokerage accounts 
receiving personalized investment advice.

B. Requests for Specific Characteristic Information

    We ask commenters to provide the following specific 
characteristics when providing data and other information describing 
retail customer demographics and accounts; broker-dealer or 
investment adviser services offered; securities; and the claims of 
retail customers in dispute resolution:
    1. Retail customer demographic information--age, wealth, income, 
education, and risk profile.
    2. Retail customer account information--general type (brokerage 
or advisory), specific type (e.g., clearing, execution-only, full-
service), amount of assets held, compensation arrangement (e.g., 
fees, commissions) and amount, investment strategy, the date of 
account opening, and the state in which the account is held.
    3. Broker-dealer or investment adviser services offered--type 
(e.g., include trade execution; product, transaction, and asset 
allocation recommendations; and provision of customer-specific 
research and analysis).
    4. Securities--type (e.g., stocks, bonds, funds, options, 
structured products), CUSIP number or other standard identifier, 
investment rating (if any), and date of initial retail customer 
ownership.
    5. Security Positions--long or short position, number of shares/
units held, position value, and the currency of valuation.
    6. Retail customer claims evidence--nature of claim, forum for 
claim, time to resolution, and outcome.
    If providing aggregate data and other information, we ask that 
commenters fully describe the sample population, including the 
number of retail customers and total assets under management, retail 
customer demographics, account characteristics, and security 
characteristics.

C. Submission Guidelines for Economic Analysis

    The market for personalized investment advice is difficult to 
analyze because of the number of factors that empirical tests must 
address in order to achieve definitive conclusions. While some 
reports and studies address the market for personalized investment 
advice, the difficulty to control for certain factors and/or 
insufficient documentation of the empirical sample and methodology 
results in interpretive difficulties. When submitting qualitative 
and quantitative economic analysis, we request commenters adhere to 
the following guidelines:
    1. The analysis should focus on non-discretionary retail 
customer brokerage and advisory accounts. To the extent the analysis 
focuses on institutional investor accounts or discretionary 
accounts, if possible please specify this.
    2. Identify and discuss all underlying assumptions, including 
actions that may be taken in response to a change in regulation. If 
providing quantitative analysis also clearly articulate empirical 
methodologies leading to analytical conclusions and provide tests 
statistics to validate claims. Isolate the additional benefits and 
costs from any additional assumptions made. If providing qualitative 
economic analysis also identify and discuss all supporting evidence.
    3. Identify and distinguish initial benefits and costs 
(including those associated with transitioning from existing 
standards to potential new standards of conduct), and on-going 
benefits and costs. Also identify whether certain benefits and costs 
may decrease or increase over time. Indicate whether benefits and 
costs are transaction-specific, account-specific, business segment 
specific, or firm-wide. If possible, separate the benefits from the 
costs and isolate by activity and by account type. When describing 
transition costs, describe and explain any relevant actions that may 
be taken in response to a change in regulation, including possible 
ways to mitigate costs or increase benefits.
    4. Describe the sample population, including the number of 
retail customers and total assets under management, retail customer 
demographics, and account characteristics. And, if possible, provide 
a description of the population of retail customers not included in 
the sample.
    5. Submit data that would allow the Commission to replicate 
findings.
    6. Identify which requested quantitative data, if any, is not 
possible, or would be

[[Page 14866]]

prohibitively costly, to provide, and explain why.

[FR Doc. 2013-05222 Filed 3-6-13; 8:45 am]
BILLING CODE 8011-01-P