Download:
pdf |
pdfSUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission for
Regulation Best Interest
This submission is being made pursuant to the Paperwork Reduction Act of 1995, 44
U.S.C. Section 3501 et seq.
A.
JUSTIFICATION
1.
Necessity of Information Collection
On April 18, 2018, the Commission proposed Rule 151-1 under the Securities Exchange
Act of 1934 (“Exchange Act”) establishing a standard of conduct for broker-dealers and natural
persons who are associated persons of a broker-dealer (unless otherwise indicated, together
referred to as “broker-dealer”) when making a recommendation of any securities transaction or
investment strategy involving securities to a retail customer (“Regulation Best Interest”). The
Commission proposed Regulation Best Interest pursuant to its authority under Sections 913(f) of
the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) 1 and
Section 15(l) of the Exchange Act. 2
Section 913(f) of the Dodd-Frank Act provides the Commission with discretionary
authority to “commence a rulemaking, as necessary or appropriate to the public interest and for
the protection of retail customers (and such other customers as the Commission may by rule
provide), to address the legal or regulatory standards of care for brokers, dealers. . .[and] persons
associated with brokers or dealers. . . for providing personalized investment advice about
securities to such retail customers.” 3 Exchange Act Section 15(l) gives the Commission the
authority to (1) facilitate the provision of simple and clear disclosures to investors regarding the
terms of their relationships with brokers, dealers, and investment advisers, including any material
conflicts of interest; and (2) examine and, where appropriate, promulgate rules prohibiting or
restricting certain sales practices, conflicts of interest, and compensation schemes for brokers,
dealers, and investment advisers that the Commission deems contrary to the public interest and
the protection of investors.” 4
Proposed Rule 15l-1(a)(1) requires broker-dealers and natural persons who are associated
persons of a broker-dealer, when making a recommendation of any securities transaction or
investment strategy involving securities to a retail customer, to act in the best interest of the retail
customer at the time the recommendation is made, without placing the financial or other interest
of the broker-dealer or natural person who is an associated person making the recommendation
ahead of the interest of the retail customer.
1
2
3
4
Pub. L. 111-203, 124 Stat. 1376, 1827 (2010).
15 U.S.C. §78o.
Section 913(f) of the Dodd-Frank Act.
15 U.S.C. §78o.
1
Proposed Rule 15l-1(a)(2) establishes four obligations that must be met to satisfy the best
interest obligation set forth in Rule 15l-1(a)(1):
1. Disclosure Obligation: requires the broker-dealer or associated person, prior to or at
the time of such recommendation, to reasonably disclose to the retail customer, in
writing, the material facts relating to the scope and terms of the relationship with the
retail customer, including all material conflicts of interest associated with the
recommendation; 5
2. Care Obligation: requires the broker-dealer or associated person, in making the
recommendation, to exercise reasonable diligence, care, skill and prudence; 6 and
3. Conflict of Interest Obligations: require the broker-dealer 7 to (i) establish, maintain,
and enforce written policies and procedures reasonably designed to identify and at a
minimum disclose, or eliminate, all material conflicts of interest and (ii) establish,
maintain, and enforce written policies and procedures reasonably designed to identify
and disclose and mitigate, or eliminate, material conflicts of interest arising from
financial incentives – associated with such recommendations. 8
Proposed Rule 15l-1(b)(1) would define “Retail Customer” as a person, or the legal
representative of such person, who: (i) receives a recommendation of any securities transaction
or investment strategy involving securities from a broker, dealer, or a natural person who is an
associated person of a broker or dealer; and (ii) uses the recommendation primarily for personal,
family, or household purposes. 9
Proposed Rule 15l-1(b)(2) would define “Retail Customer Investment Profile” as
information including, but not limited to, “the retail customer’s age, other investments, financial
situation and needs, tax status, investment objectives, investment experience, investment time
horizon, liquidity needs, risk tolerance, and any other information the retail customer may
disclose to the broker, dealer, or a natural person who is an associated person of a broker or
dealer in connection with a recommendation.” 10
In addition, the Commission proposed new record-making and recordkeeping
requirements on broker-dealers and associated persons. The addition of paragraph (a)(25) to
Rule 17a-3 would impose new record-making obligations on broker-dealers subject to
5
6
7
8
9
10
Proposed Rule 15l-1(a)(2)(i).
Proposed Rule 15l-1(a)(2)(ii).
The Conflict of Interest Obligations apply solely to the broker or dealer entity, and not to
the natural persons who are associated persons of a broker or dealer. For purposes of
discussing the Conflict of Interest Obligations, the term “broker-dealer” refers only to the
broker-dealer entity, and not to such individuals.
Proposed Rule 15l-1(a)(2)(iii).
Proposed Rule 15l-1(b)(1).
Proposed Rule 15l-1(b)(2).
2
Regulation Best Interest. The Proposed Amendment to Rule 17a-4(e)(5) would impose new
record retention obligations on broker-dealers subject to Regulation Best Interest. 11
The information that must be collected pursuant to the foregoing proposed rules is
intended to: (1) improve disclosure about the scope and terms of the broker-dealer’s relationship
with the retail customer, which would foster retail customers’ understanding of their relationship
with a broker-dealer; (2) enhance the quality of recommendations provided by establishing an
express best interest obligation under the federal securities laws; (3) enhance the disclosure of a
broker-dealer’s material conflicts of interest; and (4) establish obligations that require mitigation,
and not just disclosure, of conflicts of interest arising from financial incentives associated with
broker-dealer recommendations. The information will therefore help establish a framework that
protects investors and promotes efficiency, competition, and capital formation.
2.
Purpose and Use of Information Collection
i.
Disclosure Obligation
As noted above, the Disclosure Obligation under proposed Rule 15l-1(a)(2)(i) would
require a broker-dealer, prior to or at the time of recommending a securities transaction or
investment strategy involving securities to a retail customer, to: (1) reasonably disclose to the
retail customer, in writing, the material facts relating to the scope and terms of the relationship
with the retail customer; and (2) reasonably disclose to the retail customer, in writing, all
material conflicts of interest that are associated with the recommendation.
The collection of information arising from the Disclosure Obligation would facilitate a
retail customer’s understanding of the nature of his or her account, the broker-dealer’s fees and
charges, as well as the nature of services that the broker-dealer provides, as well as any
limitations to those services. It would also reduce retail customers’ confusion about the
differences among certain financial service providers, such as broker-dealers, investment
advisers, and dual-registrants. In addition, the obligation to disclose all material conflicts of
interest associated with a recommendation would raise retail customers’ awareness of the
potential effects of conflicts of interest, and increase the likelihood that broker-dealers would
make recommendations that are in the retail customer’s best interest.
ii.
Care Obligation
Under proposed Rule 15l-1(a)(2)(ii), a broker-dealer would be required to make a
reasonable effort to ascertain the potential risks and rewards associated with the
recommendation, and to determine whether the recommendation could be in the best interest of
at least some retail customers.
11
Because the record-making and recordkeeping obligations are being adopted under Rule
17a-3 and Rule 17a-4, which each have their own respective OMB Control Number,
separate supporting statements are being submitted to address these components of
Regulation Best Interest.
3
The Commission believes that the Care Obligation would not require a broker-dealer to
collect additional information from the retail customer beyond that currently collected in the
ordinary course of business. However, a broker-dealer’s analysis of the information collected
and any resulting recommendation would need to adhere to the enhanced best interest standard of
Regulation Best Interest.
iii.
Conflict of Interest Obligations
Proposed Rule 15l-1(a)(2)(iii)(A) would require a broker-dealer 12 to establish, maintain,
and enforce written policies and procedures reasonably designed to identify and at a minimum
disclose, or eliminate, all material conflicts of interest that are associated with a
recommendation. Proposed Rule 15l-1(a)(2)(iii)(B) would require a broker-dealer to establish,
maintain, and enforce written policies and procedures reasonably designed to identify and
disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives
associated with a recommendation.
The collection of information arising from the Conflict of Interest Obligations would help
a broker-dealer develop a process, relevant to its retail customers and the nature of its business,
for identifying material conflicts of interest, and then determining whether to eliminate, or
disclose and/or mitigate, the material conflict and the appropriate means of eliminating,
disclosing, and/or mitigating the conflict. As a result of a broker-dealer’s eliminating,
disclosing, and/or mitigating the effects of conflicts of interest on broker-dealer
recommendations, retail customers would more likely receive recommendations in their best
interest. In addition, the retention of written policies and procedures would generally: (1) assist a
broker-dealer in supervising and assessing internal compliance with Regulation Best Interest;
and (2) assist the Commission and self-regulatory organization staff in connection with
examinations and investigations.
3.
Consideration Given to Information Technology
The proposed rules do not prescribe particular forms or methods of compliance for
broker-dealers or their associated person, to allow maximum flexibility with respect to new
technologies as they develop.
4.
Duplication
The Commission evaluates disclosure, recordkeeping, and record retention rule-based
requirements for duplication, and re-evaluates them whenever it proposes a rule or a change in a
rule. Although existing principles and obligations similar to those underlying Regulation Best
Interest already apply to broker-dealers under other rules and regulations, no other Commission
rule establishes an explicit standard of conduct that requires broker-dealers and their natural
associated persons to comply with the express obligations imposed by Regulation Best Interest. We
believe that requiring broker-dealers to explicitly act in the best interests of their retail customers
12
See supra note 7.
4
– by satisfying the obligations underlying Regulation Best Interest, including the collection of
information requirements – is necessary to improve investor protection by enhancing the
professional standards of conduct that currently apply to broker-dealers when they make
recommendations to retail customers.
5.
Effect on Small Entities
The Regulatory Flexibility Act (“RFA”) 13 requires federal agencies, in promulgating
rules, to consider the impact of those rules on small entities. Section 603(a) 14 of the
Administrative Procedure Act, 15 as amended by the RFA, generally requires the Commission to
undertake a regulatory flexibility analysis of all proposed rules, or proposed rule amendments, to
determine the impact of such rulemaking on “small entities.” 16 For purposes of a Commission
rulemaking in connection with the RFA, a broker-dealer will be deemed a small entity if it: (1)
had total capital (net worth plus subordinated liabilities) of less than $500,000 on the date in the
prior fiscal year as of which its audited financial statements were prepared pursuant to Rule 17a5(d) under the Exchange Act, 17 or, if not required to file such statements, had total capital (net
worth plus subordinated liabilities) of less than $500,000 on the last day of the preceding fiscal
year (or in the time that it has been in business, if shorter); and (2) is not affiliated with any
person (other than a natural person) that is not a small business or small organization. 18
Based on 2017 FOCUS Report data about the broker-dealer retail market, we believe that
approximately 802 broker-dealers – with an estimated 7,845 retail customer accounts – would
qualify as small entities subject to Regulation Best Interest. However, proposed Regulation Best
Interest does not distinguish between small entities and other broker-dealers. We recognize that
different broker-dealers may require different amounts of time or external assistance in preparing
for proposed Relationship Best Interest. The Commission believes, however, that imposing
different requirements on smaller firms would not be consistent with investor protection and the
purposes of proposed Regulation Best Interest. The Commission reviews all rules periodically,
as required by the Regulatory Flexibility Act, to identify methods to minimize recordkeeping or
reporting requirements affecting small businesses.
6.
Consequences of Not Conducting Collection
The information to be collected and recorded under Regulation Best Interest would allow
the Commission, state securities regulatory authorities, and SROs to determine whether broker13
14
15
16
17
18
5 U.S.C. 601 et seq.
5 U.S.C. 603(a).
5 U.S.C. 551 et seq.
Although Section 601(b) of the RFA defines the term “small entity,” the statute permits
agencies to formulate their own definitions. The Commission has adopted definitions for
the term small entity for the purposes of Commission rulemaking in accordance with the
RFA. Those definitions, as relevant to this proposed rulemaking, are set forth in Rule 010 under the Exchange Act, 17 CFR 240.0-10.
See 17 CFR 240.17a-5(d).
See 17 CFR 240.0-10(c).
5
dealers are in compliance with Regulation Best Interest, and to ensure that broker-dealers are not
placing their interests ahead of the interests of their retail customers when making investment
recommendations. If a broker-dealer does not make these records, or it makes these records less
frequently, the level of investor protection will be reduced.
7.
Inconsistencies with Guidelines in 5 CFR 1320.5(d)(2)
There are no special circumstances. The collection is consistent with 5 CFR
1320.5(d)(2). 19
8.
Consultations Outside the Agency
The Commission has issued a release soliciting comment on the new “collection of
information” requirements and associated paperwork burdens. A copy of the release is
attached. Comments on Commission releases are generally received from registrants, investors,
and other market participants. In addition, the Commission and staff participate in ongoing
dialogue with representatives of various market participants through public conferences,
meetings and informal exchanges. Any comments received on this proposed rulemaking will be
posted on the Commission’s public website, and made available through
http://www.sec.gov/rules/proposed.shtml. The Commission will consider all comments received
prior to publishing the final rule, and will explain in any adopting release how the final rule
responds to such comments, in accordance with 5 C.F.R. 1320.11(f).
9.
Payment of Gift
No payment or gift is provided to respondents.
10.
Confidentiality
The records required by Regulation Best Interest are available only to the examination
staffs of the Commission, State regulatory authorities, and the SROs. Subject to the provisions
of the Freedom of Information Act, 5 U.S.C. § 552 (“FOIA”) and the Commission’s rules
thereunder (17 CFR 200.80(b)(4)(iii)), the Commission generally does not publish or make
available information contained in reports, summaries, analyses, letters, or memoranda arising
out of, in anticipation of, or in connection with an examination or inspection of any person or
any other investigation.
11.
Sensitive Questions
No questions of a sensitive nature are asked. The information collection does not collect
any Personally Identifiable Information (“PII”). 20
19
Proposed Amendment to Rule 17a-4(e)(5) would impose new record retention obligations
on broker-dealers subject to Regulation Best Interest, including a requirement for brokerdealers to preserve certain records for a period of not less than six years. This
inconsistency with the Guidelines in 5 CFR 1320.5(d)(2) is discussed separately in the
Supporting Statement for Rule 17a-4.
6
12.
Burden of Information Collection and Costs to Respondents
The Commission proposes to adopt Regulation Best Interest, which would require
broker-dealers to make, disclose, and keep current various records and information. The
Commission estimates this rule would impose on each broker-dealer an initial, one-time burden
of 2,245 hours in the first year and an ongoing burden of 2,218 hours per year (including the first
year). The Commission estimates there are likely 2,857 broker-dealers respondents (hereinafter,
“broker-dealer” and “respondent” are used interchangeably), including 2,055 large brokerdealers and 802 small broker-dealers. 21 This would result in an estimated burden of 8,899 hours
per respondent, 22 or 2,966 hours per year per respondent when annualized over three years. 23
The total estimated industry burden would be 25,424,443 hours, 24 or 8,474,814 hours per year
when annualized over three years. 25
Following is a more detailed discussion of the estimated burdens associated with each of
the broker-dealers’ four obligations under Regulation Best Interest.
i.
Disclosure Obligation
The Disclosure Obligation under proposed Regulation Best Interest, which is a thirdparty disclosure burden, would require a broker-dealer, prior to or at the time of recommending a
securities transaction or strategy involving securities to a retail customer, to: (1) reasonably
disclose to the retail customer, in writing, the material facts relating to the scope and terms of the
relationship with the retail customer; and (2) reasonably disclose to the retail customer, in
writing, all material conflicts of interest that are associated with the recommendation. The
Commission believes that requiring broker-dealers to reasonably disclose to the retail customer,
in writing, the material facts relating to the scope and terms of the relationship with a retail
customer would facilitate a retail customer’s understanding of the nature of his or her account,
the broker-dealer’s fees and charges, as well as the nature of services that the broker-dealer
provides, as well as any limitations to those services. It would also reduce retail customers’
confusion about the differences among certain financial service providers, such as brokerdealers, investment advisers, and dual-registrants. In addition, the obligation to disclose all
20
21
22
23
24
25
The term “Personally Identifiable Information” refers to information which can be used
to distinguish or trace an individual’s identity, such as their name, social security number,
biometric records, etc. alone, or when combined with other personal or identifying
information which is linked or linkable to a specific individual, such as date and place of
birth, mother’s maiden name, etc.
As of December 31, 2017, 3,841 broker-dealers filed Form BD and were registered with
the Commission – either as standalone broker-dealers or as dually-registered entities.
Based on data obtained from Form BR, the Commission believes that approximately
74.4% of this population or 2,857 broker-dealers have retail customers and therefore
would likely be subject to Regulation Best Interest.
4,463 hours in first year + 4,436 hours in second and third years = 8,899 hours.
8,899 hours / 3 = 2,966 hours per year.
8,899 hours per respondent * 2,857 broker-dealers = 25,424,443 hours.
25,424,443 hours / 3 years = 8,474,814 hours per year.
7
material conflicts of interest associated with a recommendation would raise retail customers’
awareness of the potential effects of conflicts of interest, and increase the likelihood that brokerdealers would make recommendations that are in the retail customer’s best interest.
The Commission assumes for purposes of this analysis that broker-dealers would meet
their obligation to reasonably disclose to the retail customer, in writing, the material facts
relating to the scope and terms of the relationship with the retail customer through a combination
of delivery of the Relationship Summary, creating account disclosures to include standardized
language related to capacity and scope, and types of services and the development of
comprehensive fee schedules. In addition, we preliminarily assume that broker-dealers would
satisfy the obligation to disclose material conflicts of interest through the use of a standardized,
written disclosure document provided to all retail customers and supplemental disclosure
provided to certain retail customers for specific products. We also assume for purposes of this
analysis that delivery of written disclosure would occur at the beginning of a relationship, such
as together with the account opening agreement. For existing retail customers, the disclosure
would need to occur “prior to or at the time” of a recommendation. Subsequent disclosures may
be delivered in the event of a material change or if the broker-dealer determines additional
disclosure is needed for certain types of products.
a. Disclosure of Capacity, Type and Scope of Services –
Initial One-Time Burden & Costs
We estimate that a dually-registered firm would incur an initial one-time internal burden
of 10 hours for in-house counsel and in-house compliance personnel 26 to draft language
regarding capacity for inclusion in the standardized account disclosure that is delivered to the
retail customer. 27
In addition, we estimate that dual-registrants would incur an estimated external initial,
one-time cost of $4,720 for the assistance of outside counsel in the preparation and review of
standardized language regarding capacity. 28 For the estimated 360 dually-registered firms with
retail business, 29 we project an annualized initial, one-time aggregate burden of 1,200 hours per
26
27
28
29
The 10 hour estimate includes 5 hours for in-house counsel to draft and review the
standardized language, and 5 hours for consultation and review of compliance personnel.
The following estimates include the burdens and costs that broker-dealers would incur in
drafting standardized account disclosure language related to capacity, scope and terms of
the relationship on behalf of their dually-registered representatives. For purposes of this
analysis, the Commission assumes that broker-dealers would undertake these tasks on
behalf of their registered representatives.
This estimate is based on the following calculation: (10 hours for outside counsel
review/drafting) x ($472/hour for outside counsel services) = $4,720 in initial outside
counsel costs.
FOCUS Reports, or “Financial and Operational Combined Uniform Single” Reports, are
monthly, quarterly, and annual reports that broker-dealers are generally required to file
with the Commission and/or SROs pursuant to Exchange Act Rule 17a-5. See 17 CFR
240.17a-5. This data is obtained from FOCUS filings as of December 2017.
8
year, 30 and $1.7 million in aggregate initial costs, or approximately $566,667 per year when
annualized over three years. 31
Similarly, to comply with proposed Regulation Best Interest, standalone broker-dealers
would likely draft standardized language for inclusion in the account disclosure to provide the
retail customer with more specific information regarding the types and scope of services that
they provide. We expect that the associated costs and burdens would differ between small and
large broker-dealers, as large broker-dealers generally offer more products and services and
therefore would need to potentially evaluate a larger number of products and services.
Given these assumptions, we estimate that a small broker-dealer would incur an internal
initial, one-time burden of 10 hours for in-house counsel and in-house compliance personnel to
draft this standardized language. 32 In addition, a small broker-dealer would incur an estimated
external cost of $4,720 for the assistance of outside counsel in the preparation and review of this
standardized language. 33 For the estimated 802 small broker-dealers, 34 we project an aggregate
initial burden of 8,020 hours, 35 and aggregate initial costs of $3.79 million. 36
Given the broader array of products and services offered, we estimate that a large brokerdealer would incur an internal burden of 20 hours to draft this standardized language. 37 A large
broker-dealer would also incur an estimated cost of $7,080 for the assistance of outside counsel
in the preparation and review of this standardized language. 38 For the estimated 2,055 large
30
31
32
33
34
35
36
37
38
This estimate is based on the following calculation: (360 dually-registered retail firms) x
(10 hours) = 3,600 initial aggregate burden hours for years one, two, and three. 3,600
burden hours / 3 years = 1,200 burden hours per year.
This estimate is based on the following calculation: (360 dually-registered retail firms) x
($4,720 in external cost per firm) = $1.7 million in aggregate initial costs over years one,
two, and three. $1.7 million / 3 = $566,667.
The 10 hour estimate includes 5 hours for in-house counsel to draft and review the
standardized language, and 5 hours for consultation and review of compliance personnel.
This estimate is based on the following calculation: (10 hours for outside counsel
review/drafting) x ($472/hour for outside counsel services) = $4,720 in initial outside
counsel costs.
This data is obtained from FOCUS filings as of December 2017.
This estimate is based on the following calculation: (802 small broker-dealers) x (10
hours per small broker-dealer) = 8,020 aggregate burden hours.
This estimate is based on the following calculation: (802 small broker-dealers) x ($4,720
in external cost per small retail firm) = $3.79 million in aggregate initial costs.
The 20 hour estimate includes 10 hours for in-house counsel to draft and review the
standardized language, and 10 hours for consultation and review of compliance
personnel.
This estimate is based on the following calculation: (15 hours for outside counsel
review/drafting) x ($472/hour for outside counsel services) = $7,080 in initial outside
counsel costs.
9
retail broker-dealers, we estimate an aggregate initial burden of 41,100 hours, 39 and $14.55
million in aggregate initial costs. 40
We estimate that all broker-dealers would each incur approximately 0.02 burden hours 41
for delivery of the account disclosure document. 42 Based on FOCUS data, we estimate that the
2,857 broker-dealers that report retail activity have approximately 128 million customer
accounts, and that approximately 74.4%, or 95.2 million, of those accounts belong to retail
customers. 43 We therefore estimate that broker-dealers would have an aggregate one-time initial
burden of 1,904,000 hours, or approximately 666 hours 44 per broker-dealer for the first year after
the rule is in effect. 45
We estimate a total initial aggregate burden for dually-registered, small and large brokerdealers to develop and deliver to retail customers account disclosures relating to capacity and
39
40
41
42
43
44
45
This estimate is based on the following calculation: (2,055 large broker-dealers) x (20
burden hours) = 41,100 aggregate initial burden hours.
This estimate is based on the following calculation: (2,055 large broker-dealers) x
($7,080 initial outside counsel costs) = $14.55 million in aggregate initial costs.
This is the same estimate the Commission makes in the Relationship Summary Proposing
Release. It is also the same estimate the Commission made in the Amendments to Form
ADV Adopting Release, and for which we received no comment. See Amendments to
Form ADV, 17 CFR Parts 275 and 279 at 49259. We expect that delivery requirements
will be performed by a general clerk. The general clerk’s time is included in the initial
burden estimate.
For new retail customers, we expect delivery to occur at the inception of the relationship;
for existing customers, we expect delivery to occur prior to or at the time of a
recommendation.
According to FOCUS filings as of December 2017, the 2,857 broker-dealers (including
dual registrants) with retail customers report 128 million customer accounts. Assuming
the amount of retail customer accounts is proportionate to the percentage of brokerdealers that have retail customers, or 74.4% of broker-dealers, then the number of retail
customer accounts would be 74.4% of 128 million accounts = 95.2 million retail
customer accounts. This number likely overstates the number of deliveries to be made
due to the double-counting of deliveries to be made by dual registrants to a certain extent,
and the fact that one customer may own more than one account.
These estimates are based on the following calculations: (0.02 hours per customer
account x (95.2 million retail customer accounts) = 1,904,000 aggregate burden hours.
Conversely, (1,904,000 hours) / (2,857 broker-dealers) = approximately 666 burden hours
per broker-dealer.
We estimate that broker-dealers will not incur any incremental postage costs because we
assume that they will make such deliveries with another mailing the broker-dealer was
already delivering to retail customers.
10
type and scope of services of 1,956,620 burden hours. 46 We estimate a total initial aggregate
cost of $20.04 million. 47
b. Disclosure of Capacity, Type and Scope of Services –
Ongoing Burden & Costs
For purposes of this analysis, we assume that broker-dealers would review and amend the
standardized language in the account disclosure, on average, once a year. Further, we assume
that broker-dealers would not incur outside costs in connection with updating account
disclosures, as in-house personnel would be more knowledgeable about changes in capacity, and
the types and scope of services offered by the broker-dealer.
We estimate that each dually-registered broker-dealer would incur approximately five
burden hours annually for compliance and business line personnel to review changes in the dualregistrant’s capacity and types and scope of services offered, and another two burden hours
annually for in-house counsel to amend the account disclosure to disclose material changes to the
dual-registrant’s capacity and types and scope of services offered, for a total of seven burden
hours. The estimated ongoing aggregate burden to amend dual-registrants’ account disclosures
to reflect changes in capacity and types and scope of services would therefore be 2,520 hours. 48
With respect to small standalone broker-dealers, we estimate an internal burden of two
hours for in-house compliance and business line personnel to review and update changes in
capacity and types or scope of services offered, and another two burden hours annually for inhouse counsel to amend the account disclosure to disclose material changes to capacity and types
or scope of services – for a total of four burden hours. The estimated ongoing aggregate burden
for small broker-dealers to amend account disclosures to reflect changes in capacity and types
and scope of services would therefore be 3,208 hours for small broker-dealers. 49
We estimate that large standalone broker-dealers would incur 10 burden hours annually
for in-house compliance and business line personnel to review and update changes in capacity
and the types or scope of services offered, and another 10 burden hours annually for in-house
counsel to amend the account disclosure to disclose material changes to capacity and the types
46
47
48
49
This estimate is based on the following calculation: (3,600 aggregate initial burden hours
for dual registrants) + (8,020 aggregate initial burden hours for small broker-dealers) +
(41,000 burden hours for large broker-dealers) + (1,904,000 aggregate initial burden
hours for all broker-dealers to deliver the account disclosures) = 1,956,620 total
aggregate initial burden hours.
This estimate is based on the following calculation: ($1.7 million in initial aggregate
costs for dual registrants) + ($3.79 in initial aggregate costs for small broker-dealers) +
($14.55 million in initial aggregate costs for large broker-dealers) = $20.04 million in
total initial aggregate costs.
This estimate is based on the following calculation: (7 burden hours per dually-registered
firm per year) x (360 dually-registered broker-dealers) = 2,520 ongoing aggregate burden
hours.
This estimate is based on the following calculation: (4 burden hours per broker-dealer per
year) x (802 small broker-dealers) = 3,208 ongoing aggregate burden hours.
11
and scope of services, for a total of 20 burden hours. We therefore believe the ongoing,
aggregate burden would be 41,100 hours for large broker-dealers. 50
With respect to delivery of the amended account agreements in the event of material
changes to the capacity disclosure or disclosure related to types and scope of services, we
estimate that this would take place among 20% of a broker-dealer’s retail customer accounts
annually. We therefore estimate broker-dealers to incur a total annual aggregate burden of
380,800 hours, or 133 hours per broker-dealer. 51
The total ongoing aggregate burden for dually-registered, small and large broker-dealers
to review, amend, and deliver updated account disclosures to reflect changes in capacity, types
and scope of services would be 427,700 burden hours per year. 52
The Commission acknowledges that the types of services and offering of products vary
greatly by broker-dealer, and therefore that the costs or burdens associated with updating the
account disclosure might similarly vary.
c. Disclosure of Fees –
Initial One-Time Burden & Costs
We assume that, for purposes of this analysis, the associated costs and burdens would
differ between small and large broker-dealers, as large broker-dealers generally offer more
products and services and therefore would need to potentially evaluate a wider range of fees in
their fee schedules. As stated above, while we anticipate that many broker-dealers may already
create fee schedules, we believe that small broker-dealers would initially spend five hours and
large broker-dealers would spend ten hours to internally create a new fee schedule in
consideration of the requirements of Regulation Best Interest. We additionally estimate a onetime external cost of $2,360 for smaller broker-dealers 53 and $4,720 for larger broker-dealers for
outside counsel to review the fee schedule. 54 We therefore estimate the initial aggregate burden
for small broker-dealers to be 4,010 burden hours, 55 and the initial aggregate cost to be $1.89
50
51
52
53
54
55
This estimate is based on the following calculation: (20 burden hours per broker-dealer
per year) x (2,055 large broker-dealers) = 41,100 ongoing aggregate burden hours.
(20%) x (95.2 million retail customer accounts) x (.02 hours for delivery to each
customer account) = 380,800 aggregate burden hours. Conversely, 380,800 aggregate
burden hours / 2,857 broker-dealers = 133 burden hours per broker-dealer.
This estimate is based on the following calculation: (2,520 ongoing aggregate burden
hours for dually-registered broker-dealers) + (3,280 ongoing aggregate burden hours for
small broker-dealers) + (41,100 ongoing aggregate burden hours for large broker-dealers)
+ (380,800 ongoing aggregate burden hours for delivery of amended account disclosures)
= 427,700 total ongoing aggregate burden hours.
This cost estimate is based on the following calculation: (5 hours of review) x ($472/hour
for outside counsel services) = $2,360 outside counsel costs.
This cost estimate is based on the following calculation: (10 hours of review) x
($472/hour for outside counsel services) = $4,720 outside counsel costs.
This estimate is based on the following calculation: (5 burden hours of review per small
broker-dealer) x (802 small broker-dealers) = 4,010 aggregate initial burden hours.
12
million. 56 We estimate the aggregate burden for large broker-dealers to be 20,550 burden
hours, 57 and the aggregate cost to be $9.7 million. 58
Similar to delivery of the account disclosure regarding capacity and types and scope of
services, we estimate the burden for broker-dealers to make the initial delivery of the fee
schedule to new retail customers, at the inception of the relationship, and existing retail
customers, prior to or at the time of a recommendation, will require approximately 0.02 hours to
deliver to each retail customer. 59 As stated above, we estimate that the 2,857 broker-dealers that
report retail activity have approximately 128 million customer accounts, and that approximately
74.4%, or 95.2 million, of those accounts belong to retail customers. 60 We therefore estimate
that a broker-dealer will have an aggregate initial burden of 1,904,000 hours, or approximately
666 hours per broker-dealer for the first year after the rule is in effect. 61
The total aggregate initial burden for broker-dealers is therefore estimated at 1,928,560 62
hours, and the total aggregate initial cost is estimated at $11.59 million. 63
56
57
58
59
60
61
62
63
This estimate is based on the following calculation: ($2,360 for outside counsel costs per
small broker-dealer) x (802 small broker-dealers) = $1.89 million in aggregate initial
outside costs.
This estimate is based on the following calculation: (10 burden hours of review per large
broker-dealer) x (2,055 large broker-dealers) = 20,550 aggregate initial burden hours.
This estimate is based on the following calculation: ($4,720 for outside counsel costs per
large broker-dealer) x (2,055 large broker-dealers) = $9.70 million in aggregate initial
costs.
This is the same estimate the Commission makes in the Relationship Summary Proposing
Release. It is also the same estimate the Commission made in the Amendments to Form
ADV Adopting Release, and for which we received no comment. See Amendments to
Form ADV, 17 CFR Parts 275 and 279 at 49259. We expect that delivery requirements
will be performed by a general clerk. The general clerk’s time is included in the initial
burden estimate.
For new retail customers, we expect delivery to occur at the inception of the relationship;
for existing customers, we expect delivery to occur prior to or at the time of a
recommendation.
This estimate is based on the following calculation: (95.2 million retail customer
accounts) x (.02 hours for delivery to each customer account) = 1,904,000 aggregate
burden hours. Conversely, (1,904,000 aggregate burden hours) / (2,857 broker-dealers) =
666 burden hours per broker-dealer.
This estimate is based on the following calculations: (4,010 aggregate burden hours for
small broker-dealers) + (20,550 burden hours for large broker-dealers) + (1,904,000
burden hours for delivery) = 1,928,560 total aggregate initial burden hours.
This estimate is based on the following calculation: ($1.89 million for small brokerdealer costs) + ($9.7 million large broker-dealer costs) = $11.59 million in total aggregate
costs.
13
d. Disclosure of Fees –
Ongoing Burden & Costs
For purposes of this analysis, we assume that broker-dealers would review and amend the
fee schedule on average, once a year. With respect to small broker-dealers, we estimate that it
would require approximately two hours per year to review and update the fee schedule, and for
large broker-dealers, we estimate that the recurring, annual burden to review and update the fee
schedule would be four hours for each large broker-dealer. Based on these estimates, we
estimate the recurring, aggregate, annualized burden would be approximately 1,604 hours for
small broker-dealers 64 and 8,220 hours for large broker-dealers. 65 We do not anticipate that
small or large broker-dealers would incur outside legal, compliance, or consulting fees in
connection with updating their standardized fee schedule since in-house personnel would be
more knowledgeable about these facts, and we therefore do not expect external costs associated
with updating the fee schedule.
With respect to delivery of the amended fee schedule in the event of a material change,
we estimate that this would take place among 40% of a broker-dealer’s retail customer accounts
annually. We therefore estimate broker-dealers would incur a total annual aggregate burden of
761,600 hours, or 267 hours per broker-dealer. 66
The Commission acknowledges that the type of fee schedule may vary greatly by brokerdealer, and therefore that the costs or burdens associated with updating the standardized fee
schedule might similarly vary.
e. Disclosure of Material Conflicts of Interest –
Initial One-Time Burden & Costs
The Disclosure Obligation of proposed Regulation Best Interest would provide brokerdealers with the flexibility to choose the form and manner of conflict disclosure. However, we
believe that many or most broker-dealers would develop a standardized conflict disclosure
document and distribute it to retail customers. 67 We also assume for purposes of this analysis
that broker-dealers would update and deliver the standardized conflict disclosure document
yearly on an ongoing basis, following the broker-dealer’s annual conflicts review process. 68
64
65
66
67
68
This estimate is based on the following calculation: (2 burden hours per broker-dealer) x
(802 small broker-dealers) = 1,604 aggregate burden hours.
This estimate is based on the following calculation: (4 burden hours per broker-dealer) x
(2,055 large broker-dealers) = 8,220 aggregate burden hours.
This estimate is based on the following calculation: (40% of 95.2 million retail customer
accounts) x (.02 hours) = 761,600 aggregate burden hours. Conversely, (761,600
aggregate burden hours) / (2,857 broker-dealers) = 267 burden hours per broker-dealer.
We assume that delivery for new customers would occur at the inception of the
relationship, and that delivery for existing customers would occur prior to or at the time a
recommendation is made.
However, as discussed above, we recognize that broker-dealers might choose to disclose
material conflicts of interest on an as-needed basis, and might take a layered approach to
14
For purposes of this analysis, we assume that a standardized conflict disclosure document
would be developed by in-house counsel and reviewed by outside counsel. For small brokerdealers, we estimate it would take in-house counsel, on average, 5 burden hours to create the
standardized conflict disclosure document and outside counsel 5 hours to review and revise the
document. The initial aggregate burden for the development of a standardized disclosure
document, based on an estimated 802 small broker-dealers, would be approximately 4,010
burden hours. 69 We additionally estimate an initial cost of $2,360 per small broker-dealer, 70 and
an aggregate initial cost of $1.89 million for all small broker-dealers. 71
We expect the development and review of the standardized conflict disclosure document
to take longer for large broker-dealers because, as discussed above, we believe large brokerdealers generally offer more products and services and employ more individuals, and therefore
would need to potentially disclose a larger number of conflicts. We estimate that for large
broker-dealers, it would take 7.5 burden hours for in-house counsel to create the standardized
conflict disclosure document, and outside counsel would take another 7.5 hours to review and
revise the disclosure document. As a result, we estimate the initial aggregate burden, based on
an estimated 2,055 large broker-dealers, to be approximately 15,413 burden hours. 72 We
additionally estimate initial costs of $3,540 per broker-dealer, 73 and an aggregate cost for large
broker-dealers of approximately $7.27 million. 74
We assume that broker-dealers would deliver the standardized conflict disclosure
document to new retail customers at the inception of the relationship, and to existing retail
customers prior to or at the time of a recommendation. We estimate that broker-dealers would
require approximately 0.02 hours to deliver the standardized conflict disclosure document to
each retail customer. 75 We therefore estimate that broker-dealers would incur an aggregate
69
70
71
72
73
74
75
disclosure, as opposed to a standardized conflict disclosure document. We request
comment on whether broker-dealers may choose to take a layered approach to disclosure
and the associated costs of burdens.
This estimate is based on the following calculation: (5 hours) x (802 small brokerdealers) = 4,010 aggregate burden hours.
This estimate is based on the following calculation: ($472/hour) x (5 hours) = $2,360 in
initial costs.
This estimate is based on the following calculation: ($472/hour x 5 hours) x (802 brokerdealers) = $1.89 million in aggregate initial costs.
This estimate is based on the following calculation: (7.5 hours x 2,055 large brokerdealers) = 15,413 burden hours.
This estimate is based on the following calculation: ($472/hour) x (7.5 hours) = $3,540 in
initial costs.
This estimate is based on the following calculation: ($472/hour) x (7.5 hours x 2,055
large broker-dealers) = $7.27 million in aggregate costs.
See supra note 41. For purposes of this analysis, we have assumed any initial disclosures
made by the broker-dealer related to material conflicts of interest would be delivered
together.
15
initial burden of 1,904,000 hours, or approximately 666 hours per broker-dealer for delivery of
the standardized conflict disclosure document the first year after the rule is in effect. 76
f. Disclosure of Material Conflicts of Interest –
Ongoing Burden & Costs
We believe that broker-dealers would incur ongoing annual burdens and costs to update
the disclosure document to include newly identified conflicts. While Regulation Best Interest
does not require broker-dealers to provide disclosures at specific intervals or times, but rather
allows broker-dealers to provide disclosures on an as-needed basis, we assume for purposes of
this analysis that broker-dealers would update their conflict disclosure document annually, after
conducting an annual conflicts review. We estimate that the conflict disclosure form would be
updated internally by both small and large broker-dealers.
We estimate that in-house counsel at a small broker-dealer would require approximately
1 hour per year to update the standardized conflict disclosure document, for an ongoing
aggregate burden of approximately 802 hours. 77 For large broker-dealers, we estimate that the
ongoing, annual burden would be 2 hours for each broker-dealer: 1 hour for compliance
personnel and 1 hour for legal personnel. We therefore estimate the ongoing, aggregate burden
for large broker-dealers to be approximately 4,110 burden hours. 78 We do not anticipate that
small or large broker-dealers would incur outside legal, compliance, or consulting fees in
connection with updating their standardized conflict disclosure document, since in-house
personnel would presumably be more knowledgeable about conflicts of interest.
With respect to ongoing delivery of the updated conflict disclosure document, we
estimate that this would take place among 40% of a broker-dealer’s retail customer accounts
annually. 79 We therefore estimate that broker-dealers would incur an aggregate ongoing burden
of 761,600 hours, or 267 burden hours per broker-dealer. 80
76
77
78
79
80
These estimates are based on the following calculations: (0.02 hours per customer
account x 95.2 million retail customer accounts) = 1,904,000 aggregate burden hours.
Conversely, (1,904,000 hours) / (2,857 broker-dealers) = 666 burden hours per brokerdealer.
This estimate is based on the following calculation: (1 hour per broker-dealer) x (802
small broker-dealers) = 802 aggregate burden hours.
This estimate is based on the following calculation: (2 hours per broker-dealer) x (2,055
large broker-dealers) = 4,110 aggregate burden hours.
The Commission estimates that broker-dealers would update fees and material conflicts
of interest disclosure more frequently than disclosure related to capacity or type and
scope of services.
This estimate is based on the following calculation: (40% of 95.2 million retail customer
accounts) x (.02 hours) = 761,600 aggregate burden hours. Conversely, (761,600
aggregate burden hours) / (2,857 broker-dealers) = 267 hours per broker-dealer.
16
ii.
Care Obligation
Any PRA burdens or costs associated with the Care Obligation under proposed
Regulation Best Interest are discussed separately with respect to proposed Rule 17a-3(a)(25)
(OMB No. 3235-0033).
iii.
Conflict of Interest Obligations
Regulation Best Interest would require a broker-dealer entity to establish, maintain, and
enforce written policies and procedures reasonably designed to identify and at a minimum
disclose, or eliminate, all material conflicts of interest that are associated with a
recommendation. Second, Regulation Best Interest would require a broker-dealer 81 to establish,
maintain, and enforce written policies and procedures reasonably designed to identify and
disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives
associated with a recommendation. Written policies and procedures developed pursuant to the
Conflict of Interest Obligations of proposed Regulation Best Interest would help a broker-dealer
develop a process, relevant to its retail customers and the nature of its business, for identifying
material conflicts of interest, and then determining whether to eliminate, or disclose and/or
mitigate, the material conflict and the appropriate means of eliminating, disclosing, and/or
mitigating the conflict.
We believe that most broker-dealers have policies and procedures in place to address
material conflicts of interest, but they do not necessarily have written policies and procedures
regarding the identification and management of conflicts as proposed in Regulation Best Interest.
To initially comply with this obligation, which is a recordkeeping burden, we believe that
broker-dealers would employ a combination of in-house and outside legal and compliance
counsel to update existing policies and procedures.
a. Written Policies and Procedures –
Initial One Time Burden & Costs
As an initial matter, we estimate that a large broker-dealer would incur a one-time
average internal burden of 50 hours for in-house legal and in-house compliance counsel to
update existing policies and procedures to comply with Regulation Best Interest. 82 We
additionally estimate a one-time burden of 5 hours for a general counsel at a large broker-dealer
and 5 hours for a Chief Compliance Officer to review and approve the updated policies and
procedures, for a total of 60 burden hours. 83 In addition, we estimate a cost of $4,720 for outside
81
82
83
See supra note 7.
This estimate would be broken down as follows: 40 hours for in-house legal counsel + 10
hours for in-house compliance counsel to update existing policies and procedures = 50
burden hours.
This estimate is based on the following calculation: (50 hours of review for in-house legal
and in-house compliance counsel) + (5 hours of review for general counsel) + (5 hours of
review for Chief Compliance Officer) = 60 burden hours.
17
counsel to review the updated policies and procedures on behalf of a large broker-dealer. 84 We
therefore estimate the aggregate burden for large broker-dealers to be 123,300 burden hours, 85
and the aggregate cost for large broker-dealers to be $9.70 million. 86
In contrast, we believe small broker-dealers would primarily rely on outside counsel to
update existing policies and procedures, as small broker-dealers generally have fewer in-house
legal and compliance personnel. Moreover, since small broker-dealers would typically have
fewer conflicts of interest, we estimate that only 40 hours of outside legal counsel services would
be required to update the policies and procedures, for a total one-time cost of $18,880 87 per
small broker-dealer, and an aggregate cost of $15.1 million for all small broker-dealers. 88 We
additionally believe in-house compliance personnel would require 10 hours to review and
approve the updated policies and procedures, for an aggregate burden of 8,020 hours. 89
We therefore estimate the total initial aggregate burden to be 131,320 hours, 90 and the
total initial aggregate cost to be $24.8 million. 91
b. Written Policies and Procedures –
Ongoing Burden & Costs
For purposes of this analysis, we have assumed that small and large broker-dealers would
review and update policies and procedures on a periodic basis to accommodate the addition of,
among other things, new products or services, new business lines, and/or new personnel. We
also assume that broker-dealers would review and update their policies and procedures for
84
85
86
87
88
89
90
91
Based on industry sources, Commission staff preliminarily estimates that the average
hourly rate for legal services is $472/hour. This cost estimate is therefore based on the
following calculation: (10 hours of review) x ($472/hour for outside counsel services) =
$4,720 in outside counsel costs.
This estimate is based on the following calculation: (60 burden hours of review per large
broker-dealer) x (2,055 large broker-dealers) = 123,300 aggregate burden hours.
This estimate is based on the following calculation: ($4,720 for outside counsel costs per
large broker-dealer) x (2,055 large broker-dealers) = $9.70 million in outside counsel
costs.
This cost estimate is based on the following calculation: (40 hours of review) x
($472/hour for outside counsel services) = $18,880 in outside counsel costs.
This cost estimate is based on the following calculation: ($18,880 for outside attorney
costs per small broker-dealer) x (802 small broker-dealers) = $15.1 million in outside
counsel costs.
This estimate is based on the following calculation: (10 burden hours) x (802 small
broker-dealers) = 8,020 aggregate burden hours.
This estimate is based on the following calculation: (123,300 aggregate burden hours for
large broker-dealers) + (8,020 aggregate burden hours for small broker-dealers) =
131,320 total aggregate burden hours.
This estimate is based on the following calculation: ($9.70 million in aggregate costs for
large broker-dealers) + ($15.1 million in aggregate costs for small broker-dealers) =
$24.80 million total aggregate costs.
18
compliance with Regulation Best Interest on an annual basis, and that they would perform the
review and update using in-house personnel.
For large broker-dealers with more numerous, more complex products and services, and
higher rates of hiring and turnover, we estimate that each broker-dealer would annually incur an
internal burden of 12 hours to review and update existing policies and procedures: four hours for
legal personnel, four hours for compliance personnel, and four hours for business-line personnel
to identify new conflicts. We therefore estimate an ongoing, aggregate burden for large brokerdealers of approximately 24,660 hours. 92 Because we assume that large broker-dealers would
rely on internal personnel to update policies and procedures on an ongoing basis, we do not
believe large broker-dealers would incur ongoing costs.
We assume for purposes of this analysis that small broker-dealers, with fewer and less
complex products, and lower rates of hiring, would mostly rely on outside legal counsel and
outside compliance consultants for review and update of their policies and procedures, with final
review and approval from an in-house compliance manager. We preliminarily estimate that
outside counsel would require approximately five hours per year to update policies and
procedures, for an annual cost of $2,360 for each small broker-dealer. 93 The projected
aggregate, annual ongoing cost for outside legal counsel to update policies and procedures for
small broker-dealers would be $1.89 million. 94 In addition, we expect that small broker-dealers
would require five hours of outside compliance services per year to update their policies and
procedures, for an ongoing cost of $1,490 per year, 95 and an aggregate ongoing cost of $1.19
million. 96 The total aggregate, ongoing cost for small broker-dealers is therefore projected at
$3.08 million per year. 97
In addition to the costs described above, we additionally believe small broker-dealers
would incur an internal burden of approximately 5 hours for an in-house compliance manager to
review and approve the updated policies and procedures per year. The ongoing, aggregate
92
93
94
95
96
97
This estimate is based on the following calculation: (12 burden hours per large brokerdealer) x (2,055 large broker-dealers) = 24,660 aggregate ongoing burden hours.
This estimate is based on the following calculation: (5 hours per small broker-dealer) x
($472/hour for outside counsel services) = $2,360 in outside counsel costs.
This estimate is based on the following calculation: ($2,360 in outside counsel costs per
small broker-dealer) x (802 small broker-dealers) = $1.89 million in aggregate, ongoing
outside legal costs.
Based on industry sources, Commission staff preliminarily estimates that the average
hourly rate for compliance services in the securities industry is $298/hour. This cost
estimate is based on the following calculation: (5 hours of review) x ($298/hour for
outside compliance services) = $1,490 in outside compliance service costs.
This estimate is based on the following calculation: ($1,490 in outside compliance costs
per small broker-dealer) x (802 small broker-dealers) = $1.19 million in aggregate,
ongoing outside compliance costs.
This estimate is based on the following calculation: ($1.89 million for outside legal
counsel costs) + ($1.19 million for outside compliance costs) = $3.08 million total
aggregate ongoing costs.
19
burden for small broker-dealers would be 4,010 hours for in-house compliance manager
review. 98
We therefore estimate the total ongoing aggregate ongoing burden to be 28,670 hours, 99
and the total ongoing aggregate cost to be $3.08 million per year. 100
The Commission acknowledges that policies and procedures may vary greatly by brokerdealer, given the differences in size and the complexity of broker-dealer business models.
Accordingly, we would expect that the need to update policies and procedures might also vary
greatly.
c. Identification of Material Conflicts of Interest –
Initial One-Time Burden & Costs
With respect to identifying and determining whether a material conflict of interest exists
in connection with a recommendation, a broker-dealer would first need to establish mechanisms
to proactively and systematically identify conflicts of interest in its business on an ongoing or
periodic basis. For purposes of this analysis, we understand that most broker-dealers already
have an existing technological infrastructure in place, and we assume that such infrastructure
would need to be modified to effect compliance with Regulation Best Interest.
Acknowledging that costs and burdens may vary greatly according to the size of the
broker-dealer, we expect that the modification of a broker-dealer’s existing technology would
initially require the retention of an outside programmer, and that the modification of existing
technology would require, on average, an estimated 20 hours of the programmer’s labor, for an
estimated cost per broker-dealer of $5,400. 101 We additionally project that coordination between
the programmer and the broker-dealer’s compliance manager would involve five burden hours.
The aggregate costs and burdens for the modification of existing technology to identify conflicts
of interest would therefore be $15.43 million, 102 and 14,285 burden hours. 103
98
99
100
101
102
This estimate is based on the following calculation: (5 hours compliance manager review
per small broker-dealer) x (802 small broker-dealers) = 4,010 aggregate ongoing burden
hours.
This estimate is based on the following calculation: (24,660 aggregate ongoing burden
hours for large broker-dealers) + (4,010 aggregate ongoing burden hours for small
broker-dealers) = 28,670 total aggregate ongoing burden hours.
This estimate is based on the following calculation: ($3.08 million per year in total
aggregate ongoing costs for small broker-dealers) + ($0 projected ongoing costs for large
broker-dealers) = $3.08 million per year in total aggregate ongoing costs.
Based on industry sources, Commission staff preliminarily estimates that the average
hourly rate for technology services in the securities industry is $270. This cost estimate
is based on the following calculation: (20 hours of review) x ($270/hour for technology
services) = $5,400 in outside programmer costs.
This cost estimate is based on the following calculation: ($5,400 in outside programmer
costs per broker-dealer) x (2,857 retail broker-dealers) = $15.43 million in aggregate
outside programmer costs.
20
We additionally believe that the determination whether the conflicts of interest, once
identified, are material, would require approximately five hours per broker-dealer, 104 for an
aggregate of 14,285 burden hours for all broker-dealers. 105 The total aggregate burden for the
identification of material conflicts is 28,570 hours. 106
d. Identification of Material Conflicts of Interest –
Ongoing Burden & Costs
To maintain compliance with Regulation Best Interest, we assume for purposes of this
analysis that a broker-dealer would seek to identify additional conflicts as its business evolves.
The Commission recognizes that the types of services and product offerings vary greatly by
broker-dealer. However, for purposes of this analysis, we assume that broker-dealers would, at a
minimum, engage in a material conflicts identification process on an annual basis. 107 We
estimate that a broker-dealer’s business line and compliance personnel would jointly spend, on
average, 10 hours 108 to perform an annual conflicts review using the modified technology
infrastructure. Therefore the aggregate, ongoing burden for an annual conflicts review, based on
an estimated 2,857 retail broker-dealers, would be approximately 28,570 burden hours. 109
Because we assume that broker-dealers would use in-house personnel to identify and evaluate
new, potential conflicts, we do not believe they would incur additional ongoing costs.
e. Training –
Initial One-Time Burden & Costs
Pursuant to the obligation to “maintain and enforce” written policies and procedures, we
additionally expect broker-dealers to develop training programs that promote compliance with
103
104
105
106
107
108
109
This burden estimate is based on the following calculation: (5 burden hours) x (2,857
broker-dealers) = 14,285 aggregate burden hours.
This burden estimate consists of 2.5 hours for review by a senior business analyst, and
2.5 hours for review by in-house compliance manager.
This burden estimate is based on the following calculation: (5 burden hours) x (2,857
broker-dealers) = 14,285 aggregate burden hours.
This burden estimate is based on the following calculation: (14,285 burden hours for
modification of technology) + (14,285 burden hours for evaluation of conflict materiality)
= 28,570 total aggregate burden hours.
Analogously, FINRA rules set an annual supervisory review as a minimum threshold for
broker-dealers. See, e.g., FINRA Rules 3110 (requiring an annual review of the
businesses in which the broker-dealer engages); 3120 (requiring an annual report
detailing a broker-dealer’s system of supervisory controls, including compliance efforts
in the areas of antifraud and sales practices); and 3130 (requiring each broker-dealer’s
CEO or equivalent officer to certify annually to the reasonable design of the policies and
procedures for compliance with relevant regulatory requirements).
This burden estimate consists of 5 hours for review by a senior business analyst, and 5
hours for review by an in-house compliance counsel or compliance manager.
This estimate is based on the following calculation: (10 hours of labor per retail brokerdealer) x (2,857 retail broker-dealers) = 28,570 aggregate burden hours.
21
Regulation Best Interest among registered representatives. We believe that broker-dealers would
likely use a computerized training module to train registered representatives on the policies and
procedures pertaining to Regulation Best Interest. We estimate that a broker-dealer would retain
an outside systems analyst, an outside programmer, and an outside programmer analyst to create
the training module, at 20 hours, 40 hours, and 20 hours, respectively. The total cost for a
broker-dealer to develop the training module would be approximately $21,600, 110 for an
aggregate initial cost of $61.7 million. 111
Additionally, we expect that the training module would require the approval of the Chief
Compliance Officer, as well as in-house legal counsel, each of whom we expect would require
approximately 2 hours to review and approve the training module. The aggregate burden for
broker-dealers is therefore estimated at 11,428 burden hours. 112
In addition, broker-dealers would incur an initial cost for registered representatives to
undergo training through the training module. We estimate the training time at one hour per
registered representative, for an aggregate burden of 435,071 burden hours, or an initial burden
of 152.3 hours per broker-dealer. 113 The total aggregate burden to approve the training module
and implement the training program would be 446,499 burden hours. 114
f. Training –
Ongoing Burden & Costs
We believe that, as a matter of best practice, broker-dealers would likely require
registered representatives to repeat the training module for Regulation Best Interest on an annual
basis. The ongoing aggregate cost for the one-hour training would be 435,071 burden hours per
year, or 152.3 burden hours per broker-dealer per year. 115
110
111
112
113
114
115
This estimate is based on the following calculation: ((20 hours of labor for a systems
analyst) x ($270/hour)) + ((40 hours of labor for a programmer) x ($270/hour)) + ((20
hours of labor for a programmer analyst) x ($270/hour)) = $21,600 in external technology
service costs per broker-dealer. The $270 estimated average hourly rate for technology
services is based on industry sources.
This estimate is based on the following calculation: (2,857 broker-dealers) x ($21,600
cost per broker-dealer) = $61.7 million in aggregate costs for technology services.
This estimate is based on the following calculation: (2,857 broker-dealers) x (4 burden
hours per broker-dealer) = 11,428 burden hours.
This estimate is based on the following calculation: (1 burden hour) x (435,071 registered
representatives at standalone or dually-registered broker-dealers) = 435,071 aggregate
burden hours. Conversely, (435,071 aggregate burden hours) / (2,857 retail brokerdealers) = 152.3 initial burden hours per broker-dealer.
This estimate is based on the following calculation: (435,071 burden hours for training of
registered representatives) + (11,428 burden hours to approve training program) =
446,499 total aggregate burden hours.
This estimate is based on the following calculation: (1 burden hour) x (435,071 registered
representatives at standalone or dually-registered broker-dealers) = 435,071 burden
22
Summary of Hourly Burdens
Name of
Information
Collection
A.
B.
C.
D.
E.
F.
G.
H.
I.
Number of
Entities
Impacted
Annual
Responses per
Entity
Initial Burden
per Entity per
Response
Total
Initial
OneTime
Burden
Initial Burden
Annualized per
Entity per Response
Ongoing
Burden
per Entity
per
Response
Annual
Burden Per
Entity per
Response
Total Ongoing
Burden per
Year per
Entity
Total
Industry
Burden
Small
Business
Entities
Affected
[ E + F]
[G * B]
[H * A]
[A *
28.071%]
[Type of Burden]
Disclosure
Obligation 15l1(a)(2)(i)
[C ÷ 3 years]
[Third-Party
Disclosure]
(1) Disclosure of
Capacity, Type, and
Scope of Services
(2) Disclosure of
Fees
(3) Disclosure of
Material Conflicts
of Interest
360 duallyregistered
BD/IAs
1
10
3,600
3.333
7
10.333
10.333
3,720
101
802 small
standalone BDs
1
10
8,020
3.333
4
7.333
7.333
5,881.07
802
2,055 large
standalone BDs
1
20
41,100
6.667
20
26.667
26.667
54,800.07
0
2,857 all BDs
33,321.67
.02
1,904,000
.00667
0
.00667
222.26
634,984.07
802
2,857 all BD’s
6,664.33
0
0
0
.02
.02
133.29
380,799.82
802
802 small
standalone BDs
1
5
4,010
1.667
2
3.667
3.667
2,940.93
802
2,055 large
standalone BDs
1
10
20,550
3.333
4
7.333
7.333
15,069.32
0
2,857 all BDs
33,321.67
.02
1,904,000
.00667
0
.00667
222.26
634,984.07
802
2,857 all BDs
13,328.67
0
0
0
.02
.02
266.57
761,590.49
802
802 small
standalone BDs
1
5
4,010
1.667
1
2.667
2.667
2,138.93
802
2,055 large
standalone BDs
1
7.5
15,413
2.5
2
4.5
4.5
9,247.50
0
2,857 all BDs
33,321.67
.02
1,904,000
.00667
0
.00667
222.26
634,984.07
802
2,857 all BDs
13,287.67
0
0
0
.02
.02
266.57
761,590.49
802
TOTAL BURDEN FOR ALL RESPONDENTS (DISCLOSURE OBLIGATION)
3,902,731
hours. Conversely, (435,071 aggregate burden hours) / (2,857 retail broker-dealers) =
152.3 initial burden hours per broker-dealer.
23
Name of
Information
Collection
A.
B.
C.
D.
E.
F.
G.
H.
I.
Number of
Entities
Impacted
Annual
Responses per
Entity
Initial Burden
per Entity per
Response
Total
Initial
OneTime
Burden
Initial Burden
Annualized per
Entity per Response
Ongoing
Burden
per Entity
per
Response
Annual
Burden Per
Entity per
Response
Total Ongoing
Burden per
Year
Total
Industry
Burden
Small
Business
Entities
Affected
[ E + F]
[G * B]
[H * A]
[A *
28.071%]
0
[Type of Burden]
Conflict of Interest
Obligations
15l-1(a)(2)(iii)
[C ÷ 3 years]
[Recordkeeping]
(1) Written Policies
& Procedures
(2) Identification of
Material Conflicts of
Interest
2,055 large BDs
1
60
123,300
20
12
32
32
65,760
802 small BDs
1
10
8,020
3.33
5
8.33
8.33
6,680.66
802
2,857 all BDs
1
10
28,570
3.33
10
13.33
13.33
38,083.81
802
2,857 all BDs
1
4
11,428
1.333
0
1.333
1.333
3,808.38
802
2,857 all BDs
152.3
1
435,071
0.333
1
1.333
203.06
580,142.42
802
(3) Training
(a) Develop Module
(b) Implement
Training
TOTAL BURDEN FOR ALL RESPONDENTS (CONFLICT OF INTEREST OBLIGATIONS)
TOTAL BURDEN FOR ALL RESPONDENTS
694,475
4,597,206
Summary of Costs to Respondents
The Commission proposes to adopt Regulation Best Interest, which would require
broker-dealers to make and keep current various records. As described in more detail above, the
Commission estimates this rule would impose various costs, in addition to hour burdens, on each
broker-dealer. Specifically, the Commission estimates this rule would impose on each brokerdealer an initial cost of $49,954 in the first year and an ongoing cost of $1,078 per year
(including the first year). The Commission estimates there are 2,857 broker-dealers. This would
result in an estimated cost $53,189 per respondent, 116 or $17,730 per year per respondent when
annualized over three years. 117 The total estimated industry burden would be approximately
$50,653,315. 118.
116
117
$49,954 initial costs in first year + $1,078 ongoing in first year + $1,078 in second year +
$1,078 in third year = $53,189.
$53,189 / 3 years = $17,730 per year. These figures represent average, industry-wide
costs without respect to the size or type of broker-dealer. As described above and set
24
Summary of Dollar Costs
Name of
Information
Collection
A.
B.
C.
D.
E.
F.
G.
H.
I.
Number of
Entities
Impacted
Annual
Responses per
Entity
Initial Cost
per Entity per
Response
Total
Initial OneTime Cost
Initial Cost
Annualized per
Entity per Response
Ongoing
Cost per
Entity per
Response
Annual
Cost per
Entity per
Response
Total Annual
Cost Per
Entity
Total
Industry Cost
[ E + F]
[G * B]
[H * A]
[Type of Burden]
Disclosure
Obligation 15l1(a)(2)(i)
[C ÷ 3 years]
Small
Business
Entities
Affected
[Third-Party
Disclosure]
(1) Disclosure of
Capacity, Type, and
Scope of Services
(2) Disclosure of
Fees
(3) Disclosure of
Material Conflicts of
Interest
360 duallyregistered
BD/IAs
1
$4,720
$1,699,200
$1,573.33
0
$1,573.33
$1,573.33
$566,400.00
101
802 small
standalone BDs
1
$4,720
$3,785,440
$1,573.33
0
$1,573.33
$1,573.33
$1,261,813.33
802
2,055 large
standalone BDs
1
$7,080
$14,549,400
$2,360
0
$2,360
$2,360
$4,849,800.00
0
802 small
standalone BDs
1
$2,360
$1,892,720
$786.67
0
$786.67
$786.67
$630,906.67
802
2,055 large
standalone BDs
1
$4,720
$9,699,600
$1,573.33
0
$1,573.33
$1,573.33
$3,233,200.00
0
802 small
standalone BDs
1
$2,360
$1,892,720
$786.67
0
$786.67
$786.67
$630,906.67
802
2,055 large
standalone BDs
1
$3,540
$7,274,700
$1,180
0
$1,180
$1,180
$2,424,900.00
0
TOTAL COST FOR ALL RESPONDENTS (DISCLOSURE OBLIGATION)
118
$13,597,927
forth in the table, the actual estimated costs differ based on the size and type of brokerdealer.
$17,730 per respondent * 2,857 broker-dealers = $50,653,315. This figure is slightly
different from the value in the chart due to rounding.
25
Name of
Information
Collection
A.
B.
C.
D.
E.
F.
G.
H.
I.
Number of
Entities
Impacted
Annual
Responses
per Entity
Initial Cost
per Entity
per
Response
Total
Initial OneTime Cost
Initial Cost
Annualized per
Entity per
Response
Ongoing
Cost per
Entity per
Response
Annual
Cost Per
Entity per
Response
Total Annual
Cost Per
Entity
Total Industry Cost
[ E + F]
[G * B]
[H * A]
[Type of Burden]
Conflict of Interest
Obligations
15l-1(a)(2)(iii)
[C ÷ 3 years]
Small
Business
Entities
Affected
[Recordkeeping]
(1) Written
Policies &
Procedures
2,055 large
standalone
BDs
1
$4,720
$9,699,600
$1,573.33
0
$1,573.33
$1,573.33
$3,233,193.15
0
802 small
standalone
BDs
1
$18,880
$15,141,760
$6,293.33
$3,850
$10,143.33
$10,143.33
$8,134,950.66
101
(2) Identification of
Material Conflicts
of Interest
2,857 all BDs
1
$5,400
$15,427,800
$1,800
0
$1,800
$1,800
$5,142,600.00
802
(3) Training
2,857 all BDs
1
$21,600
$61,711,200
$7,200
0
$7,200
$7,200
$20,570,400.00
802
TOTAL COST FOR ALL RESPONDENTS (CONFLICT OF INTEREST OBLIGATIONS)
$37,081,144
TOTAL COSTS FOR ALL RESPONDENTS (FOR ALL OBLIGATIONS)
$50,679,071
26
14.
Cost to Federal Government
Commission staff estimates that there is no annual cost associated with information
submitted to the Commission under the new rules, other than the cost of full-time employee labor
costs.
15.
Explanation of Changes in Burden
N/A
16.
Information Collection Planned for Statistical Purposes
Not applicable. The Commission does not publish information collected pursuant to the
Rules.
17.
OMB Expiration Date Display Approval
The Commission is not seeking approval to not display the OMB approval expiration
date.
18.
Exceptions to Certification for Paperwork Reduction Act Submissions
This collection complies with the requirements in 5 CFR 1320.9.
B.
COLLECTION OF INFORMATION EMPLOYING STATISTICAL METHODS
This collection does not involve statistical methods.
27
| File Type | application/pdf |
| File Modified | 2018-06-15 |
| File Created | 2018-06-15 |