LegiStorm

Summary:
Highlights

GAO reviewed the Securities and Exchange Commission's (Commission) new rule on the broker-dealer standard of conduct. GAO found that the final rule (A) establishes a standard of conduct for broker-dealers and natural persons who are associated persons of a broker-dealer when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities; and (B) enhances the broker-dealer standard of conduct beyond existing suitability obligations and aligns the standard of conduct with retail customers' reasonable expectations by requiring broker-dealers, among other things, to: (1) act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker-dealer ahead of the interests of the retail customer; and (2) address conflicts of interest by establishing, maintaining, and enforcing policies and procedures reasonably designed to identify and fully and fairly disclose material facts about conflicts of interest, and in instances where it has been determined that disclosure is insufficient to reasonably address the conflict, to mitigate or, in certain instances, eliminate the conflict.







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B-331218
July 26, 2019
The Honorable Mike Crapo
Chairman
The Honorable Sherrod Brown
Ranking Member
Committee on Banking, Housing, and Urban Affairs
United States Senate
The Honorable Maxine Waters
Chairwoman
The Honorable Patrick McHenry
Ranking Member
Committee on Financial Services
House of Representatives
Subject: Securities and Exchange
Commission: Regulation Best Interest: The Broker-Dealer Standard of Conduct
Pursuant to section 801(a)(2)(A) of title 5, United States Code, this is our report on a
major rule promulgated by the Securities and Exchange Commission (Commission) entitled
?Regulation Best Interest: The Broker-Dealer Standard of Conduct? (RIN: 3235-AM35). 
We received the rule on June 7, 2019.  It was published in the Federal Register
as a final rule on July 12, 2019.  84 Fed. Reg. 33318.  The effective date of the
rule is September 10, 2019.
The Commission stated the final rule establishes a standard of conduct for
broker-dealers and natural persons who are associated persons of a broker-dealer when they
make a recommendation to a retail customer of any securities transaction or investment
strategy involving securities.  The Commission further stated the final rule enhances
the broker-dealer standard of conduct beyond existing suitability obligations and aligns
the standard of conduct with retail customers? reasonable expectations by requiring
broker-dealers, among other things, to: (1) act in the best interest of the retail customer
at the time the recommendation is made, without placing the financial or other interest of
the broker-dealer ahead of the interests of the retail customer; and (2) address conflicts
of interest by establishing, maintaining, and enforcing policies and procedures reasonably
designed to identify and fully and fairly disclose material facts about conflicts of
interest, and in instances where it has been determined that disclosure is insufficient to
reasonably address the conflict, to mitigate or, in certain instances, eliminate the
conflict.  The Commission also stated the standard of conduct in the final rule draws
from key principles underlying fiduciary obligations, including those that apply to
investment advisers under the Investment Advisers Act of 1940.  Importantly, according
to the Commission, regardless of whether a retail investor chooses a broker-dealer or an
investment adviser (or both), the retail investor will be entitled to a recommendation
(from a broker-dealer) or advice (from an investment advisor) that is in the best interest
of the retail investor and that does not place the interests of the firm or the financial
professional ahead of the interests of the retail customer.
Enclosed is our assessment of the Commission?s compliance with the procedural steps
required by section 801(a)(1)(B)(i) through (iv) of title 5 with respect to the rule. 
If you have any questions about this report or wish to contact GAO officials responsible
for the evaluation work relating to the subject matter of the rule, please contact Janet
Temko-Blinder, Assistant General Counsel, at (202) 512-7104.
  signed
Shirley A. Jones
Managing Associate General Counsel
Enclosure
cc: Vanessa Countryman
Acting Secretary
Securities and Exchange CommissionENCLOSURE
REPORT UNDER 5 U.S.C. § 801(a)(2)(A) ON A
MAJOR RULE
ISSUED BY THE
SECURITIES AND EXCHANGE COMMISSION
ENTITLED
?Regulation Best Interest:
The Broker-Dealer Standard of Conduct? (RIN: 3235-AM35)
(i) Cost-benefit analysis
The Securities and Exchange Commission (Commission) stated the final rule contains
several different obligations, and each obligation has its own costs and benefits. 
Key examples from each obligation follow.  The Commission stated the ?Disclosure
Obligation? would create costs for broker-dealers by having to evaluate their continued use
of the title adviser and advisor as well as any rebranding for any business using those
terms in its name or materials.  The Commission also stated broker-dealers will incur
costs in assessing potential conflicts of interest on a case-by-case basis, preparing
disclosure materials, and documenting when disclosures occur.  Overall, the Commission
estimated the ?Disclosure Obligation? will impose an initial aggregate cost of $1,508.88
million and ongoing annual costs of $499.59 million.  Also, the Commission stated the
?Care Obligation? may require broker-dealers to stop offering certain products, which could
lead to a loss of revenue.  The Commission also stated the obligation could lead to
increased retail customer arbitration or litigation.  Next, the Commission stated the
?Conflict of Interest Obligation? would impose costs on broker-dealers as they expend
resources to identify current and potential conflicts of interest and periodically review
and update their procedures to account for new conflicts and circumstances.  The
Commission also stated broker-dealers may have to stop offering certain products and forgo
revenues to comply with the obligation.  The Commission estimates the obligation would
impose an initial aggregate cost of $110.73 million and an ongoing aggregate annual cost of
at least $20.44 million on broker-dealers.  Also, the Commission stated the
?Compliance Obligation? would impose training as well as other costs on
broker-dealers.  The Commission estimated the obligation would impose an initial
aggregate cost of $214.66 million and an ongoing aggregate cost of $110.86 million on
broker-dealers.  Finally, the Commission estimated the ?Record-Making and
Recordkeeping Obligations? would impose an initial aggregate burden of $375,732 and
17,684,020 hours as well as an ongoing aggregate annualized burden of 5,520,800
hours.  After monetizing the burden hours, the Commission estimates the obligation
imposes an initial aggregate cost of $4,121.73 million and an ongoing aggregate annual cost
of $7,736.52 million.
The Commission stated the ?Disclosure Obligation? would benefit retail customers by
making them aware of the capacity in which a broker-dealer is acting, which will allow them
to better evaluate the advice they receive.  The Commission also stated this
obligation would allow investors to seek an advisory relationship if desired and focus
their attention on any potential conflicts of interest, amongst other benefits.  Also,
the Commission stated the ?Care Obligation? would benefit customers by reducing the
incidence of high-cost investment recommendations when there are reasonable alternatives.
 The Commission further stated the obligation will increase recommendation efficiency
and enhance investor protection.  Next, the Commission stated the ?Conflict of
Interest Obligation? would benefit retail customers by reducing information asymmetry
between the customer and the broker-dealer and reduce the effect of incentives posed by
these conflicts.  Also, the Commission stated the ?Compliance Obligation? would
indirectly benefit retail customers by ensuring broker-dealers have in place sufficient
internal controls.
(ii) Agency actions relevant to the Regulatory Flexibility Act (RFA), 5 U.S.C. §§
603-605, 607, and 609
The Commission stated it prepared a Final Regulatory Flexibility Analysis in accordance
with the provisions of the Act.  The analysis included (1) a statement of the need for
and objectives of the final rule; (2) a description of issues raised by public comments;
(3) a description of small entities subject to the rule; (4) projected reporting,
recordkeeping, and other compliance requirements; and (5) and a description of the
Commission?s actions to minimize effects of the rule.
(iii) Agency actions relevant to sections 202-205 of the Unfunded Mandates Reform Act
of 1995, 2 U.S.C. §§ 1532-1535
As an independent regulatory agency, the Commission is not subject to the Act.
(iv) Other relevant information or requirements under acts and executive
orders
Administrative Procedure Act, 5 U.S.C. §§ 551et seq.
On May 9, 2018, the Commission published a notice of proposed rulemaking. 
83 Fed. Reg. 21574.  The Commission further stated it received over
6,000 comment letters in connection with the proposed rule, of which approximately 3,000
were unique comments letters.  The Commission stated the comments came from a variety
of sources including individual investors, consumer advocacy groups, financial services
firms (including broker-dealers, investment advisers, and insurance companies), investment
professionals, industry and trade associations, state securities regulators, bar
associations, and others.  The Commission also stated it solicited individual
investors? input through a number of forums and also hosted seven investor roundtables and
received in-person feedback from 200 attendees.  The Commission responded to comments
in the final rule.
Paperwork Reduction Act (PRA), 44 U.S.C. §§ 3501-3520
The Commission determined the final rule contains information collection requirements
(ICR) under the Act.  The Commission stated the ICRs were submitted to the Office of
Management and Budget (OMB) for review.  The ICRs include ?Regulation Best Interest,?
?Records to made by certain exchange members, brokers and dealers? (OMB Control No.
3235-0033), and ?Records to be preserved by certain exchange members, brokers and dealers?
(OMB Control No. 3235-0279). 
Under the final rule?s ?Disclosure Obligation,? the Commission estimates broker-dealers
will incur an aggregate total initial burden of 6,216,125 hours and a total initial cost of
$42.84 million as well as an aggregate total ongoing annual burden of 2,101,493 hours to
comply with the related ICRs. 
Under the final rule?s ?Conflict of Interest Obligation,? the Commission estimates
broker-dealers will incur an aggregate total initial burden of 197,310 hours and a total
initial cost of $40.71 million as well as an aggregate total ongoing burden of 55,560 hours
and $2.91 million to comply with the related ICRs. 
Under the final rule?s ?Compliance Obligation,? the Commission estimates broker-dealers
will incur an aggregate total initial burden of 524,414 hours and a total initial cost of
$71.4 million as well as an aggregate total ongoing burden of 463,588 hours and $2.91
million to comply with the related ICRs. 
Under the final rule?s record-making obligations, the Commission estimates
broker-dealers will incur an aggregate total initial burden of 4,084,020 hours and a total
initial cost of $375,732 as well as an aggregate total ongoing annual burden of 1,060,000
hours to comply with the related ICRs. 
Under the final rule?s recordkeeping obligation, the Commission estimates broker-dealers
will incur an aggregate total initial burden of 13,600,000 hours as well as an aggregate
total ongoing annual burden of 4,460,000 hours to comply with the related ICRs.
Statutory authorization for the rule
The Commission stated it promulgated the rule under section 913(f) of the Dodd-Frank
Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376, 1827,
as well as 15 U.S.C. §§ 78c, 78j, 78o, 78q, 78w, and 78mm.
Executive Order No. 12,866 (Regulatory Planning and Review)
As an independent regulatory agency, the Commission is not subject to the Order.
Executive Order No. 13,132 (Federalism)
As an independent regulatory agency, the Commission is not subject to the Order.




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