| Page Range | 21165-21706 | |
| FR Document |
| Page and Subject | |
|---|---|
| 83 FR 21333 - Imposition of Nonproliferation Measures Against Rosoboronexport, Including a Ban on U.S. Government Procurement | |
| 83 FR 21169 - Airworthiness Directives; Rolls-Royce plc Turbojet Engines | |
| 83 FR 21171 - Special Local Regulation; Wolf River Chute, Memphis, TN | |
| 83 FR 21276 - Taking and Importing Marine Mammals; Taking Marine Mammals Incidental to Construction and Operation of the Liberty Drilling and Production Island, Beaufort Sea, Alaska | |
| 83 FR 21301 - National Institute on Drug Abuse; Notice of Closed Meeting | |
| 83 FR 21300 - National Institute on Drug Abuse; Notice of Closed Meetings | |
| 83 FR 21302 - National Institute of Biomedical Imaging and Bioengineering; Notice of Closed Meeting | |
| 83 FR 21304 - Center for Scientific Review; Notice of Closed Meetings | |
| 83 FR 21272 - National Cybersecurity Center of Excellence (NCCoE) Securing Picture Archiving and Communication System (PACS) Cybersecurity for the Healthcare Sector | |
| 83 FR 21335 - Notice of Submission Deadline for Schedule Information for Chicago O'Hare International Airport, John F. Kennedy International Airport, Los Angeles International Airport, Newark Liberty International Airport, and San Francisco International Airport for the Winter 2018/2019 Scheduling Season | |
| 83 FR 21278 - Renewal of the Market Risk Advisory Committee | |
| 83 FR 21182 - Endangered and Threatened Wildlife and Plants: Final Rule To List the Taiwanese Humpback Dolphin as Endangered Under the Endangered Species Act | |
| 83 FR 21235 - Air Plan Approval; California; Yolo-Solano Air Quality Management District; Negative Declarations | |
| 83 FR 21233 - Approval and Promulgation of Air Quality Implementation Plans; Virginia; Interstate Transport Requirements for the 2012 Fine Particulate Matter Standard | |
| 83 FR 21295 - Change in Bank Control Notices; Acquisitions of Shares of a Bank or Bank Holding Company | |
| 83 FR 21318 - Proposed Collection; Comment Request | |
| 83 FR 21309 - Notice of Funds and Request for Applications for 2017 Hurricanes and Wildfires Disaster-Response Legal Services Grants | |
| 83 FR 21226 - Interstate Transport Prongs 1 and 2 for the 2012 Fine Particulate Matter (PM2.5 | |
| 83 FR 21340 - Agency Information Collection Activity Under OMB Review: Funeral Arrangements | |
| 83 FR 21214 - Ballast Water Management-Annual Reporting Requirement | |
| 83 FR 21283 - 229 Boundary Notice for the Pantex Plant Administrative Support Complex | |
| 83 FR 21339 - Agency Information Collection Activities: Information Collection Renewal; Submission for OMB Review; Customer Complaint Form | |
| 83 FR 21181 - Accelerating Wireline Broadband Deployment by Removing Barriers to Infrastructure Investment | |
| 83 FR 21282 - Change in Control: Cameron LNG, LLC | |
| 83 FR 21338 - Agency Information Collection Activities: Request for Comments for a New Information Collection | |
| 83 FR 21263 - Notice of Funding Availability: Inviting Applications for the Market Access Program | |
| 83 FR 21295 - Common Formats for Patient Safety Data Collection | |
| 83 FR 21257 - Notice of Funding Availability: Inviting Applications for the Quality Samples Program | |
| 83 FR 21260 - Notice of Funding Availability: Inviting Applications for the Technical Assistance for Specialty Crops Program | |
| 83 FR 21269 - Notice of Funding Availability: Inviting Applications for the Foreign Market Development Cooperator Program | |
| 83 FR 21265 - Notice of Funding Availability: Inviting Applications for the Emerging Markets Program | |
| 83 FR 21284 - Combined Notice of Filings #1 | |
| 83 FR 21284 - Notice of Petition for Declaratory Order: Buckeye Pipe Line Company, L.P., Laurel Pipe Line Company, L.P. | |
| 83 FR 21288 - Commission Information Collection Activities (FERC-917 and FERC-918); Comment Request; Extension | |
| 83 FR 21291 - Notice of Intent to Prepare an Environmental Assessment for the Proposed Cheyenne Connector Pipeline and Cheyenne Hub Enhancement Projects and Request for Comments On Environmental Issues: Cheyenne Connector, LLC; Rockies Express Pipeline LLC | |
| 83 FR 21293 - Notice of Electric Quarterly Report Users Group Meeting | |
| 83 FR 21290 - Notice of Document Labelling Guidance for Documents Submitted to or Filed With the Commission or Commission Staff | |
| 83 FR 21294 - Notice of Commission Staff Attendance | |
| 83 FR 21285 - Before Commissioners: Cheryl A. LaFleur, Neil Chatterjee, Robert F. Powelson, and Richard Glick | |
| 83 FR 21294 - Notice of Institution of Section 206 Proceeding and Refund Effective Date; NRG Energy Center Dover LLC | |
| 83 FR 21293 - Notice of Institution of Section 206 Proceeding and Refund Effective Date; NRG Wholesale Generation LP | |
| 83 FR 21294 - Energy Storage Association v. PJM Interconnection, L.L.C.; Renewable Energy System Americas and Invenergy Storage Development, LLC v. PJM Interconnection, L.L.C.; PJM Interconnection, L.L.C.; Notice of Technical Conference | |
| 83 FR 21287 - Combined Notice of Filings | |
| 83 FR 21290 - Combined Notice of Filings #2 | |
| 83 FR 21300 - Meeting of the Chronic Fatigue Syndrome Advisory Committee | |
| 83 FR 21297 - Waivers, Exceptions, and Exemptions From the Requirements of Section 582 of the Federal Food, Drug, and Cosmetic Act; Draft Guidance for Industry; Availability | |
| 83 FR 21307 - Notice of Lodging of Proposed Consent Decree Under the Clean Water Act | |
| 83 FR 21319 - Self-Regulatory Organizations; Nasdaq PHLX LLC; Order Approving a Proposed Rule Change Amending Rule 1079, FLEX Index, Equity and Currency Options, and Rule 1059, Accommodation Transactions, To Allow the Closing of Flexible Exchange Options (“FLEX options”) in Cabinet Trading | |
| 83 FR 21277 - Submission for OMB Review; Comment Request | |
| 83 FR 21276 - Submission for OMB Review; Comment Request | |
| 83 FR 21274 - Proposed Information Collection; Comment Request; Observer Programs' Information That Can Be Gathered Only Through Questions | |
| 83 FR 21275 - Proposed Extension of a Currently Approved Information Collection; Comment Request; Aleutian Islands Pollock Fishery | |
| 83 FR 21280 - Agency Information Collection Activities; Submission to the Office of Management and Budget for Review and Approval; Comment Request; Assurance of Compliance-Civil Rights Certificate | |
| 83 FR 21308 - Inorganic Arsenic Standard; Extension of the Office of Management and Budget's (OMB) Approval of Information Collection (Paperwork) Requirements | |
| 83 FR 21280 - National Assessment Governing Board | |
| 83 FR 21324 - Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Extend the Operation of the SPXPM Pilot Program | |
| 83 FR 21316 - Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Renew the Nonstandard Expirations Pilot Program | |
| 83 FR 21335 - RTCA PMC Program Management Committee Plenary | |
| 83 FR 21327 - Meeting of the Interagency Task Force on Veterans Small Business Development | |
| 83 FR 21299 - National Advisory Council on the National Health Service Corps; Notice of Meeting | |
| 83 FR 21327 - Meeting of the Advisory Committee on Veterans Business Affairs | |
| 83 FR 21279 - Proposed Collection; Comment Request | |
| 83 FR 21340 - Health Services Research and Development Service Scientific Merit Review Board; Notice of Meeting | |
| 83 FR 21221 - Changes to the Claim Construction Standard for Interpreting Claims in Trial Proceedings Before the Patent Trial and Appeal Board | |
| 83 FR 21188 - Irish Potatoes Grown in Certain Designated Counties in Idaho, and Malheur County, Oregon; Modification of Handling Regulations | |
| 83 FR 21306 - Low Melt Polyester Staple Fiber (PSF) From Korea and Taiwan; Revised Schedule for Final Investigations | |
| 83 FR 21307 - Certain Mobile Electronic Devices and Radio Frequency and Processing Components Thereof; Notice of Commission Determination To Amend the Notice of Investigation To Delete Certain Claims That Were Erroneously Included Due to an Apparent Typographical Error | |
| 83 FR 21165 - Grapes Grown in a Designated Area of Southeastern California; Decreased Assessment Rate | |
| 83 FR 21304 - Office of The Director, National Institutes of Health; Notice of Meeting | |
| 83 FR 21302 - National Institute of Diabetes and Digestive and Kidney Diseases Notice of Closed Meetings | |
| 83 FR 21303 - National Institute of Diabetes and Digestive and Kidney Diseases; Notice of Closed Meetings | |
| 83 FR 21304 - National Institute on Aging; Notice of Closed Meeting | |
| 83 FR 21301 - Center for Scientific Review; Notice of Closed Meetings | |
| 83 FR 21279 - Submission for OMB Review; Comment Request | |
| 83 FR 21295 - Notice of Termination of Receiverships | |
| 83 FR 21320 - Self-Regulatory Organizations; BOX Options Exchange LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Adopt Price Protections for Complex Orders | |
| 83 FR 21167 - Regulation A: Extensions of Credit by Federal Reserve Banks | |
| 83 FR 21328 - Agency Information Collection Activities: Proposed Request and Comment Request | |
| 83 FR 21310 - Northern States Power Company: Monticello Nuclear Generating Plant | |
| 83 FR 21238 - Approval and Promulgation of Air Quality State Implementation Plans; California; Chico Redesignation Request and Maintenance Plan for the 2006 24-hour PM2.5 | |
| 83 FR 21309 - Notice of Intent To Grant Partially Exclusive Patent License; Correction | |
| 83 FR 21174 - Approval and Promulgation of Implementation Plans; New Jersey; Motor Vehicle Enhanced Inspection and Maintenance Program | |
| 83 FR 21178 - Approval and Promulgation of Implementation Plans; Texas; Revisions to Permitting and Public Participation for Air Quality Permit Applications | |
| 83 FR 21191 - Airworthiness Directives; ATR-GIE Avions de Transport Régional Airplanes | |
| 83 FR 21196 - Airworthiness Directives; Airbus Airplanes | |
| 83 FR 21194 - Airworthiness Directives; Airbus Helicopters | |
| 83 FR 21278 - Community Bank Advisory Council Meeting | |
| 83 FR 21296 - Agency Information Collection Activities: Proposed Collection; Comment Request | |
| 83 FR 21254 - Outer Continental Shelf Air Regulations; Consistency Update for Massachusetts; Reopening of Comment Period | |
| 83 FR 21199 - Airworthiness Directives; SOCATA Airplanes | |
| 83 FR 21334 - Thirty Sixth RTCA SC-214 Standards for Air Traffic Data Communications Services Plenary | |
| 83 FR 21334 - Eighty Eighth RTCA SC-147 Plenary Session Joint With EUROCAE WG-75 | |
| 83 FR 21684 - Aviation Economic Regulation Amendments | |
| 83 FR 21203 - Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers; Request for Comment on Enhancing Investment Adviser Regulation | |
| 83 FR 21342 - Reform of Generator Interconnection Procedures and Agreements | |
| 83 FR 21416 - Form CRS Relationship Summary; Amendments to Form ADV; Required Disclosures in Retail Communications and Restrictions on the Use of Certain Names or Titles | |
| 83 FR 21574 - Regulation Best Interest |
Agricultural Marketing Service
Commodity Credit Corporation
Foreign Agricultural Service
National Institute of Standards and Technology
National Oceanic and Atmospheric Administration
Patent and Trademark Office
Army Department
Federal Energy Regulatory Commission
National Nuclear Security Administration
Agency for Healthcare Research and Quality
Centers for Medicare & Medicaid Services
Food and Drug Administration
Health Resources and Services Administration
National Institutes of Health
Coast Guard
Occupational Safety and Health Administration
Federal Aviation Administration
Federal Highway Administration
Comptroller of the Currency
Consult the Reader Aids section at the end of this issue for phone numbers, online resources, finding aids, and notice of recently enacted public laws.
To subscribe to the Federal Register Table of Contents electronic mailing list, go to https://public.govdelivery.com/accounts/USGPOOFR/subscriber/new, enter your e-mail address, then follow the instructions to join, leave, or manage your subscription.
Agricultural Marketing Service, USDA.
Final rule.
This rule implements a recommendation from the California Desert Grape Administrative Committee (Committee) to decrease the assessment rate established for the 2018 fiscal period for grapes grown in a designated area of southeastern California. The assessment rate will remain in effect indefinitely unless modified, suspended, or terminated.
Effective June 8, 2018.
Maria Stobbe, Marketing Specialist or Jeffrey Smutny, Regional Director, California Marketing Field Office, Marketing Order and Agreement Division, Specialty Crops Program, AMS, USDA; Telephone: (559) 487-5901, Fax: (559) 487-5906, or Email:
Small businesses may request information on complying with this regulation by contacting Richard Lower, Marketing Order and Agreement Division, Specialty Crops Program, AMS, USDA, 1400 Independence Avenue SW, STOP 0237, Washington, DC 20250-0237; Telephone: (202) 720-2491, Fax: (202) 720-8938, or Email:
This action, pursuant to 5 U.S.C. 553, amends regulations issued to carry out a marketing order as defined in 7 CFR 900.2(j). This rule is issued under Marketing Agreement and Order No. 925, as amended (7 CFR part 925), regulating the handling of grapes grown in a designated area of southeastern California. Part 925 (referred to as the “Order”) is effective under the Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-674), hereinafter referred to as the “Act.” The Committee locally administers the Order and is comprised of producers and handlers of grapes operating within the area of production, and a member of the public.
The Department of Agriculture (USDA) is issuing this rule in conformance with Executive Orders 13563 and 13175. This action falls within a category of regulatory actions that the Office of Management and Budget (OMB) exempted from Executive Order 12866 review. Additionally, because this rule does not meet the definition of a significant regulatory action, it does not trigger the requirements contained in Executive Order 13771. See OMB's Memorandum titled “Interim Guidance Implementing Section 2 of the Executive Order of January 30, 2017, titled `Reducing Regulation and Controlling Regulatory Costs' ” (February 2, 2017).
This rule has been reviewed under Executive Order 12988, Civil Justice Reform. Under the Order now in effect, grape handlers in a designated area of southeastern California are subject to assessments. Funds to administer the Order are derived from such assessments. It is intended that the assessment rate as established herein would be applicable to all assessable grapes beginning on January 1, 2018, and continue until amended, suspended, or terminated.
The Act provides that administrative proceedings must be exhausted before parties may file suit in court. Under section 608c(15)(A) of the Act, any handler subject to an order may file with USDA a petition stating that the order, any provision of the order, or any obligation imposed in connection with the order is not in accordance with law and request a modification of the order or to be exempted therefrom. Such handler is afforded the opportunity for a hearing on the petition. After the hearing, USDA would rule on the petition. The Act provides that the district court of the United States in any district in which the handler is an inhabitant, or has his or her principal place of business, has jurisdiction to review USDA's ruling on the petition, provided an action is filed not later than 20 days after the date of the entry of the ruling.
This rule decreases the assessment rate established for the 2018 and subsequent fiscal periods from $0.030 to $0.020 per 18-pound lug of grapes handled.
The Order provides authority for the Committee, with the approval of USDA, to formulate an annual budget of expenses and collect assessments from handlers to administer the program. The members of the Committee are producers and handlers of grapes grown in a designated area of southeastern California, and a member of the public. They are familiar with the Committee's needs and with the costs for goods and services in their local area and are thus in a position to formulate an appropriate budget and assessment rate. The assessment rate is formulated and discussed in a public meeting. Thus, all directly affected persons have an opportunity to participate and provide input.
For the 2016 and subsequent fiscal periods, the Committee recommended, and USDA approved, an assessment rate that would continue in effect from fiscal period to fiscal period unless modified, suspended, or terminated by USDA upon recommendation and information submitted by the Committee or other information available to USDA.
The Committee met on November 30, 2017, and unanimously recommended 2018 fiscal year expenditures of $119,000, with an estimated cash reserve of $115,000, and an assessment rate of $0.020 per 18-pound lug of grapes. In comparison, last fiscal year's budgeted expenditures were $108,500. The assessment rate of $0.020 is $0.010 lower than the rate currently in effect. The 2017 crop, at the higher assessment rate currently in effect, provided more income than required to cover expenses, resulting in an estimated financial reserve of $140,000. The financial reserves are sufficient to supplement this fiscal year's revenues at an assessment rate of $0.020 per 18-pound lug of grapes to fully fund the recommended 2018 budgeted expenditures.
The major expenditures recommended by the Committee for the
The assessment rate recommended by the Committee was derived by considering anticipated expenses, expected shipments of grapes in the production area, and the level of funds in the authorized reserve. Grape shipments for the year are estimated at 4.7 million 18-pound lugs, which should provide $94,000 in assessment income. Income derived from handler assessments, along with interest income and funds from the Committee's authorized reserve, should be adequate to cover budgeted expenses. Funds in the reserve (currently $140,000) would be kept within the maximum permitted by the Order (approximately one fiscal period's expenses as stated in § 925.42(a)(2)). The Committee would utilize approximately $25,000 of its reserve funds to fully fund the recommended 2018 fiscal year budget, while assessing the new 2018 fiscal year crop at the lower rate.
The assessment rate established in this rule will continue in effect indefinitely unless modified, suspended, or terminated by USDA upon recommendation and information submitted by the Committee or other available information.
Although this assessment rate will be effective for an indefinite period, the Committee will continue to meet prior to or during each fiscal period to recommend a budget of expenses and consider recommendations for modification of the assessment rate. The dates and times of Committee meetings are available from the Committee or USDA. Committee meetings are open to the public, and interested persons may express their views at these meetings. USDA will evaluate Committee recommendations and other available information to determine whether modification of the assessment rate is needed. Further rulemaking will be undertaken as necessary. The Committee's budget for fiscal year 2018 and those for subsequent fiscal periods will be reviewed and, as appropriate, approved by USDA.
Pursuant to requirements set forth in the Regulatory Flexibility Act (RFA) (5 U.S.C. 601-612), the Agricultural Marketing Service (AMS) has considered the economic impact of this rule on small entities. Accordingly, AMS has prepared this final regulatory flexibility analysis.
The purpose of the RFA is to fit regulatory actions to the scale of businesses subject to such actions in order that small businesses will not be unduly or disproportionately burdened. Marketing orders issued pursuant to the Act, and the rules issued thereunder, are unique in that they are brought about through group action of essentially small entities acting on their own behalf.
There are approximately 38 producers of grapes in the production area and approximately 14 handlers subject to regulation under the Marketing Order. Small agricultural producers are defined by the Small Business Administration (SBA) as those having annual receipts less than $750,000, and small agricultural service firms are defined as those whose annual receipts are less than $7,500,000 (13 CFR 121.201).
Eleven of the 14 handlers subject to the Marketing Order have annual grape sales of less than $7,500,000, according to USDA Market News Service and Committee data. In addition, information from the Committee and USDA's Market News shipping point pricing data indicates that at least ten of the 38 producers have annual receipts of less than $750,000. Thus, it may be concluded that a majority of the grape handlers regulated under the Marketing Order and at least ten of the producers could be classified as small entities under the SBA's definitions.
This rule decreases the assessment rate collected from handlers for the 2018 and subsequent fiscal periods from $0.030 to $0.020 per 18-pound lug of grapes. The Committee unanimously recommended fiscal year 2018 expenditures of $119,000 and an assessment rate of $0.020 per 18-pound lug. The assessment rate of $0.020 is $0.010 lower than the 2017 rate. The quantity of assessable commodity for the 2018 fiscal year is estimated at 4.7 million 18-pound lugs. Thus, the $0.020 rate should provide $94,000 in assessment income. Assessment income, interest income, plus the use of $25,000 in reserve funds, should be adequate to meet this 2018 fiscal year's expenses.
The major expenditures recommended by the Committee for the 2018 fiscal year include $65,000 for management and compliance services, $25,500 in office expenditures, and $28,500 for research. Budgeted expenses for these items in 2017 were $50,000 for management and compliance services, $28,330 in office expenditures, and $28,500 for research.
Prior to arriving at this budget and assessment rate, the Committee considered various options, such as maintaining the current assessment rate and expenditure levels. Alternative expenditure levels were discussed by the Committee, based upon the relative value of various activities to the grape industry. The Committee ultimately determined that 2018 expenditures of $119,000 were appropriate, and the recommended assessment rate and the use of $25,000 from the carry over financial reserves should provide sufficient revenue to meet its expenses.
A review of historical crop and price information, indicates that the shipping point price for the 2017 season averaged about $21.62 per 18-pound lug of California desert grapes handled. If the 2018 price is similar to the 2017 price, estimated assessment revenue as a percentage of total estimated handler revenue would be 0.09 percent for the 2018 season ($0.020 divided by $21.62 per 18-pound lug).
This action decreases the assessment obligation imposed on handlers. Assessments are applied uniformly on all handlers, and some of the costs may be passed on to producers. However, decreasing the assessment rate reduces the burden on handlers, and may reduce the burden on producers. In addition, the Committee's meeting was widely publicized throughout the production area. The grape industry and all interested persons were invited to attend the meeting and participate in Committee deliberations on all issues. Like all Committee meetings, the November 30, 2017, meeting was a public meeting and all entities, both large and small, were able to express views on this issue.
In accordance with the Paperwork Reduction Act of 1995, (44 U.S.C. Chapter 35), the Order's information collection requirements have been previously approved by OMB and assigned OMB No. 0581-0189, Generic Fruit Crops. No changes in those requirements are necessary as a result of this action. Should any changes become necessary, they would be submitted to OMB for approval.
This rule imposes no additional reporting or recordkeeping requirements on either small or large southeastern California grape handlers. As with all Federal marketing order programs, reports and forms are periodically reviewed to reduce information requirements and duplication by industry and public sector agencies. As mentioned in the initial regulatory flexibility analysis, USDA has not identified any relevant Federal rules that duplicate, overlap, or conflict with this final rule.
AMS is committed to complying with the E-Government Act, to promote the use of the internet and other information technologies to provide increased opportunities for citizen access to Government information and services, and for other purposes.
USDA has not identified any relevant Federal rules that duplicate, overlap, or conflict with this action.
A proposed rule concerning this action was published in the
A small business guide on complying with fruit, vegetable, and specialty crop marketing agreements and orders may be viewed at:
After consideration of all relevant material presented, including the information and recommendation submitted by the Committee and other available information, it is hereby found that this rule will tend to effectuate the declared policy of the Act.
Grapes, Marketing agreements, Reporting and recordkeeping requirements.
For the reasons set forth in the preamble, 7 CFR part 925 is amended as follows:
7 U.S.C. 601-674.
On and after January 1, 2018, an assessment rate of $0.020 per 18-pound lug is established for grapes grown in a designated area of southeastern California.
Board of Governors of the Federal Reserve System.
Final rule.
The Board of Governors of the Federal Reserve System (Board) is adopting final amendments to its Regulation A to revise the provisions regarding the establishment of the primary credit rate in a financial emergency and to delete the provisions relating to the use of credit ratings for collateral for extensions of credit under the former Term Asset-Backed Securities Loan Facility (TALF). The final amendments are intended to allow the regulation to address circumstances in which the Federal Open Market Committee (FOMC) has established a target range for the federal funds rate rather than a single target rate, and to reflect the expiration of the TALF program.
The final rule is effective June 8, 2018.
Sophia H. Allison, Special Counsel, (202-452-3565), Legal Division, or Lyle Kumasaka, Senior Financial Analyst, (202-452-2382), Division of Monetary Affairs; for users of Telecommunications Device for the Deaf (TDD) only, contact 202-263-4869; Board of Governors of the Federal Reserve System, 20th and C Streets NW, Washington, DC 20551.
The Federal Reserve Banks make primary, secondary, and seasonal credit available to depository institutions subject to rules and regulations prescribed by the Board. The primary, secondary, and seasonal credit rates are the interest rates that the twelve Federal Reserve Banks charge for extensions of credit under these programs. Under the primary credit program, Federal Reserve Banks may extend credit on a very short-term basis, typically overnight, to depository institutions that are in generally sound condition in the judgment of the Federal Reserve Bank. In accordance with the Federal Reserve Act, the primary credit rate is established by the boards of directors of the Federal Reserve Banks, subject to review and determination of the Board. The primary credit rate is set forth in § 201.51(a) of Regulation A.
Section 201.3(e) of Regulation A, adopted in December 2009, established criteria and procedures governing the acceptance by the Federal Reserve Bank of New York (FRBNY) of credit ratings issued by credit rating agencies in connection with extensions of credit under the former TALF. On June 30, 2010, the TALF was closed for new loan extensions, and the final outstanding TALF loan was repaid in full in October 2014.
On December 8, 2017, the Board published a notice of proposed rulemaking in the
The Board received five comments on the proposal. One comment supported the flexibility the amendment provides during times of crisis, and raised other issues regarding the size of the Federal Reserve balance sheet that were outside the scope of the proposal. Another commenter expressed support for the proposal as eliminating roadblocks while dealing with an emergency. The other three comments raised issues outside the scope of the proposal. Accordingly, the final rule adopts the proposal as proposed.
An initial regulatory flexibility analysis (IRFA) was included in the proposal in accordance with section 3(a) of the Regulatory Flexibility Act (RFA).
The RFA requires an agency to prepare a final regulatory flexibility analysis unless the agency certifies that the rule will not, if promulgated, have a significant economic impact on a substantial number of small entities. In accordance with section 3(a) of the RFA, the Board has reviewed the final rule. Based on its analysis, and for the reasons stated below, the Board certifies that the final rule will not have a significant economic impact on a substantial number of small entities.
Office of Management and Budget (OMB) regulations implementing the Paperwork Reduction Act (PRA) state that agencies must submit “collections of information” contained in proposed rules published for public comment in the
In accordance with the PRA, the Board reviewed the proposed rule under the authority delegated to the Board by OMB. The proposed rule contained no requirements subject to the PRA, and the Board received no comments on its PRA analysis in the proposed rule. The final rule adopts the proposed rule as proposed, and contains no requirements subject to the PRA.
Each Federal banking agency, including the Board, is required to use plain language in all proposed and final rulemakings published after January 1, 2000.
Banks, Banking, Federal Reserve System, Reporting and recordkeeping requirements.
For the reasons set forth in the preamble, the Board is amending 12 CFR chapter II as follows:
12 U.S.C. 248(i)-(j) and (s), 343
(d) * * *
(1) The primary credit rate at a Federal Reserve Bank is the target federal funds rate of the Federal Open Market Committee or, if the Federal Open Market Committee has set a target range for the federal funds rate, the rate corresponding to the top of the target range, if:
By the Board of Governors of the Federal Reserve System, May 3, 2018.
Federal Aviation Administration (FAA), DOT.
Final rule; request for comments.
We are adopting a new airworthiness directive (AD) for Rolls-Royce plc (RR) Viper Mk. 601-22 turbojet engines. This AD requires removing the oil pump assembly, part number (P/N) V112027, and oil pressure filter, P/N V21264, from service and replacing them with parts eligible for installation. This AD was prompted by a report of an engine failure caused by installation of an incorrect oil filter. We are issuing this AD to correct the unsafe condition on these products.
This AD is effective May 24, 2018.
The Director of the Federal Register approved the incorporation by reference of a certain publication listed in this AD as of May 24, 2018.
We must receive comments on this AD by June 25, 2018.
You may send comments, using the procedures found in 14 CFR 11.43 and 11.45, by any of the following methods:
•
•
•
•
For service information identified in this final rule, contact DA Services Operations Room at Rolls-Royce plc, Defense Sector Bristol, WH-70, P.O. Box 3, Filton, Bristol BS34 7QE, United Kingdom; phone: +44 (0) 117 97 90700; fax: +44 (0) 117 97 95498; email:
You may examine the AD docket on the internet at
Robert Green, Aerospace Engineer, ECO Branch, FAA, 1200 District Avenue, Burlington, MA 01803; phone: 781-238-7754; fax: 781-238-7199; email:
The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Community, has issued EASA AD 2017-0197, dated October 6, 2017 (referred to after this as the MCAI), to address an unsafe condition for the specified products. The MCAI states:
An engine mainline bearing failure occurred on a Viper Mk. 632-43 engine because of debris being present in the engine oil system. The debris entered the oil system through a damaged oil pressure filter. Further investigation of this event revealed that, although the oil pump assembly was of post-modification (mod) CV4559 standard, the oil pressure filter fitted on the oil pump assembly was a pre-mod CV 4559 standard (Part Number (P/N) V21264). The purpose of modification CV4559 is to replace the oil pressure filter P/N V21264 with a more robust oil pressure filter (P/N 2526). Mod CV4559 was introduced in service by R-R Service Bulletin (SB) 72-198.
This condition, if not detected and corrected, could lead to an engine mainline bearing failure, possibly resulting in a complete loss of thrust and consequent reduced control of the aeroplane.
To address this potentially unsafe condition, R-R issued Alert SB 72-A208, providing instructions to identify and replace pre-modification oil filters.
For the reason described above, this [EASA] AD requires replacement of all oil pressure filters P/N V21264 found to be installed on post-mod CV4559 oil pump assemblies. This AD also requires replacement of all pre-mod CV4559 oil pump assemblies (P/N V112027) with post-mod oil pump assemblies (P/N V112225 or P/N NPN11962).
You may obtain further information by examining the MCAI in the AD docket on the internet at
We reviewed RR Alert Service Bulletin (ASB) Mk. 601-22 Number 72-A208, dated September 2017. The ASB describes procedures for inspecting and replacing a pre-modification oil pump assembly and oil pressure filter with parts eligible for installation. This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the
This product has been approved by EASA and is approved for operation in the United States. Pursuant to our bilateral agreement with the European Community, EASA has notified us of the unsafe condition described in the MCAI and service information referenced above. We are issuing this AD because we evaluated all the relevant information provided by EASA and determined the unsafe condition described previously is likely to exist or develop in other products of the same type design.
This AD requires inspecting the oil pump assembly and oil pressure filter and replacing pre-modification parts with parts eligible for installation.
An unsafe condition exists that requires the immediate adoption of this AD without providing an opportunity for public comments prior to adoption. The FAA has found that the risk to the flying public justifies waiving notice and comment prior to adoption of this rule because the compliance time for the action is less than the time required for public comment. EASA made a determination of an unsafe condition warranting regulatory action and compliance within 25 flight hours or 30 days. Therefore, we find good cause that notice and opportunity for prior public comment are impracticable. In addition, for the reason stated above, we find that
This AD is a final rule that involves requirements affecting flight safety and was not preceded by notice and an opportunity for public comment. However, we invite you to send any written data, views, or arguments about this final rule. Send your comments to an address listed under the
We will post all comments we receive, without change, to
We estimate that this AD affects 32 engines installed on airplanes of U.S. registry.
We estimate the following costs to comply with this AD:
We estimate the following costs to do any necessary replacements that would be required based on the results of the proposed inspection. We have no way of determining the number of aircraft that might need this replacement.
Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. “Subtitle VII: Aviation Programs,” describes in more detail the scope of the Agency's authority.
We are issuing this rulemaking under the authority described in Subtitle VII, Part A, Subpart III, Section 44701: “General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.
This AD is issued in accordance with authority delegated by the Executive Director, Aircraft Certification Service, as authorized by FAA Order 8000.51C. In accordance with that order, issuance of ADs is normally a function of the Compliance and Airworthiness Division, but during this transition period, the Executive Director has delegated the authority to issue ADs applicable to engines, propellers, and associated appliances to the Manager, Engine and Propeller Standards Branch, Policy and Innovation Division.
This AD will not have federalism implications under Executive Order 13132. This AD will not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.
For the reasons discussed above, I certify this AD:
(1) Is not a “significant regulatory action” under Executive Order 12866,
(2) Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979),
(3) Will not affect intrastate aviation in Alaska, and
(4) Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.
Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety.
Accordingly, under the authority delegated to me by the Administrator, the FAA amends 14 CFR part 39 as follows:
49 U.S.C. 106(g), 40113, 44701.
This AD is effective May 24, 2018.
None.
This AD applies to all Rolls-Royce plc (RR) Viper Mk. 601-22 engines.
Joint Aircraft System Component (JASC) Code 7900, Engine Oil System (Airframe Furnished).
This AD was prompted by a report of an engine failure caused by the installation of an incorrect oil filter. We are issuing this AD to prevent a failure of the engine oil system. The unsafe condition, if not addressed, could
Comply with this AD within the compliance times specified, unless already done.
(1) For engines with an oil pump assembly, part number (P/N) V112225 or P/N NPN11962, installed:
(i) After the effective date of this AD, within 30 days or 25 flight hours, whichever occurs first, inspect the oil pump assembly to determine the P/N of the oil pressure filter in accordance with the Accomplishment Instructions, Paragraph 2.A.(3), of RR Alert Service Bulletin (ASB) Mk. 601-22 Number 72-A208, dated September 2017.
(ii) If an oil pressure filter, P/N V21264, is installed, replace the oil pressure filter before the next flight with oil filter, P/N 2526, in accordance with the Accomplishment Instructions, Paragraph 2.A.(3)(b), of RR ASB Mk. 601-22 Number 72-A208, dated September 2017.
(2) For engines with an oil pump assembly, P/N V112027, installed:
(i) After the effective date of this AD, within 30 days or 25 flight hours, whichever occurs first, replace the oil pump assembly with oil pump assembly, P/N V112225 or P/N NPN11962, in accordance with the Accomplishment Instructions, Paragraph 2.A.(2), of RR ASB Mk. 601-22 Number 72-A208, dated September 2017.
(ii) Reserved.
After the effective date of this AD, do not install an oil pump assembly, P/N V112027, or an oil pressure filter, P/N V21264, on any engine, nor return any engine to service with an oil pump assembly, P/N V112027, or an oil pressure filter, P/N V21264, installed.
(1) The Manager, ECO Branch, FAA, has the authority to approve AMOCs for this AD, if requested using the procedures found in 14 CFR 39.19. In accordance with 14 CFR 39.19, send your request to your principal inspector or local Flight Standards District Office, as appropriate. If sending information directly to the manager of the certification office, send it to the attention of the person identified in paragraph (j)(1) of this AD. You may email your request to:
(2) Before using any approved AMOC, notify your appropriate principal inspector, or lacking a principal inspector, the manager of the local flight standards district office/certificate holding district office.
(1) For more information about this AD, contact Robert Green, Aerospace Engineer, ECO Branch, FAA, 1200 District Avenue, Burlington, MA 01803; phone: 781-238-7754; fax: 781-238-7199; email:
(2) Refer to European Aviation Safety Agency (EASA) AD 2017-0197, dated October 6, 2017, for more information. You may examine the EASA AD in the AD docket on the internet at
(1) The Director of the Federal Register approved the incorporation by reference (IBR) of the service information listed in this paragraph under 5 U.S.C. 552(a) and 1 CFR part 51.
(2) You must use this service information as applicable to do the actions required by this AD, unless the AD specifies otherwise.
(i) Rolls-Royce plc Alert Service Bulletin Mk. 601-22 Number 72-A208, dated September 2017.
(ii) Reserved.
(3) For Rolls-Royce plc service information identified in this AD, contact DA Services Operations Room at Rolls-Royce plc, Defense Sector Bristol, WH-70, P.O. Box 3, Filton, Bristol BS34 7QE, United Kingdom; phone: +44 (0) 117 97 90700; fax: +44 (0) 117 97 95498; email:
(4) You may view this service information at FAA, Engine & Propeller Standards Branch, 1200 District Avenue, Burlington, MA 01803. For information on the availability of this material at the FAA, call 781-238-7759.
(5) You may view this service information that is incorporated by reference at the National Archives and Records Administration (NARA). For information on the availability of this material at NARA, call 202-741-6030, or go to:
Coast Guard, DHS.
Temporary final rule.
The Coast Guard is establishing a temporary special local regulation for all navigable waters of the Wolf River Chute in the vicinity of the Mud Island River Park near Memphis, TN. This action is necessary to protect spectators and vessels during the Duncan William Dragon Boat Races regatta. Entry of vessels or persons into this regulated area is prohibited unless authorized by the Captain of the Port Sector Lower Mississippi River (COTP) or a designated representative.
This rule is effective from 7 a.m. through 4 p.m. on May 12, 2018.
To view documents mentioned in this preamble as being available in the docket, go to
If you have questions about this rule, call or email Petty Officer Todd Manow, Sector Lower Mississippi River Prevention Department, U.S. Coast Guard, telephone 901-521-4813, email
The Coast Guard is issuing this temporary final rule without prior notice and opportunity to comment pursuant to authority under section 4(a) of the Administrative Procedure Act (APA) (5 U.S.C. 553(b)). This provision authorizes an agency to issue a rule without prior notice and opportunity to comment when the agency, for good cause, finds that those procedures are “impracticable, unnecessary, or contrary to the public interest.” Under 5 U.S.C. 553(b)(3)(B), the Coast Guard finds that good cause exists for not publishing a notice of proposed rulemaking (NPRM) with respect to this rule because it is impracticable. The Coast Guard did not receive the event details in sufficient time to publish an NPRM. We must establish this special local regulation on May 12, 2018 and lack sufficient time to provide a reasonable comment period and then consider those comments before issuing this rule. The NPRM process would delay the establishment of the regulated area until after the date of the regatta and compromise public safety.
Under 5 U.S.C. 553(d)(3), the Coast Guard finds that good cause exists for making this temporary rule effective less than 30 days after publication in the
The Coast Guard is issuing this rule under authority in 33 U.S.C. 1233. The Captain of the Port Sector Lower Mississippi River (COTP) has determined that potential hazards associated with the Duncan Williams Dragon Boat Races from 7 a.m. to 4 p.m. on May 12, 2018 will be a safety concern for all navigable waters of the Wolf River Chute in the vicinity of the Mud Island River Park. This rule is necessary to ensure the safety of life and vessels on these navigable waters before, during, and after the scheduled event.
This rule establishes a special local regulation from 7 a.m. through 4 p.m. on May 12, 2017 for all navigable waters of the Wolf River Chute from the Mud Island River Park Monorail Bridge at 35°08.9″ N, 090°03.4″ W, south to the mouth of the Chute at 35°08.5″ N, 090°08.5″ W, in Memphis, TN. The duration of the regulated area is intended to ensure the safety of life and vessels on these navigable waters before, during, and after the scheduled event. No vessel or person shall transit the regulated area unless authorized by the COTP or a designated representative. A designated representative may be a Patrol Commander (PATCOM). The PATCOM may be aboard either a Coast Guard or Coast Guard Auxiliary vessel. The PATCOM may be contacted on Channel 16 VHF-FM (156.8 MHz) by the call sign “PATCOM”.
All persons and vessels not registered with the event sponsor as participants or official patrol vessels are considered spectators. The “official patrol vessels” consist of any Coast Guard, state, or local law enforcement and sponsor provided vessels assigned or approved by the COTP to patrol the regulated area.
Spectator vessels desiring to transit the regulated area may do so only with prior approval of the COTP or a designated representative and when so directed by that officer will be operated at a minimum safe navigation speed in a manner that will not endanger participants in the regulated area or any other vessels. No spectator vessel shall anchor, block, loiter, or impede the through transit of participants or official patrol vessels in the regulated area during the effective dates and times, unless cleared for entry by or through an official patrol vessel. Any spectator vessel may anchor outside the regulated area, but may not anchor in, block, or loiter in a navigable channel. Spectator vessels may be moored to a waterfront facility within the regulated area in such a way that they shall not interfere with the progress of the event. Such mooring must be complete at least 30 minutes prior to the establishment of the regulated area and remain moored through the duration of the event.
Persons or vessels seeking to enter into or transit through the regulated area must request permission from the COTP or a designated representative. They may be contacted on VHF-FM channels 16 or by telephone at 1-866-777-2784. If permission is granted, all persons and vessels must comply with the instructions of the COTP or designated representative.
The COTP or a designated representative may forbid and control the movement of all vessels in the regulated area. When hailed or signaled by an official patrol vessel, a vessel shall come to an immediate stop and comply with the directions given. Failure to do so may result in expulsion from the area, citation for failure to comply, or both.
The COTP or a designated representative may terminate the event or the operation of any vessel at any time it is deemed necessary for the protection of life or property. The COTP or a designated representative will terminate enforcement of the regulated area at the conclusion of the event.
We developed this rule after considering numerous statutes and Executive orders related to rulemaking. Below we summarize our analyses based on a number of these statutes and Executive orders and we discuss First Amendment rights of protestors.
Executive Orders 12866 and 13563 direct agencies to assess the costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits. Executive Order 13771 directs agencies to control regulatory costs through a budgeting process. This rule has not been designated a “significant regulatory action,” under Executive Order 12866. Accordingly, this rule has not been reviewed by the Office of Management and Budget (OMB), and pursuant to OMB guidance it is exempt from the requirements of Executive Order 13771.
This regulatory action determination is based on the size, location, duration, and time-of-day of the special local regulation. This special local regulation will restrict vessel traffic for nine hours on a less than half-mile stretch of the Wolf River Chute for one day. Moreover, the Coast Guard will issue Broadcast Notice to Mariners (BNMs) via VHF-FM marine channel 16 about the regulated area, and the rule allows vessels to seek permission to enter the regulated area.
The Regulatory Flexibility Act of 1980, 5 U.S.C. 601-612, as amended, requires Federal agencies to consider the potential impact of regulations on small entities during rulemaking. The term “small entities” comprises small businesses, not-for-profit organizations that are independently owned and operated and are not dominant in their fields, and governmental jurisdictions with populations of less than 50,000. The Coast Guard certifies under 5 U.S.C. 605(b) that this rule will not have a significant economic impact on a substantial number of small entities.
While some owners or operators of vessels intending to transit the regulated area may be small entities, for the reasons stated in section V.A. above, this rule will not have a significant economic impact on any vessel owner or operator.
Under section 213(a) of the Small Business Regulatory Enforcement Fairness Act of 1996 (Pub. L. 104-121), we want to assist small entities in understanding this rule. If the rule would affect your small business, organization, or governmental jurisdiction and you have questions concerning its provisions or options for compliance, please contact the person listed in the
Small businesses may send comments on the actions of Federal employees who enforce, or otherwise determine compliance with, Federal regulations to the Small Business and Agriculture Regulatory Enforcement Ombudsman and the Regional Small Business Regulatory Fairness Boards. The Ombudsman evaluates these actions annually and rates each agency's responsiveness to small business. If you wish to comment on actions by employees of the Coast Guard, call 1-888-REG-FAIR (1-888-734-3247). The Coast Guard will not retaliate against small entities that question or complain about this rule or any policy or action of the Coast Guard.
This rule will not call for a new collection of information under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520).
A rule has implications for federalism under Executive Order 13132, Federalism, if it has a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. We have analyzed this rule under that Order and have determined that it is consistent with the fundamental federalism principles and preemption requirements described in Executive Order 13132.
Also, this rule does not have tribal implications under Executive Order 13175, Consultation and Coordination with Indian Tribal Governments, because it does not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes. If you believe this rule has implications for federalism or Indian tribes, please contact the person listed in the
The Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538) requires Federal agencies to assess the effects of their discretionary regulatory actions. In particular, the Act addresses actions that may result in the expenditure by a State, local, or tribal government, in the aggregate, or by the private sector of $100,000,000 (adjusted for inflation) or more in any one year. Though this rule will not result in such expenditure, we do discuss the effects of this rule elsewhere in this preamble.
We have analyzed this rule under Department of Homeland Security Management Directive 023-01 and Commandant Instruction M16475.lD, which guide the Coast Guard in complying with the National Environmental Policy Act of 1969 (42 U.S.C. 4321-4370f), and have determined that this action is one of a category of actions that do not individually or cumulatively have a significant effect on the human environment. This rule involves the establishment of a special local regulation lasting nine hours for an event spanning 860 yards of the Wolf River Chute in the vicinity of the Mud Island River Park in Memphis, TN. It is categorically excluded from further review under paragraphs L61 of Appendix A, Table 1 of DHS Instruction Manual 023-01-001-01, Rev. 01. A Record of Environmental Consideration is available in the docket where indicated under
The Coast Guard respects the First Amendment rights of protesters. Protesters are asked to contact the person listed in the
Marine safety, Navigation (water), Reporting and recordkeeping requirements, Waterways.
For the reasons discussed in the preamble, the Coast Guard amends 33 CFR part 100 as follows:
33 U.S.C. 1233.
(a)
(b)
(2) All persons and vessels not registered with the event sponsor as participants or official patrol vessels are considered spectators. The “official patrol vessels” consist of any Coast Guard, state, or local law enforcement and sponsor provided vessels assigned or approved by the COTP to patrol the regulated area.
(3) Spectator vessels desiring to transit the regulated area may do so only with prior approval of the COTP or a designated representative and when so directed by that officer will be operated at a minimum safe navigation speed in a manner that will not endanger participants in the regulated area or any other vessels.
(4) No spectator vessel shall anchor, block, loiter, or impede the through transit of participants or official patrol vessels in the regulated area during the effective dates and times, unless cleared for entry by or through an official patrol vessel.
(5) Any spectator vessel may anchor outside the regulated area, but may not anchor in, block, or loiter in a navigable channel. Spectator vessels may be moored to a waterfront facility within the regulated area in such a way that they shall not interfere with the progress of the event. Such mooring must be complete at least 30 minutes prior to the establishment of the regulated area and remain moored through the duration of the event.
(6) Persons or vessels seeking to enter into or transit through the regulated area must request permission from the COTP or a designated representative. They may be contacted on VHF-FM channels 16 or by telephone at 1-866-777-2784.
(7) If permission is granted, all persons and vessels must comply with the instructions of the COTP or designated representative.
(8) The COTP or a designated representative may forbid and control the movement of all vessels in the regulated area. When hailed or signaled by an official patrol vessel, a vessel shall come to an immediate stop and comply with the directions given. Failure to do so may result in expulsion from the area, citation for failure to comply, or both.
(9) The COTP or a designated representative may terminate the event or the operation of any vessel at any time it is deemed necessary for the protection of life or property.
(10) The COTP or a designated representative will terminate enforcement of the regulated area at the conclusion of the event.
(c)
(d)
Environmental Protection Agency (EPA).
Final rule.
The Environmental Protection Agency (EPA) is approving a request from New Jersey to revise its State Implementation Plan (SIP) to incorporate revisions to the motor vehicle enhanced inspection and maintenance (I/M) program. New Jersey has made several amendments to its I/M program and has requested that the SIP be revised to include these changes. EPA is approving New Jersey's amendments to its I/M program to discontinue idle tests on model years 1995 and older light duty gasoline vehicles, idle tests on heavy-duty gasoline vehicles and gas cap leak testing. In addition, heavy-duty gasoline vehicles equipped with on-board diagnostics (OBD) will be subject to OBD testing with this revision. The intended effect of this action is to maintain consistency between the State-adopted rules and the federally approved SIP.
This rule is effective on June 8, 2018.
The EPA has established a docket for this action under Docket ID No. EPA-R02-OAR-2017-0101. All documents in the docket are listed on the
Reema Loutan, Air Programs Branch, U.S. Environmental Protection Agency, 290 Broadway, 25th Floor, New York, New York 10007, at (212) 637-3760, or by email at
The EPA is approving a request from New Jersey to revise its SIP to incorporate revisions to the enhanced inspection and maintenance (I/M) program.
On September 16, 2016, New Jersey submitted to the EPA revisions to the New Jersey SIP pertaining to New Jersey's motor vehicle enhanced I/M program. On October 6, 2017 (82 FR 46742), the EPA published a notice of proposed rulemaking to approve the revisions to the SIP for New Jersey's I/M program. The revisions submitted by New Jersey include:
• Discontinuing the two-speed idle tests on model year 1981-1995 light duty gasoline vehicles, idle tests on pre-1981 model year light duty gasoline vehicles, and idle tests on heavy-duty gasoline vehicles;
• Discontinuing the smoke opacity test for diesel-powered vehicles equipped with an on-board diagnostic (OBD) system;
• Discontinuing the rolling acceleration smoke opacity test and the power brake smoke opacity test for heavy-duty diesel motor vehicles;
• Replacing the fuel cap leak test or gas cap test for gasoline-fueled vehicles with a visual gas cap check to ensure the gas cap is present;
• Requiring an OBD test for every vehicle subject to inspection that is required by the EPA to be equipped with an OBD system;
• Requiring inspections for commercial vehicles;
• Requiring that re-inspections of all vehicles be performed at New Jersey's decentralized I/M facilities;
• Adding procedures for the diesel exhaust after-treatment checks; and
• Authorizing inspectors of both gasoline and diesel vehicles to fail a vehicle if it is determined that there has been tampering with the vehicle's emission controls.
The EPA's rationale for the proposed approval of the SIP revision was presented in the October 6, 2017 proposal, referenced above, and will not be restated here.
The proposed action provided a 30-day public comment period. During this period, two comments were received. One comment discussed greenhouse gas concerns and is not relevant to the content of the I/M SIP revision submitted by New Jersey. The second comment and EPA's response is discussed below.
The OBD system processes readings from sensors in the engine and along the exhaust system to monitor and record indicators of engine performance, performance of the fuel delivery system, and functioning of the emission control system. The OBD system thus monitors for nearly all potential emission control component malfunctions that may cause excess vehicle emissions, and an OBD inspection test provides technicians with timely and accurate emissions data and flags malfunctions early, which helps vehicle owners better maintain their vehicles. Thus, OBD inspection tests play a key role in helping states meet national air quality standards, and offers significant benefits to state and local agencies working to improve air quality through vehicle inspection and maintenance programs.
New Jersey's SIP revision does eliminate tailpipe idle tests for model year 1995 and earlier light duty vehicles and all heavy-duty gasoline vehicles. However, the number of vehicles that will no longer require idle testing and that also do not have OBD systems is a small proportion of vehicles in New
The commenter also expressed concern regarding school buses. All school buses in New Jersey undergo an annual emissions test, either an OBD test for gasoline vehicles or smoke opacity for the larger diesel vehicles. Finally, New Jersey's motor vehicle idling laws regarding driving behavior remain in effect and are unaffected by this rulemaking.
The EPA is approving New Jersey's revised I/M program discussed in the Notice of Proposed Rulemaking titled “Approval and Promulgation of Implementation Plans; New Jersey; Motor Vehicle Enhanced Inspection and Maintenance Program” (82 FR 46742). The EPA is approving New Jersey's request to eliminate exhaust emission tests or tailpipe testing for all gasoline-powered motor vehicles and require OBD testing for all vehicles, including heavy-duty gasoline vehicles, that are subject to inspection and required by the EPA to be equipped with an OBD system. The EPA is also approving New Jersey's revised procedures for diesel exhaust after-treatment checks, standards for fuel leak checks, and implementation of a visual gas cap check to ensure that the gas cap is present on gasoline-powered vehicles (as a replacement for the fuel cap leak test). For heavy-duty diesel-powered vehicles, the EPA is approving New Jersey's repeal of the rolling acceleration smoke opacity test and the power brake smoke opacity test. The State demonstrated that neither the elimination of the tailpipe tests nor the other amendments made under this SIP revision will result in an adverse impact to air quality. Please refer to the October 6, 2017 proposed rulemaking (82 FR 46742) for further details on all approved measures. The EPA's authority to approve New Jersey's enhanced I/M program is set forth at sections 110 and 182 of the Clean Air Act.
In this rule, the EPA is finalizing regulatory text that includes incorporation by reference. In accordance with requirements of 1 CFR 51.5, the EPA is finalizing the incorporation by reference of revisions to portions of Title 7, Chapter 27: Subchapters 14 and 15; Chapter 27A: Subchapter 3; Chapter 27B: Subchapters 4 and 5; and Title 13, Chapter 20: Subchapter 7, Subchapter 26, Subchapter 32, Subchapter 33, Subchapter 43 and Subchapter 44 of the New Jersey Administrative Code that implement New Jersey's Enhanced I/M Program, as described in section II of this preamble.
The EPA has made, and will continue to make, these materials generally available through
Under the Clean Air Act, the Administrator is required to approve a SIP submission that complies with the provisions of the Act and applicable Federal regulations. 42 U.S.C. 7410(k); 40 CFR 52.02(a). Thus, in reviewing SIP submissions, the EPA's role is to approve state choices, provided that they meet the criteria of the Clean Air Act. Accordingly, this action merely approves state law as meeting Federal requirements and does not impose additional requirements beyond those imposed by state law. For that reason, this action:
• Is not a significant regulatory action subject to review by the Office of Management and Budget under Executive Orders 12866 (58 FR 51735, October 4, 1993) and 13563 (76 FR 3821, January 21, 2011);
• Is not an Executive Order 13771 (82 FR 9339, February 2, 2017) regulatory action because SIP approvals are exempted under Executive Order 12866;
• Does not impose an information collection burden under the provisions of the Paperwork Reduction Act (44 U.S.C. 3501
• Is certified as not having a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601
• Does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4);
• Does not have Federalism implications as specified in Executive Order 13132 (64 FR 43255, August 10, 1999);
• Is not an economically significant regulatory action based on health or safety risks subject to Executive Order 13045 (62 FR 19885, April 23, 1997);
• Is not a significant regulatory action subject to Executive Order 13211 (66 FR 28355, May 22, 2001);
• Is not subject to requirements of section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) because application of those requirements would be inconsistent with the Clean Air Act; and
• Does not provide the EPA with the discretionary authority to address, as appropriate, disproportionate human health or environmental effects, using practicable and legally permissible methods, under Executive Order 12898 (59 FR 7629, February 16, 1994).
In addition, the SIP is not approved to apply on any Indian reservation land or in any other area where the EPA or an Indian tribe has demonstrated that a tribe has jurisdiction. In those areas of Indian country, the rule does not have tribal implications and will not impose substantial direct costs on tribal governments or preempt tribal law as specified by Executive Order 13175 (65 FR 67249, November 9, 2000).
The Congressional Review Act, 5 U.S.C. 801
Under section 307(b)(1) of the Clean Air Act, petitions for judicial review of this action must be filed in the United States Court of Appeals for the appropriate circuit by July 9, 2018. Filing a petition for reconsideration by the Administrator of this final rule does not affect the finality of this action for the purposes of judicial review nor does it extend the time within which a
Environmental protection, Air pollution control, Incorporation by reference, Nitrogen dioxide, Intergovernmental relations, Lead, Ozone, Particulate matter, Reporting and recordkeeping requirements, Sulfur oxides, Volatile organic compounds.
42 U.S.C. 7401
Part 52 chapter I, title 40 of the Code of Federal Regulations is amended as follows:
42 U.S.C. 7401
The revisions and additions read as follows:
(c) * * *
Environmental Protection Agency (EPA).
Final rule.
Pursuant to the Federal Clean Air Act (CAA or the Act), the Environmental Protection Agency (EPA) is approving four revisions to the Texas State Implementation Plan (SIP) submitted on December 12, 2016 and February 21, 2017, specific to air quality permitting and public notice for air quality permit applications.
This rule is effective on June 8, 2018.
The EPA has established a docket for this action under Docket ID No. EPA-R06-OAR-2017-0124. All documents in the docket are listed on the
Adina Wiley, 214-665-2115,
Throughout this document “we,” “us,” and “our” means the EPA.
The background for this action is discussed in detail in our February 14, 2018, proposal (83 FR 6491). In that document we proposed to approve four revisions to the Texas SIP that revise the New Source Review (NSR) permitting and public notice requirements. We received one supportive comment from the Texas Commission on Environmental Quality. We also received six anonymous comments.
We are approving revisions to the Texas SIP that revise the NSR permitting and public notice requirements. We have determined that the revisions submitted on December 12, 2016 were developed in accordance
• Repeal of 30 TAC Section 116.120—Applicability—adopted on November 2, 2016, and submitted on December 12, 2016;
• Repeal of 30 TAC Section 116.121—Exemptions—adopted on November 2, 2016, and submitted on December 12, 2016;
• Repeal of 30 TAC Section 116.122—Contents of Compliance History—adopted on November 2, 2016, and submitted on December 12, 2016;
• Repeal of 30 TAC Section 116.123—Effective Dates—adopted on November 2, 2016, and submitted on December 12, 2016;
• Repeal of 30 TAC Section 116.125—Preservation of Existing Rights and Procedures—adopted on November 2, 2016, and submitted on December 12, 2016; and
• Repeal of 30 TAC Section 116.126—Voidance of Permit Applications—adopted on November 2, 2016, and submitted on December 12, 2016.
Additionally, we have determined that the revisions submitted on February 21, 2017, were developed in accordance with the CAA and EPA's regulations, policy and guidance for public notice for air permitting. Under section 110 of the Act, the EPA approves the following revisions into the Texas SIP:
• Revisions to 30 TAC Section 39.405 adopted on December 9, 2015, and submitted on February 21, 2017;
• Revisions to 30 TAC Section 39.411 adopted on December 7, 2016, and submitted on February 21, 2017;
• Revisions to 30 TAC Section 39.419 adopted on December 9, 2015, and submitted on February 21, 2017;
• Revisions to 30 TAC Section 39.603 adopted on December 7, 2016, and submitted on February 21, 2017;
• Revisions to 30 TAC Section 55.152 adopted on December 7, 2016, and submitted on February 21, 2017;
• Withdrawal of 30 TAC Section 55.156(e) from the Texas SIP as adopted on December 9, 2015, and submitted on February 21, 2017; and the
• Repeal of 30 TAC Sections 116.130—116.134, 116.136, and 116.137 from the Texas SIP as adopted on November 2, 2016 and submitted on February 21, 2017.
We also approve revisions to the amendatory language at 40 CFR 52.2270(c) to identify specific provisions adopted by the State not submitted for inclusion in the Texas SIP. We are revising the language at 40 CFR 52.2270(c) to clearly indicate that the Texas SIP does not include the revisions to 30 TAC Sections 39.405(h)(1)(A) and 39.602(c) as adopted on December 9, 2015, or 30 TAC Section 39.411(e)(10) as adopted on December 7, 2016.
In this rule, the EPA is finalizing regulatory text that includes incorporation by reference. In accordance with requirements of 1 CFR 51.5, the EPA is finalizing the incorporation by reference of the revisions to the Texas regulations as described in the Final Action section above. The EPA has made, and will continue to make, these materials generally available through
Under the CAA, the Administrator is required to approve a SIP submission that complies with the provisions of the Act and applicable Federal regulations. 42 U.S.C. 7410(k); 40 CFR 52.02(a). Thus, in reviewing SIP submissions, the EPA's role is to approve state choices, provided that they meet the criteria of the CAA. Accordingly, this action merely approves state law as meeting Federal requirements and does not impose additional requirements beyond those imposed by state law. For that reason, this action:
• Is not a “significant regulatory action” subject to review by the Office of Management and Budget under Executive Orders 12866 (58 FR 51735, October 4, 1993) and 13563 (76 FR 3821, January 21, 2011);
• Is not an Executive Order 13771 (82 FR 9339, February 2, 2017) regulatory action because SIP approvals are exempted under Executive Order 12866;
• Does not impose an information collection burden under the provisions of the Paperwork Reduction Act (44 U.S.C. 3501
• Is certified as not having a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601
• Does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4);
• Does not have Federalism implications as specified in Executive Order 13132 (64 FR 43255, August 10, 1999);
• Is not an economically significant regulatory action based on health or safety risks subject to Executive Order 13045 (62 FR 19885, April 23, 1997);
• Is not a significant regulatory action subject to Executive Order 13211 (66 FR 28355, May 22, 2001);
• Is not subject to requirements of section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) because application of those requirements would be inconsistent with the CAA; and
• Does not provide EPA with the discretionary authority to address, as appropriate, disproportionate human health or environmental effects, using practicable and legally permissible methods, under Executive Order 12898 (59 FR 7629, February 16, 1994).
The Congressional Review Act, 5 U.S.C. 801
Under section 307(b)(1) of the Clean Air Act, petitions for judicial review of this action must be filed in the United States Court of Appeals for the appropriate circuit by July 9, 2018. Filing a petition for reconsideration by the Administrator of this final rule does not affect the finality of this action for the purposes of judicial review nor does it extend the time within which a
Environmental protection, Air pollution control, Incorporation by reference, Nitrogen dioxide, Ozone, Particulate matter, Reporting and recordkeeping requirements, Sulfur oxides, Volatile organic compounds.
40 CFR part 52 is amended as follows:
42 U.S.C. 7401
The revision and addition read as follows:
(c) * * *
Federal Communications Commission.
Final rule; announcement of effective date.
In this document, the Commission announces that the Office of Management and Budget (OMB) has approved, for a period of three years, the information collection associated with the Commission's discontinuance rules. This document is consistent with the
The amendment to 47 CFR 63.60(d)-(i) and 63.71(k) published at 82 FR 61453, December 28, 2017, is effective on May 9, 2018.
Michele Levy Berlove, Attorney Advisor, Wireline Competition Bureau, at (202) 418-1477, or by email at
This document announces that, on May 1, 2018, OMB approved, for a period of three years, the information collection requirements relating to certain discontinuance rules contained in the Commission's
The OMB Control Number is 3060-0149. The Commission publishes this document as an announcement of the effective date of the rules. If you have any comments on the burden estimates listed below, or how the Commission can improve the collections and reduce any burdens caused thereby, please contact Nicole Ongele, Federal Communications Commission, Room 1-A620, 445 12th Street SW, Washington, DC 20554. Please include the OMB Control Number, 3060-0149, in your correspondence. The Commission will also accept your comments via email at
To request materials in accessible formats for people with disabilities (Braille, large print, electronic files, audio format), send an email to
As required by the Paperwork Reduction Act of 1995 (44 U.S.C. 3507),
No person shall be subject to any penalty for failing to comply with a collection of information subject to the Paperwork Reduction Act that does not display a current, valid OMB Control Number. The OMB Control Number is 3060-0149.
The foregoing notice is required by the Paperwork Reduction Act of 1995, Public Law 104-13, October 1, 1995, and 44 U.S.C. 3507.
The total annual reporting burdens and costs for the respondents are as follows:
National Marine Fisheries Service (NMFS), National Oceanic and Atmospheric Administration (NOAA), Commerce.
Final rule.
In response to a petition by Animal Welfare Institute, Center for Biological Diversity, and WildEarth Guardians, we, NMFS, are issuing a final rule to list the Taiwanese humpback dolphin (
This final rule is effective June 8, 2018.
Endangered Species Conservation Division, NMFS Office of Protected Resources (F/PR3), 1315 East-West Highway, Silver Spring, MD 20910.
Chelsey Young, NMFS, Office of Protected Resources,
On March 9, 2016, we received a petition from Animal Welfare Institute (AWI), Center for Biological Diversity (CBD), and WildEarth Guardians (Guardians) to list the Taiwanese humpback dolphin (
We are responsible for determining whether species meet the definition of threatened or endangered under the ESA (16 U.S.C. 1531
Section 3 of the ESA defines an endangered species as any species which is in danger of extinction throughout all or a significant portion of its range and a threatened species as one which is likely to become an endangered species within the foreseeable future throughout all or a significant portion of its range. We interpret an “endangered species” to be one that is presently in danger of extinction. A “threatened species,” on the other hand, is not presently in danger of extinction, but is likely to become so in the foreseeable future (that is, at a later time). In other words, the primary statutory difference between a threatened species and endangered species is the timing of when a species may be in danger of extinction, either presently (endangered) or in the foreseeable future (threatened).
Section 4(a)(1) of the ESA requires us to determine whether any species is endangered or threatened due to any one or a combination of the following five threat factors: The present or threatened destruction, modification, or curtailment of its habitat or range; overutilization for commercial, recreational, scientific, or educational purposes; disease or predation; the inadequacy of existing regulatory mechanisms; or other natural or manmade factors affecting its continued existence. We are also required to make listing determinations based solely on the best scientific and commercial data available, after conducting a review of the species' status and after taking into account efforts being made by any state or foreign nation to protect the species.
In assessing the extinction risk of the Taiwanese humpback dolphin, we considered demographic risk factors, such as those developed by McElhany
Scientific conclusions about the overall risk of extinction faced by the Taiwanese humpback dolphin under present conditions and in the foreseeable future are based on our evaluation of the species' demographic risks and section 4(a)(1) threat factors. Our assessment of overall extinction risk considered the likelihood and contribution of each particular factor, synergies among contributing factors, and the cumulative impact of all demographic risks and threats on the species.
Section 4(b)(1)(A) of the ESA requires the Secretary, when making a listing determination for a species, to take into consideration those efforts, if any, being made by any State or foreign nation, or any political subdivision of a State or foreign nation, to protect the species. Therefore, prior to making a listing determination, we also assess such protective efforts to determine if they are adequate to mitigate the existing threats.
In response to our request for comments on the proposed rule, we received a total of eight public comments from several non-governmental organizations as well as individual members of the public. All comments were supportive of the proposed listing of the Taiwanese humpback dolphin as endangered and the large majority provided no new or substantive data or information relevant to the listing of Taiwanese humpback dolphin that was not already considered in the status review report and proposed rule. We have considered all public comments, and we provide responses to all relevant issues raised by comments as summarized below.
Several commenters reiterated information and many of the points from the status review and proposed rule for the Taiwanese humpback dolphin, notably the subspecies' small and dwindling population, its restricted range in the shallow waters of the Taiwan Strait, the numerous anthropogenic threats the subspecies faces, and the need for more stringent regulations to protect the dolphin. The petitioners (AWI, CBD, and Guardians) also submitted a comment letter in support of our endangered listing determination for the Taiwanese humpback dolphin. The comment letter largely reiterated information from the status review and proposed rule and emphasized the severity of fisheries interactions, results of population viability models showing population declines, and the inadequacy of current laws to protect the dolphin. They also provided new scientific and commercial information regarding the emerging threat of acoustic disturbance to the subspecies (discussed below in
We did not receive, nor did we find, data or references that presented substantial new information to change our proposed listing determination. We did, however, make some revisions to the status review report (Whittaker and Young 2018) to incorporate, as appropriate, relevant information that we received in response to our request for public comments or identified ourselves. Specifically, we updated the status review to include new information regarding the threat of acoustic disturbance to the Taiwanese humpback dolphin, particularly as it relates to the increase in underwater noise that is likely to occur from the construction of offshore wind farms within the subspecies' habitat.
The status review for the Taiwanese humpback dolphin was completed by NMFS staff from the Office of Protected Resources. To complete the status review, we compiled the best available data and information on the subspecies' biology, ecology, life history, threats, and conservation status by examining the petition and cited references, and by conducting a comprehensive literature search and review. We also considered information submitted to us in response to our petition finding. The draft status review report was subjected to independent peer review as required by the Office of Management and Budget Final Information Quality Bulletin for Peer Review (M-05-03; December 16, 2004). The draft status review report was peer reviewed by three independent specialists selected from the academic and scientific community, with expertise in cetacean biology, conservation and management, and specific knowledge of the Taiwanese humpback dolphin. The peer reviewers were asked to evaluate the adequacy, appropriateness, and application of data used in the draft status review report as well as the findings made in the “Assessment of Extinction Risk” section of the report. All peer reviewer comments were addressed prior to finalizing the draft status review report.
We subsequently reviewed the status review report, and its cited references, and we find the status review report, upon which the proposed and final rules are based, provides the best available scientific and commercial information on the Taiwanese humpback dolphin. The final status review report (cited as Whittaker and Young 2018) is available on our website (see
As stated previously and as discussed in the proposed rule (82 FR 28802; June 26, 2017), we considered whether any one or a combination of the five threat factors specified in section 4(a)(1) of the ESA is contributing to the extinction risk of the Taiwanese humpback dolphin. One commenter provided additional information related to threats, particularly underwater noise from coastal and energy development. The information provided was
As discussed previously, the status review evaluated the demographic risks to the Taiwanese humpback dolphin according to four categories—abundance and trends, population growth/productivity, spatial structure/connectivity, and genetic diversity. As a concluding step, after considering all of the available information regarding demographic and other threats to the subspecies, we rated the subspecies' extinction risk according to a qualitative scale (high, moderate, and low risk). Although we did update our status review to incorporate the most recent threat information for the Taiwanese humpback dolphin, none of the comments or information we received on the proposed rule changed the outcome of our extinction risk evaluation for the subspecies. As such, our conclusions regarding extinction risk for the Taiwanese humpback dolphin remain the same. Therefore, we incorporate and affirm, herein, all information, discussion, and conclusions on the extinction risk of the Taiwanese humpback dolphin in the final status review report (Whittaker and Young 2018) and proposed rule (82 FR 28802; June 26, 2017).
In addition to regulatory measures (
We summarize the factors supporting our final listing determination as follows: (1) The best available information indicates that the subspecies has a critically small population of less than 100 individuals, which is likely declining; (2) the Taiwanese humpback dolphin has a very restricted range, occurring only in the shallow waters off the western coast of Taiwan; (3) the subspecies possesses life history characteristics that increase its vulnerability to threats, including that it is long-lived and has a late age of maturity, slow population growth, and low rate of reproduction and fecundity; (4) the subspecies is confined to limited habitat in a heavily impacted area of coastline where ongoing habitat destruction (including coastal development, land reclamation, and fresh water diversion) contributes to a high risk of extinction; (5) the Taiwanese humpback dolphin is experiencing unsustainable rates of fisheries interactions, including mortality and major injuries due to bycatch and entanglement in fishing gear; and (6) existing regulatory mechanisms are inadequate for addressing the most important threats of habitat destruction and fisheries interactions. Based on the foregoing information, which is based on the best available scientific and commercial data, we find that the Taiwanese humpback dolphin meets the definition of an endangered species and list it as such.
Conservation measures provided for species listed as endangered or threatened under the ESA include the development and implementation of recovery plans (16 U.S.C. 1533(f)); designation of critical habitat, if prudent and determinable (16 U.S.C. 1533(a)(3)(A)); and a requirement that Federal agencies consult with NMFS under section 7 of the ESA to ensure their actions are not likely to jeopardize the species or result in adverse modification or destruction of designated critical habitat (16 U.S.C. 1536). For endangered species, protections also include prohibitions related to “take” and trade (16 U.S.C. 1538). Take is defined as to harass, harm, pursue, hunt, shoot, wound, kill, trap, capture, or collect, or to attempt to engage in any such conduct (16 U.S.C. 1532(19)). Recognition of the species' imperiled status through listing may also promote conservation actions by Federal and state agencies, foreign entities, private groups, and individuals.
On July 1, 1994, NMFS and the U.S. Fish and Wildlife Service (USFWS) published a policy (59 FR 34272) that requires us to identify, to the maximum extent practicable, at the time a species is listed, those activities that would or would not constitute a violation of section 9 of the ESA. The intent of this policy is to increase public awareness of the potential effects of species listings on proposed and ongoing activities.
Because we are listing the Taiwanese humpback dolphin as endangered, all of the prohibitions of section 9(a)(1) of the ESA will apply to this subspecies. Section 9(a)(1) includes prohibitions against the import, export, use in foreign commerce, and “take” of the listed species. These prohibitions apply to all persons subject to the jurisdiction of the United States, including all persons in the United States or its territorial sea, and U.S. citizens on the high seas. Activities that could result in a violation of section 9 prohibitions for Taiwanese humpback dolphins include, but are not limited to, the following:
(1) Delivering, receiving, carrying, transporting, or shipping in interstate or foreign commerce any Taiwanese humpback dolphin or any of its parts, in the course of a commercial activity;
(2) Selling or offering for sale in interstate commerce any part of a Taiwanese humpback dolphin, except antique articles at least 100 years old; and
(3) Importing or exporting Taiwanese humpback dolphins or any parts of these dolphins.
Whether a violation results from a particular activity is entirely dependent upon the facts and circumstances of each incident. Further, an activity not listed here may in fact constitute a violation.
Although the determination of whether any given activity constitutes a violation is fact dependent, we consider the following actions, depending on the circumstances, as being unlikely to violate the prohibitions in ESA section 9 with regard to Taiwanese humpback dolphins: (1) Take authorized by, and carried out in accordance with the terms and conditions of, an ESA section 10(a)(1)(A) permit issued by NMFS for purposes of scientific research or the enhancement of the propagation or survival of the species; and (2) continued possession of Taiwanese humpback dolphins or any parts that
Section 7(a)(2) (16 U.S.C. 1536(a)(2)) of the ESA and joint NMFS/USFWS regulations require Federal agencies to consult with NMFS to ensure that activities they authorize, fund, or carry out are not likely to jeopardize the continued existence of listed species or destroy or adversely modify critical habitat. It is unlikely that the listing of the Taiwanese humpback dolphin under the ESA will increase the number of section 7 consultations, because this subspecies occurs outside of the United States and is unlikely to be affected by U.S. Federal actions.
Critical habitat is defined in section 3 of the ESA (16 U.S.C. 1532(5)) as: (1) The specific areas within the geographical area occupied by a species, at the time it is listed in accordance with the ESA, on which are found those physical or biological features (a) essential to the conservation of the species and (b) that may require special management considerations or protection; and (2) specific areas outside the geographical area occupied by a species at the time it is listed if such areas are determined to be essential for the conservation of the species. Section 4(a)(3)(A) of the ESA (16 U.S.C. 1533(a)(3)(A)) requires that, to the extent prudent and determinable, critical habitat be designated concurrently with the listing of a species. However, critical habitat cannot be designated in foreign countries or other areas outside U.S. jurisdiction (50 CFR 424.12(g)). The Taiwanese humpback dolphin is endemic to Taiwan and does not occur within areas under U.S. jurisdiction. There is no basis to conclude that any unoccupied areas under U.S. jurisdiction are essential for the conservation of the subspecies. Therefore, we do not intend to propose any critical habitat designations for this subspecies.
In December 2004, the Office of Management and Budget (OMB) issued a Final Information Quality Bulletin for Peer Review establishing a minimum peer review standard. We solicited peer review comments on the draft status review report from three scientists with expertise on cetaceans in general and specific knowledge regarding the Taiwanese humpback dolphin in particular. We received and reviewed comments from these scientists, and, prior to publication of the proposed rule, their comments were incorporated into the draft status review report (Whittaker and Young 2017), which was then made available for public comment. Peer reviewer comments on the status review are available at
A complete list of the references used is available upon request (see
Section 4(b)(1)(A) of the ESA restricts the information that may be considered when assessing species for listing and sets the basis upon which listing determinations must be made. Based on the requirements in section 4(b)(1)(A) of the ESA and the opinion in
As noted in the Conference Report on the 1982 amendments to the ESA, economic impacts cannot be considered when assessing the status of a species. Therefore, the economic analysis requirements of the Regulatory Flexibility Act are not applicable to the listing process.
In addition, this final rule is exempt from review under Executive Order 12866.
This final rule does not contain a collection-of-information requirement for the purposes of the Paperwork Reduction Act.
In accordance with E.O. 13132, we determined that this final rule does not have significant federalism effects and that a federalism assessment is not required.
Endangered and threatened species, Exports, Transportation.
For the reasons set out in the preamble, 50 CFR part 224 is amended as follows:
16 U.S.C. 1531-1543 and 16 U.S.C 1361
(h) * * *
Agricultural Marketing Service, USDA.
Proposed rule.
This proposed rule would implement a recommendation from the Idaho-Eastern Oregon Potato Committee (Committee) to revise the varietal classifications that determine the size requirements for Irish potatoes grown in certain designated counties of Idaho, and Malheur County, Oregon. As provided under section 8e of the Agricultural Marketing Agreement Act of 1937, the proposed modification would also apply to all imported long type Irish potatoes. This proposed rule would also make administrative revisions to the subpart headings to bring the language into conformance with the Office of
Comments must be received by July 9, 2018.
Interested persons are invited to submit written comments concerning this proposed rule. Comments must be sent to the Docket Clerk, Marketing Order and Agreement Division, Specialty Crops Program, AMS, USDA, 1400 Independence Avenue SW, STOP 0237, Washington, DC 20250-0237; Fax: (202) 720-8938; or internet:
Barry Broadbent, Marketing Specialist, or Gary D. Olson, Regional Manager, Northwest Marketing Field Office, Marketing Order and Agreement Division, Specialty Crops Program, AMS, USDA; Telephone: (503) 326-2724, Fax: (503) 326-7440, or Email:
Small businesses may request information on complying with this regulation by contacting Richard Lower, Marketing Order and Agreement Division, Specialty Crops Program, AMS, USDA, 1400 Independence Avenue SW, STOP 0237, Washington, DC 20250-0237; Telephone: (202) 720-2491, Fax: (202) 720-8938, or Email:
This action, pursuant to 5 U.S.C. 553, proposes an amendment to regulations issued to carry out a marketing order as defined in 7 CFR 900.2(j). This proposed rule is issued under Marketing Order No. 945 (7 CFR part 945), as amended, regulating the handling of Irish potatoes grown in certain designated counties in Idaho, and Malheur County, Oregon. Part 945 (referred to as the “Order”) is effective under the Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-674), hereinafter referred to as the “Act.” The Committee locally administers the Order and is comprised of potato producers and handlers operating within the production area.
Section 8e of the Act provides that whenever certain specified commodities, including potatoes, are regulated under a Federal marketing order, imports of these commodities into the United States are prohibited unless they meet the same or comparable grade, size, quality, or maturity requirements as those in effect for the domestically produced commodities.
The Department of Agriculture (USDA) is issuing this proposed rule in conformance with Executive Orders 13563 and 13175. This action falls within a category of regulatory actions that the Office of Management and Budget (OMB) exempted from Executive Order 12866 review. Additionally, because this proposed rule does not meet the definition of a significant regulatory action it does not trigger the requirements contained in Executive Order 13771. See OMB's Memorandum titled “Interim Guidance Implementing Section 2 of the Executive Order of January 30, 2017, titled `Reducing Regulation and Controlling Regulatory Costs' ” (February 2, 2017).
This proposed rule has been reviewed under Executive Order 12988, Civil Justice Reform. This action is not intended to have retroactive effect.
The Act provides that administrative proceedings must be exhausted before parties may file suit in court. Under section 608c(15)(A) of the Act, any handler subject to an order may file with USDA a petition stating that the order, any provision of the order, or any obligation imposed in connection with the order is not in accordance with law and request a modification of the order or to be exempted therefrom. A handler is afforded the opportunity for a hearing on the petition. After the hearing, USDA would rule on the petition. The Act provides that the district court of the United States in any district in which the handler is an inhabitant, or has his or her principal place of business, has jurisdiction to review USDA's ruling on the petition, provided an action is filed not later than 20 days after the date of the entry of the ruling.
There are no administrative procedures which must be exhausted prior to any judicial challenge to the provisions of import regulations issued under section 8e of the Act.
Under the terms of the Order, fresh market shipments of Idaho-Eastern Oregon potatoes are required to be inspected and are subject to minimum grade, size, quality, maturity, pack, and container requirements. This proposed rule would revise the varietal classifications that determine the size requirements for potatoes handled under the Order. As required under section 8e of the Act, the proposed revisions to the Order's varietal classifications would also be applied to imported long type potatoes.
At its meeting on November 8, 2017, the Committee unanimously recommended revising the varietal
Section 945.341 establishes minimum grade, size, quality, maturity, pack, and container requirements for potatoes handled subject to the Order. The Order's handling regulations currently have two different size requirements for U.S. No. 2 grade potatoes. The requirements are applied based upon the varietal classification of the subject potato. Currently, the varietal classifications that determine which of the different size requirements are applicable are designated as “round varieties” in § 945.341(a)(2)(i), and “all other varieties” in § 945.341(a)(2)(ii).
This proposed rule would remove the designation “round varieties” in § 945.341(a)(2)(i) to make the size requirements in that paragraph applicable to all U.S. No. 2 grade potatoes, unless otherwise specified. In addition, this proposed rule would change the designation for “all other varieties” in § 945.341(a)(2)(ii) to “Russet types,” maintaining the larger size requirements for “Russet types” only.
Committee members reported that the Idaho-Eastern Oregon potato industry has been producing and shipping an increasing number of non-traditional potato varieties, such as oblong, fingerling, and banana potatoes. The current size requirements contained in the handling regulations do not adequately differentiate between the various types of potatoes to effectively regulate the unique varieties that are now being marketed from the production area. Without a clear distinction, there exists the potential to inhibit orderly marketing of such potatoes by requiring them to adhere to size requirements that were never intended to be applied to that type or variety. Designating potatoes as “round varieties” and “all other varieties” was appropriate when the regulations were initially established but potatoes from the production area are now segmented into two different market sectors, Russet type potatoes and all other non-Russet varieties. The characteristics of each of these market sectors continues to need different minimum size requirements. However, with the current size requirement classifications in the handling regulations, some varieties of potatoes are being required to meet size requirements that do not match their natural characteristics or their intended market outlet.
For example, Russet varieties are primarily utilized as baked potatoes or are peeled and further prepared by the consumer as products such as french fries, potato salad, or mashed potatoes. The Committee intends for the size requirements for these potatoes to be greater than for other varieties of potatoes and those size requirements match the likely utilization of such potatoes. Non-Russet type potatoes are typically marketed fresh and are prepared and consumed whole. These types, while predominantly round varieties, include unique varieties that could not be described as “round” but are also not comparable to Russet types. Requiring non-Russet type potatoes to meet size requirements intended for potatoes used for baking or french fries puts those potatoes at a marketing disadvantage.
The Committee believes that potato size is a significant consideration of potato buyers. Providing potato buyers with the sizes desired by their customers for the type of potato that is being marketed is important to promoting potato sales. The size requirements intended to facilitate orderly marketing should not unintentionally inhibit a market segment, even if that segment is a minor one. Modifying the size requirement classifications to meet the intent of the Committee would help facilitate the growth of the emerging market for unique potato varieties. This proposed change is expected to improve the marketing of Idaho-Eastern Oregon potatoes and enhance overall returns to handlers and producers.
This proposed rule would relax the current handling regulations for non-round potatoes that are also not Russet type. Such potatoes would be subject to the smaller size requirements that are currently applied to round varieties. The Committee believes that, while these potatoes represent a small market segment relative to the total output from the production area, the market is expected to grow and the Order's handling regulations should be responsive to it.
Section 8e mandates the regulation of certain imported commodities whenever those same commodities are regulated by a domestic marketing order. Irish potatoes are one of the commodities specifically covered by section 8e in the Act. In addition, section 8e stipulates that, whenever two or more such marketing orders regulating the same agricultural commodity produced in different areas are concurrently in effect, imports must comply with the provisions of the order which regulates the commodity produced in the area with which the imported commodity is in the “most direct competition.” 7 CFR 980.1(a)(2)(iii) contains the determination that imports of long type potatoes during each month of the year are in most direct competition with potatoes of the same type produced in the area covered by the Order.
Minimum grade, size, quality, and maturity requirements for potatoes imported into the United States are currently in effect under § 980.1. Section 980.1(b)(3) stipulates that, through the entire year, the grade, size, quality, and maturity requirements of the Order applicable to potatoes of all long types shall be the respective grade, size, quality, and maturity requirements for imported potatoes of all long types. Therefore, this proposed action would relax the minimum size requirements for imports of non-round U.S. No. 2 grade long type potatoes, other than Russet types, accordingly.
This rule would also allow potato importers to respond to the changing demands of domestic consumers. The domestic market's increasing preference for unique potato varieties applies to imported potatoes as well as to domestically produced potatoes. In addition, the higher prices that the unique potatoes are expected to command would also apply to imported product. Thus, importers are expected to benefit along with domestic producers and handlers by increased sales of U.S. No. 2 grade potatoes and increased total revenue.
Pursuant to the requirements set forth in the Regulatory Flexibility Act (RFA) (5 U.S.C. 601-612), the Agricultural Marketing Service (AMS) has considered the economic impact of this proposed rule on small entities. Accordingly, AMS has prepared this initial regulatory flexibility analysis.
The purpose of the RFA is to fit regulatory actions to the scale of businesses subject to such actions in order that small businesses will not be unduly or disproportionately burdened. Marketing orders issued pursuant to the Act, and rules issued thereunder, are unique in that they are brought about through group action of essentially small entities acting on their own behalf. Import regulations issued under the Act are based on those established under Federal marketing orders.
There are approximately 32 handlers of Idaho-Eastern Oregon potatoes who are subject to regulation under the Order and about 450 potato producers in the regulated area. In addition, there are approximately 255 importers of all types of potatoes, many of which import long
During the 2016-2017 fiscal period, the most recent full year of statistics available, 37,449,300 hundredweight of Idaho-Eastern Oregon potatoes were inspected under the Order and sold into the fresh market. Based on information provided by the National Agricultural Statistics Service (NASS), the average producer price for the 2016 Idaho potato crop was $6.75 per hundredweight. Multiplying $6.75 by the shipment quantity of 37,449,300 hundredweight yields an annual crop revenue estimate of $252,782,775. The average annual fresh potato revenue for each of the 450 producers is therefore calculated to be $561,740 ($252,782,775 divided by 450), which is less than the SBA threshold of $750,000. Consequently, on average, most of the Idaho-Eastern Oregon potato producers may be classified as small entities.
In addition, based on information reported by USDA's Market News Service (Market News), the average f.o.b. shipping point price for the 2016-2017 Idaho potato crop was $11.79 per hundredweight. Multiplying $11.79 by the shipment quantity of 37,449,300 hundredweight yields an annual crop revenue estimate of $441,527,247. The average annual fresh potato revenue for each of the 32 handlers is therefore calculated to be $13,797,726 ($441,527,247 divided by 32), which is above the SBA threshold of $7,500,000 for agricultural service firms. Therefore, most of the Idaho-Eastern Oregon potato handlers would be classified as large entities.
Further, based on information from USDA's Foreign Agricultural Service (FAS), potato importers imported 11,157,190 hundredweight of potatoes into the U.S. in 2016 (the most recent full year that statistics are available). FAS also reported the total value of potato imports for 2016 to be $212,331,000. The average annual revenue of the estimated 255 potato importers is therefore calculated to be $832,670 ($212,331,000 divided by 255), which is significantly less than the SBA threshold of $7,500,000. Consequently, on average, most of the entities importing potatoes into the U.S. may be classified as small entities.
This proposed rule would revise the varietal classifications that determine the size requirements for U.S. No. 2 grade potatoes handled under the Order. Specifically, this action would remove the designation “round varieties” in § 945.341(a)(2)(i) to make the size requirements in that paragraph applicable to all U.S. No. 2 grade potatoes, unless otherwise specified. In addition, this proposed rule would change the designation for “all other varieties” in § 945.341(a)(2)(ii) to “Russet types,” maintaining the larger size requirements that were previously applied to all non-round varieties, but would only apply them to “Russet types.”
Pursuant to section 8(e) of the Act, this proposed revision to the Order's varietal classifications that determine the size requirements for U.S. No. 2 grade potatoes would also be applied to imported long type Irish potatoes.
This proposed action was recommended by the Committee to ensure that the size profile of non-round, non-Russet type U.S. No. 2 grade potatoes would consistently be a size preferred by consumers. This proposed change is expected to improve the marketability of Idaho-Eastern Oregon potatoes and increase returns to handlers and producers. Authority for this proposed rule is provided in §§ 945.51 and 945.52 of the Order.
At the November 8, 2017, meeting, the Committee discussed the impact of this change on handlers and producers. The proposed change to the varietal classifications that determine the size requirements is a relaxation in regulation. The proposed regulatory change is expected to have a positive, or neutral, impact on industry participants.
The Committee relied on the opinions of producers and handlers familiar with the industry to draw its conclusions regarding the recommended handling regulation change. The Committee received anecdotal evidence from industry members at the November 8, 2017, meeting that there is some confusion in the industry with regards to which size requirements apply to which varieties of potatoes and that some varieties are being inspected and sized to requirements that were not intended by the Committee. The proposed change to the size requirements would clarify which size requirements are applicable to which potatoes.
If implemented, this proposed change is expected to lead to increased revenue for handlers and producers. Currently, non-round potato varieties that are not Russet type are required to conform to the larger size requirements, even though the Committee does not believe that this meets its intent with regards to the handling regulation. Defining the distinct classifications would allow more of the non-round, non-Russet type potatoes to enter the market, thereby allowing the sale of potatoes that would have otherwise been restricted. The benefits derived from this proposed action are not expected to be disproportionately more or less for small handlers or producers than for larger entities.
The Committee discussed alternatives to this proposed change. One consideration was making no change at all to the current regulation. Another alternative was to further differentiate between various varieties and types of potatoes in the handling regulations. There was some discussion of adding another classification. After consideration of all the alternatives, the Committee decided that the proposed changes would provide the greatest amount of benefit to the industry with the least amount of burden to producers and handlers.
Further, the Committee's meeting was widely publicized throughout the potato industry, and all interested persons were invited to attend the meeting and participate in Committee deliberations. Like all Committee meetings, the November 8, 2017, meeting was a public meeting and all entities, both large and small, were able to express their views on this issue. Finally, interested persons are invited to submit comments on this proposed rule, including the regulatory and informational impacts of this action on small businesses.
In accordance with the Paperwork Reduction Act of 1995, (44 U.S.C. Chapter 35), the Order's information collection requirements have been previously approved by OMB and assigned OMB No. 0581-0178, Generic Vegetable and Specialty Crops. No changes in those requirements would be necessary as a result of this proposed rule. Should any changes become necessary, they would be submitted to OMB for approval.
This proposed rule would not impose any additional reporting or recordkeeping requirements on small or large potato handlers and importers. As with all Federal marketing order programs, reports and forms are periodically reviewed to reduce information requirements and duplication by industry and public sector agencies.
AMS is committed to complying with the E-Government Act, to promote the use of the internet and other information technologies to provide increased opportunities for citizen access to Government information and services, and for other purposes.
USDA has not identified any relevant Federal rules that duplicate, overlap, or conflict with this proposed rule.
A small business guide on complying with fruit, vegetable, and specialty crop marketing agreements and orders may be viewed at:
In accordance with section 8e of the Act, the United States Trade Representative has concurred with the issuance of this proposed rule.
A 60-day comment period is provided to allow interested persons to respond to this proposal. All written comments timely received will be considered before a final determination is made on this matter.
Marketing agreements, Potatoes, Reporting and recordkeeping requirements.
For the reasons set forth above, 7 CFR part 945 is proposed to be amended as follows:
7 U.S.C. 601-674.
(a) * * *
(1) * * *
(2)
(ii)
Federal Aviation Administration (FAA), DOT.
Notice of proposed rulemaking (NPRM).
We propose to adopt a new airworthiness directive (AD) for certain ATR-GIE Avions de Transport Régional Model ATR42-200, -300, and -320 airplanes. This proposed AD was prompted by a determination that more restrictive maintenance requirements and airworthiness limitations are necessary. This proposed AD would require updating the maintenance or inspection program, as applicable, to incorporate new or more restrictive maintenance requirements and airworthiness limitations. We are proposing this AD to address the unsafe condition on these products.
We must receive comments on this proposed AD by June 25, 2018.
You may send comments, using the procedures found in 14 CFR 11.43 and 11.45, by any of the following methods:
•
•
•
•
For service information identified in this NPRM, contact ATR-GIE Avions de Transport Régional, 1 Allée Pierre Nadot, 31712 Blagnac Cedex, France; telephone +33 (0) 5 62 21 62 21; fax +33 (0) 5 62 21 67 18; email
You may examine the AD docket on the internet at
Shahram Daneshmandi, Aerospace Engineer, International Section, Transport Standards Branch, FAA, 2200 South 216th Street, Des Moines, WA 98198; telephone and fax 206-231-3220.
We invite you to send any written relevant data, views, or arguments about this proposal. Send your comments to an address listed under the
We will post all comments we receive, without change, to
The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Union, has issued EASA Airworthiness Directive 2017-0221R1, dated December 15, 2017 (referred to after this as the Mandatory Continuing Airworthiness Information, or “the MCAI”), to correct an unsafe condition for all ATR-GIE Avions de Transport Régional Model ATR42-200, -300, and -320 airplanes. The MCAI states:
The airworthiness limitations and certification maintenance requirements (CMR) for ATR aeroplanes, which are approved by EASA, are currently defined and published in the ATR42-200/-300/-320 Time Limits (TL) document. These instructions have been identified as mandatory for continued airworthiness.
Failure to accomplish these instructions could result in an unsafe condition.
Consequently, ATR published Revision 8 of the ATR42-200/-300/-320 TL document, which contains new and/or more restrictive CMRs and airworthiness limitation tasks.
For the reasons described above, this [EASA] AD requires accomplishment of the actions specified in the ATR42-200/-300/-320 TL document Revision 8, hereafter referred to as `the TLD' in this [EASA] AD.
This [EASA] AD, in conjunction with two other [EASA] ADs related to ATR 42-400/-500 (EASA AD 2017-0222) and ATR 72-101/-102/-201/-202/-211/-212/-212A (EASA AD 2017-0223) aeroplanes, retains the requirements of EASA AD 2009-0242 [which corresponds to FAA AD 2008-04-19 R1, Amendment 39-16069 (74 FR 56713, November 3, 2009) (“AD 2008-04-19 R1”)] and EASA AD 2012-1093 [which corresponds to FAA AD 2015-26-09, Amendment 39-18357 (81 FR 1483, January 13, 2016) (“AD 2015-26-09”)]. EASA plans, when all these three ADs are effective, to cancel EASA AD 2009-0242 and EASA AD 2012-0193.
This [EASA] AD is revised to provide the correct issue date (17 October 2016) of the TLD. The original [EASA] AD inadvertently referenced the EASA approval date for that document.
You may examine the MCAI in the AD docket on the internet at
This NPRM would not supersede AD 2008-04-19 R1 or AD 2015-26-09. Rather, we have determined that a stand-alone AD would be more appropriate to address the changes in the MCAI. This NPRM would require revising the maintenance or inspection program, as applicable, to incorporate new or more restrictive maintenance requirements and airworthiness limitations. Accomplishment of the proposed actions would then terminate all requirements of AD 2008-04-19 R1 and AD 2015-26-09 for ATR-GIE Avions de Transport Régional Model ATR42-200, -300, and -320 airplanes only. Accomplishment of the proposed actions would also terminate all requirements of AD 2000-17-09, Amendment 39-11883 (65 FR 53897, September 6, 2000) (“AD 2000-17-09”) for ATR-GIE Avions de Transport Régional Model ATR42-200, -300, and -320 airplanes only.
ATR-GIE Avions de Transport Régional has issued ATR 42-200/-300/-320, Time Limits Document (TL), Revision 8, dated October 17, 2016. This service information describes life limits and maintenance requirements for the affected airplanes. This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the
This product has been approved by the aviation authority of another country, and is approved for operation in the United States. Pursuant to our bilateral agreement with the State of Design Authority, we have been notified of the unsafe condition described in the MCAI and service information referenced above. We are proposing this AD because we evaluated all pertinent information and determined an unsafe condition exists and is likely to exist or develop on other products of the same type design.
This proposed AD would require revisions to certain operator maintenance documents to include new actions (
The FAA recently became aware of an issue related to the applicability of ADs that require incorporation of revised airworthiness limitations (ALS) into an operator's maintenance or inspection program.
Typically, when these types of ADs are issued by civil aviation authorities of other countries, they apply to all airplanes covered under an identified type certificate (TC). The corresponding FAA AD typically retains applicability to all of those airplanes.
In addition, U.S. operators must operate their airplanes in an airworthy condition, in accordance with 14 CFR 91.7(a). Included in this obligation is the requirement to perform any maintenance or inspections specified in the ALS, and in accordance with the ALS as specified in 14 CFR 43.16 and 91.403(c), unless an alternative has been approved by the FAA.
When a type certificate is issued for a type design, the specific ALS, including revisions, is a part of that type design, as specified in 14 CFR 21.31(c).
The sum effect of these operational and maintenance requirements is an obligation to comply with the ALS defined in the type design referenced in the manufacturer's conformity statement. This obligation may introduce a conflict with an AD that requires a specific ALS revision if new airplanes are delivered with a later revision as part of their type design.
To address this conflict, the FAA has approved alternative methods of compliance (AMOCs) that allow operators to incorporate the most recent ALS revision into their maintenance/inspection programs, in lieu of the ALS revision required by the AD. This eliminates the conflict and enables the operator to comply with both the AD and the type design.
However, compliance with AMOCs is normally optional, and we recently became aware that some operators choose to retain the AD-mandated ALS revision in their fleet-wide maintenance/inspection programs, including those for new airplanes delivered with later ALS revisions, to help standardize the maintenance of the fleet. To ensure that operators comply with the applicable ALS revision for newly delivered airplanes containing a later revision than that specified in an AD, we plan to limit the applicability of ADs that mandate ALS revisions to those airplanes that are subject to an earlier revision of the ALS, either as part of the type design or as mandated by an earlier AD.
This proposed AD therefore would apply to ATR-GIE Avions de Transport Régional Model ATR42-200, -300, and -320 airplanes with an original certificate of airworthiness or original export certificate of airworthiness that was issued on or before the date of approval of the ALS revision identified in this proposed AD. Operators of airplanes with an original certificate of airworthiness or original export certificate of airworthiness issued after that date must comply with the airworthiness limitations specified as part of the approved type design and referenced on the type certificate data sheet.
We estimate that this proposed AD affects 33 airplanes of U.S. registry.
We estimate the following costs to comply with this proposed AD.
We have determined that revising the maintenance or inspection program takes an average of 90 work-hours per operator, although we recognize that this number may vary from operator to operator. In the past, we have estimated that this action takes 1 work-hour per airplane. Since operators incorporate maintenance or inspection program changes for their affected fleet(s), we have determined that a per-operator estimate is more accurate than a per-airplane estimate. Therefore, we estimate the total cost per operator to be $7,650 (90 work-hours × $85 per work-hour).
Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. “Subtitle VII: Aviation Programs,” describes in more detail the scope of the Agency's authority.
We are issuing this rulemaking under the authority described in “Subtitle VII, Part A, Subpart III, Section 44701: General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.
This proposed AD is issued in accordance with authority delegated by the Executive Director, Aircraft Certification Service, as authorized by FAA Order 8000.51C. In accordance with that order, issuance of ADs is normally a function of the Compliance and Airworthiness Division, but during this transition period, the Executive Director has delegated the authority to issue ADs applicable to transport category airplanes to the Director of the System Oversight Division.
We determined that this proposed AD would not have federalism implications under Executive Order 13132. This proposed AD would not have a substantial direct effect on the States, on the relationship between the national Government and the States, or on the distribution of power and responsibilities among the various levels of government.
For the reasons discussed above, I certify this proposed regulation:
1. Is not a “significant regulatory action” under Executive Order 12866;
2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979);
3. Will not affect intrastate aviation in Alaska; and
4. Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.
Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety.
Accordingly, under the authority delegated to me by the Administrator, the FAA proposes to amend 14 CFR part 39 as follows:
49 U.S.C. 106(g), 40113, 44701.
We must receive comments by June 25, 2018.
This AD affects the ADs specified in paragraphs (b)(1), (b)(2), and (b)(3) of this AD.
(1) AD 2000-17-09, Amendment 39-11883 (65 FR 53897, September 6, 2000) (“AD 2000-17-09”).
(2) AD 2008-04-19 R1, Amendment 39-16069 (74 FR 56713, November 3, 2009) (“AD 2008-04-19 R1”).
(3) AD 2015-26-09, Amendment 39-18357 (81 FR 1483, January 13, 2016) (“AD 2015-26-09”).
This AD applies to ATR-GIE Avions de Transport Régional Model ATR42-200, -300, and -320 airplanes, certificated in any category, with an original airworthiness certificate or original export certificate of airworthiness dated on or before October 17, 2016.
Air Transport Association (ATA) of America Code 05, Time limits/maintenance checks.
This AD was prompted by a determination that more restrictive maintenance requirements and airworthiness limitations are necessary. We are issuing this AD to prevent reduced structural integrity of the airplane.
Comply with this AD within the compliance times specified, unless already done.
Within 90 days after the effective date of this AD, revise the maintenance or inspection program, as applicable, to incorporate the information specified in the airworthiness limitations (ALS) and certification maintenance requirements (CMR) sections of ATR-GIE Avions de Transport Régional ATR 42-200/-300/-320, Time Limits Document (TL), Revision 8, dated October 17, 2016. The initial compliance time for accomplishing the tasks is at the applicable times specified in the ALS and CMR sections of ATR-GIE Avions de Transport Régional ATR 42-200/-300/-320, TL, Revision 8, dated October 17, 2016, or within 90 days after the effective date of this AD, whichever occurs later, except as specified in paragraph (h) of this AD.
For the CMR tasks listed in figure 1 to paragraph (h) of this AD, the initial compliance time for accomplishing the tasks is at the applicable time specified in the ALS and CMR sections of ATR-GIE Avions de Transport Régional ATR 42-200/-300/-320, TL, Revision 8, dated October 17, 2016, or within the compliance time specified in figure 1 to paragraph (h) of this AD, whichever occurs later.
After the maintenance or inspection program, as applicable, has been revised as required by paragraphs (g) and (h) of this AD, no alternative actions (
Accomplishing the actions required by this AD terminates all requirements of AD 2000-17-09, AD 2008-04-19 R1, and AD 2015-26-09 for ATR-GIE Avions de Transport Régional Model ATR42-200, -300, and -320 airplanes only.
The following provisions also apply to this AD:
(1)
(2)
(1) Refer to Mandatory Continuing Airworthiness Information (MCAI) EASA Airworthiness Directive 2017-0221R1, dated December 15, 2017, for related information. This MCAI may be found in the AD docket on the internet at
(2) For more information about this AD, contact Shahram Daneshmandi, Aerospace Engineer, International Section, Transport Standards Branch, FAA, 2200 South 216th Street, Des Moines, WA 980198; telephone and fax 206-231-3220.
(3) For service information identified in this AD, contact ATR-GIE Avions de Transport Régional, 1 Allée Pierre Nadot, 31712 Blagnac Cedex, France; telephone +33 (0) 5 62 21 62 21; fax +33 (0) 5 62 21 67 18; email
Federal Aviation Administration (FAA), DOT.
Notice of proposed rulemaking (NPRM).
We propose to adopt a new airworthiness directive (AD) for Airbus Helicopters Model AS-365N2, AS 365 N3, EC 155B, EC155B1, SA-365N1, and SA-366G1 helicopters. This proposed AD would require repetitive inspections of the aft fuselage outer skin. This proposed AD is prompted by several reports of aft fuselage outer skin disbonding. The actions of this proposed AD are intended to address an unsafe condition on these products.
We must receive comments on this proposed AD by July 9, 2018.
You may send comments by any of the following methods:
•
•
•
•
You may examine the AD docket on the internet at
For service information identified in this proposed rule, contact Airbus Helicopters, 2701 N. Forum Drive, Grand Prairie, TX 75052; telephone (972) 641-0000 or (800) 232-0323; fax (972) 641-3775; or at
Matt Fuller, Senior Aviation Safety Engineer, Safety Management Section, Rotorcraft Standards Branch, FAA, 10101 Hillwood Pkwy., Fort Worth, TX 76177; telephone (817) 222-5110; email
We invite you to participate in this rulemaking by submitting written comments, data, or views. We also invite comments relating to the economic, environmental, energy, or federalism impacts that might result from adopting the proposals in this document. The most helpful comments reference a specific portion of the proposal, explain the reason for any recommended change, and include supporting data. To ensure the docket does not contain duplicate comments, commenters should send only one copy of written comments, or if comments are filed electronically, commenters should submit only one time.
We will file in the docket all comments that we receive, as well as a report summarizing each substantive public contact with FAA personnel concerning this proposed rulemaking. Before acting on this proposal, we will consider all comments we receive on or before the closing date for comments. We will consider comments filed after the comment period has closed if it is possible to do so without incurring expense or delay. We may change this proposal in light of the comments we receive.
EASA, which is the Technical Agent for the Member States of the European Union, has issued EASA AD No. 2017-0165, dated September 5, 2017 (EASA AD 2017-0165), to correct an unsafe condition for Airbus Helicopters Model SA 365 N1, AS 365 N2, AS 365 N3, SA 366 G1, EC 155 B and EC 155 B1 helicopters. EASA advises of several reports of aft fuselage (baggage compartment area) outer skin disbonding found during a 600-hour inspection. EASA advises that most of the reports of disbonding occurred on Model EC 155 helicopters and may occur in the same area on Model AS 365, SA 365, and SA 366 helicopters due to design similarity. According to EASA, the cause of the disbonding has not yet been determined and the investigation is continuing. Airbus Helicopters states possible causes that are being considered include exhaust gas heat from the exhaust pipes and environmental conditions. EASA states that this condition, if not detected and corrected, could reduce the structural integrity of the aft fuselage, possibly affecting safe flight and landing.
To address this unsafe condition, EASA AD 2017-0165 requires a repetitive tap inspection of the aft fuselage outer skin for disbonding, a repetitive visual inspection of the aft fuselage outer skin for distortion, wrinkling, and corrosion, and contacting Airbus Helicopters if there is any disbonding.
These helicopters have been approved by the aviation authority of France and are approved for operation in the United States. Pursuant to our bilateral agreement with France, EASA, its technical representative, has notified us of the unsafe condition described in its AD. We are proposing this AD because we evaluated all known relevant information and determined that an unsafe condition is likely to exist or develop on other products of the same type design.
We reviewed Airbus Helicopters Alert Service Bulletin (ASB) No. AS365-05.00.77 for Model AS365 N, N1, N2, and N3 and non-FAA-certificated Model AS365 F, Fs, Fi, K, and K2 helicopters; ASB No. SA366-05.48 for Model SA366 G1 and non-FAA-certificated Model SA366 GA helicopters; and ASB No. EC155-05A033 for Model EC155 B and B1 helicopters, all Revision 0 and all dated July 21, 2017. This service information specifies repetitive tap and visual inspections between aft fuselage outer skin frames X4630 and X6630 and defines the allowable limit of disbonding for this area. If there is distortion, wrinkling, or corrosion, this service information specifies performing a tap inspection. If there is disbonding within the allowable limit, this service information specifies reporting the inspection results to Airbus Helicopters and performing the recurring tap inspection at a shorter compliance time interval. If there is disbonding that exceeds the allowable limit, this service information specifies contacting Airbus Helicopters for repair before further flight.
This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the
This proposed AD would require, within 110 hours time-in-service (TIS), a tap inspection of the aft fuselage outer skin for disbonding. If there is no disbonding, repeating the tap inspection at intervals not to exceed 660 hours TIS would be required. If there is disbonding, either repeating the tap inspections at intervals not to exceed 110 hours TIS or repairing or replacing the panel before further flight and then tap inspecting the panel at intervals not to exceed 660 hours TIS would be required. This proposed AD would also require, within 220 hours TIS and thereafter at intervals not to exceed 110 hours TIS, cleaning the aft fuselage outer skin and visually inspecting for distortion, wrinkling, and corrosion. If there is any distortion, wrinkling, or corrosion, tap inspecting the area for disbonding would be required before further flight.
If there is disbonding within the allowable limit, the EASA AD specifies reporting the inspection results to Airbus Helicopters, whereas this proposed AD would not. If there is disbonding that exceeds the allowable limit, the EASA AD specifies contacting Airbus Helicopters for approved skin panel repair or replacement instructions, whereas this proposed AD would require repairing or replacing the panel instead.
We consider this proposed AD to be an interim action. If final action is later identified, we might consider further rulemaking then.
We estimate that this proposed AD would affect 46 helicopters of U.S. Registry. We estimate that operators may incur the following costs in order to comply with this AD. Labor costs are estimated at $85 per work-hour.
Tap inspecting the aft fuselage outer skin would take about 3 work-hours for an estimated cost of $255 per helicopter and $11,730 for the U.S. fleet per inspection cycle. Visually inspecting the aft fuselage outer skin would take about 0.3 work-hour for an estimated cost of $26 per helicopter and $1,196 for the U.S. fleet per inspection cycle. Repairing a panel would take about 5 work-hours and parts would cost about $500 for an estimated cost of $925. Replacing a panel would take about 10 work-hours and parts would cost about $20,000 for an estimated cost of $20,850.
Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. “Subtitle VII: Aviation Programs,” describes in more detail the scope of the Agency's authority.
We are issuing this rulemaking under the authority described in “Subtitle VII,
We determined that this proposed AD would not have federalism implications under Executive Order 13132. This proposed AD would not have a substantial direct effect on the States, on the relationship between the national Government and the States, or on the distribution of power and responsibilities among the various levels of government.
For the reasons discussed, I certify this proposed regulation:
1. Is not a “significant regulatory action” under Executive Order 12866;
2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979);
3. Will not affect intrastate aviation in Alaska to the extent that it justifies making a regulatory distinction; and
4. Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.
We prepared an economic evaluation of the estimated costs to comply with this proposed AD and placed it in the AD docket.
Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety.
Accordingly, under the authority delegated to me by the Administrator, the FAA proposes to amend 14 CFR part 39 as follows:
49 U.S.C. 106(g), 40113, 44701.
This AD applies to Model AS-365N2, AS 365 N3, EC 155B, EC155B1, SA-365N1, and SA-366G1 helicopters, certificated in any category.
This AD defines the unsafe condition as disbonding of the aft fuselage outer skin. This condition could result in loss of aft fuselage structural integrity and subsequent loss of control of the helicopter.
We must receive comments by July 9, 2018.
You are responsible for performing each action required by this AD within the specified compliance time unless it has already been accomplished prior to that time.
(1) Within 110 hours time-in-service (TIS), tap inspect the aft fuselage outer skin for disbonding between frames X4630 and X6630 in the areas depicted in Figure 1 of Airbus Helicopters Alert Service Bulletin (ASB) No. AS365-05.00.77, ASB No. SA366-05.48, or ASB No. EC155-05A033, all Revision 0 and dated July 21, 2017 (ASB AS365-05.00.77, ASB SA366-05.48, or ASB EC155-05A033), as applicable for your model helicopter. Examples of acceptable and unacceptable disbonding areas are depicted in Figure 2 of ASB AS365-05.00.77, ASB SA366-05.48, and ASB EC155-05A033, as applicable for your model helicopter.
(i) If there is no disbonding, repeat the tap inspection at intervals not to exceed 660 hours TIS.
(ii) If there is disbonding within one square-shaped area measuring 3.94 in. x 3.94 in. (10 cm x 10 cm) that does not cross two skin panels, repeat the tap inspection at intervals not to exceed 110 hours TIS.
(iii) If there is disbonding that exceeds one square-shaped area measuring 3.94 in. x 3.94 in. (10 cm x 10 cm) or crosses two skin panels, before further flight, repair or replace the panel. Thereafter, tap inspect the panel at intervals not to exceed 660 hours TIS.
(2) Within 220 hours TIS, and thereafter at intervals not to exceed 110 hours TIS, clean the aft fuselage outer skin and using a light, visually inspect for distortion, wrinkling, and corrosion between frames X4630 and X6630 as depicted in Figure 1 of ASB AS365-05.00.77, ASB SA366-05.48, or ASB EC155-05A033, as applicable for your model helicopter. If there is any distortion, wrinkling, or corrosion, before further flight, tap inspect the area for disbonding by following the inspection instructions in paragraph (e)(1) of this AD.
(1) The Manager, Safety Management Section, Rotorcraft Standards Branch, FAA, may approve AMOCs for this AD. Send your proposal to: Matt Fuller, Senior Aviation Safety Engineer, Safety Management Section, Rotorcraft Standards Branch, FAA, 10101 Hillwood Pkwy., Fort Worth, TX 76177; telephone (817) 222-5110; email
(2) For operations conducted under a 14 CFR part 119 operating certificate or under 14 CFR part 91, subpart K, we suggest that you notify your principal inspector, or lacking a principal inspector, the manager of the local flight standards district office or certificate holding district office before operating any aircraft complying with this AD through an AMOC.
The subject of this AD is addressed in European Aviation Safety Agency (EASA) AD No. 2017-0165, dated September 5, 2017. You may view the EASA AD on the internet at
Joint Aircraft Service Component (JASC) Code: 5302, Rotorcraft tail boom.
Federal Aviation Administration (FAA), DOT.
Notice of proposed rulemaking (NPRM).
We propose to adopt a new airworthiness directive (AD) for all Airbus Model A330-200 Freighter series airplanes, Model A330-200 series airplanes, Model A330-300 series airplanes, Model A340-200 series airplanes, Model A340-300 series airplanes, Model A340-500 series airplanes, and Model A340-600 series airplanes. This proposed AD was prompted by a report of deficient fatigue performance of high strength steel used in forgings. Components made from the affected high strength steel are installed on the main landing gear (MLG), nose landing gear (NLG), and center landing gear (CLG). This proposed AD would require identifying the part number and serial number of certain components installed on the MLG, NLG, and CLG; replacing affected parts; identifying the airplane's weight variant; and determining the applicable life limit for
We must receive comments on this proposed AD by June 25, 2018.
You may send comments, using the procedures found in 14 CFR 11.43 and 11.45, by any of the following methods:
•
•
•
•
For service information identified in this NPRM, contact Airbus SAS, Airworthiness Office—EAL, 1 Rond Point Maurice Bellonte, 31707 Blagnac Cedex, France; telephone +33 5 61 93 36 96; fax +33 5 61 93 45 80; email
You may examine the AD docket on the internet at
Vladimir Ulyanov, Aerospace Engineer, International Section, Transport Standards Branch, FAA, 2200 South 216th St., Des Moines, WA 98198-6547; telephone and fax 206-231-3229.
We invite you to send any written relevant data, views, or arguments about this proposal. Send your comments to an address listed under the
We will post all comments we receive, without change, to
The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Union, has issued EASA AD 2017-0185, dated September 22, 2017 (referred to after this as the Mandatory Continuing Airworthiness Information, or “the MCAI”), to correct an unsafe condition for all Airbus Model A330-200 Freighter series airplanes, Model A330-200 series airplanes, Model A330-300 series airplanes, Model A340-200 series airplanes, Model A340-300 series airplanes, Model A340-500 series airplanes, and Model A340-600 series airplanes. The MCAI states:
In 2006, Messier-Dowty identified a deficiency in the fatigue performance of 300M high strength steel used in forgings. The root cause for this fatigue deficiency was the processing during preparation of the material. After investigation, it was determined that the following material sources (S) were affected by this fatigue deficiency: Electralloy (S1), RSM (S2A, S2B or S2C), Latrobe (S3) and Aubert et Duval (S4).
Consequently, reduced lives were calculated for certain landing gear main fittings, bogie beams and sliding pistons, determined to be affected by the 300M material properties quality issue. These components are installed on Main, Nose and Centre Landing Gears (MLG, NLG, CLG) of A330 and A340 aeroplanes.
This condition, if not corrected, could lead to structural failure of a landing gear, possibly resulting in loss of control of the aeroplane during take-off or landing.
To initially address this potential unsafe condition, Airbus published reduced life limits for the affected parts from material sources S1, S2 and S3 in the applicable Airworthiness Limitation Section (ALS) Part 1. Later, it was determined that ALS Part 1 was an inappropriate place for recording the reduced lives and Airbus published Service Bulletin (SB) A330-32-3281, SB A340-32-4310, and SB A340-32-5119, as applicable, to provide identification and replacement instructions for affected parts made of all material sources S1, S2, S3 and S4. This action was also accomplished to simplify Airbus ALS Part 1.
For the reasons described above, this [EASA] AD requires [identification of the part numbers and serial numbers of the main fitting, bogie beam and sliding piston of the MLG, NLG, and CLG, and the airplane's weight variant], and implementation of the reduced life limits for the affected parts and replacement of any parts that are close to, or have exceeded the applicable reduced life limit.
You may examine the MCAI in the AD docket on the internet at
Airbus has issued the following service information. These documents are distinct since they apply to different airplane models.
• Service Bulletin A330-32-3281, Revision 02, dated June 16, 2017, including Appendixes 01 through 06; and Service Bulletin A340-32-4310, Revision 02, dated June 16, 2017, including Appendixes 01 through 06. This service information includes procedures for inspections to identify the part numbers and serial numbers of the main fittings, bogie beams, and sliding pistons of the MLG; and procedures for determining the airplane's weight variant. This service information also describes the reduced life limits for affected parts. These documents are distinct since they apply to different airplane models.
• Service Bulletin A340-32-5119, Revision 01, dated January 31, 2017, including Appendixes 01 through 07. This service information includes procedures for inspections to identify the part numbers and serial numbers of the main fittings and bogie beams of the MLG, NLG, and CLG; and procedures for determining the airplane's weight variant. This service information also describes the reduced life limits for affected parts.
In addition, Airbus has issued the following service information, which describes life limits for affected parts. These documents are distinct since they apply to different airplane models and to different life limited parts.
• A330 Airworthiness Limitations Section (ALS) Part 1, “Safe Life Airworthiness Limitation Items (SL-ALI),” Revision 09, dated September 18, 2017.
• A330 ALS Part 1, “Safe Life Airworthiness Limitation Items (SL-ALI),” Variation 9.2, dated November 28, 2017.
• A340 Airworthiness Limitations Section (ALS) Part 1, “Safe Life Airworthiness Limitation Items (SL-ALI),” Revision 09, dated September 18, 2017.
• A340 ALS Part 1, “Safe Life Airworthiness Limitation Items (SL-ALI),” Variation 9.2, dated November 28, 2017.
This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the
This product has been approved by the aviation authority of another country, and is approved for operation in the United States. Pursuant to our bilateral agreement with the State of Design Authority, we have been notified of the unsafe condition described in the MCAI and service information referenced above. We are proposing this AD because we evaluated all pertinent information and determined an unsafe condition exists and is likely to exist or develop on other products of these same type designs.
We estimate that this proposed AD affects 103 airplanes of U.S. registry.
We estimate the following costs to comply with this proposed AD:
We have received no definitive data that would enable us to provide cost estimates for the on-condition part replacements specified in this proposed AD.
Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. “Subtitle VII: Aviation Programs,” describes in more detail the scope of the Agency's authority.
We are issuing this rulemaking under the authority described in “Subtitle VII, Part A, Subpart III, Section 44701: General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.
This proposed AD is issued in accordance with authority delegated by the Executive Director, Aircraft Certification Service, as authorized by FAA Order 8000.51C. In accordance with that order, issuance of ADs is normally a function of the Compliance and Airworthiness Division, but during this transition period, the Executive Director has delegated the authority to issue ADs applicable to transport category airplanes to the Director of the System Oversight Division.
We determined that this proposed AD would not have federalism implications under Executive Order 13132. This proposed AD would not have a substantial direct effect on the States, on the relationship between the national Government and the States, or on the distribution of power and responsibilities among the various levels of government.
For the reasons discussed above, I certify this proposed regulation:
1. Is not a “significant regulatory action” under Executive Order 12866;
2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979);
3. Will not affect intrastate aviation in Alaska; and
4. Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.
Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety.
Accordingly, under the authority delegated to me by the Administrator, the FAA proposes to amend 14 CFR part 39 as follows:
49 U.S.C. 106(g), 40113, 44701.
We must receive comments by June 25, 2018.
None.
This AD applies to the Airbus airplanes identified in paragraphs (c)(1) through (c)(7) of this AD; certificated in any category; all manufacturer serial numbers.
(1) Model A330-201, -202, -203, -223, and -243 airplanes.
(2) Model A330-223F and -243F airplanes.
(3) Model A330-301, -302, -303, -321, -322, -323, -341, -342, and -343 airplanes.
(4) Model A340-211, -212, and -213 airplanes.
(5) Model A340-311, -312, and -313 airplanes.
(6) Model A340-541 airplanes.
(7) Model A340-642 airplanes.
Air Transport Association (ATA) of America Code 32, Landing Gear.
This AD was prompted by a report of deficient fatigue performance of 300M high strength steel used in forgings. Components made of 300M high strength steel are installed on the main landing gear (MLG), nose landing gear (NLG), and center landing gear (CLG). We are issuing this AD to detect and correct parts made from 300M high strength steel, which if uncorrected, could lead to structural failure of the landing gear, and possibly loss of control of the airplane during take-off or landing.
Comply with this AD within the compliance times specified, unless already done.
(1) For the purpose of this AD, an affected part is any main fitting, bogie beam, or sliding piston of the MLG, NLG, or CLG installed on the airplane, having a part number and serial number combination specified in the applicable service information identified in paragraphs (h)(1), (h)(2), and (h)(3) of this AD.
(2) For the purpose of this AD, a serviceable part is any main fitting, bogie beam, or sliding piston of the MLG, NLG, or
(i) The life limit specified in the applicable service information identified in paragraphs (h)(1), (h)(2), and (h)(3) of this AD.
(ii) The life limit specified in Airbus A330 Airworthiness Limitations Section (ALS) Part 1, “Safe Life Airworthiness Limitation Items (SL-ALI),” Revision 09, dated September 18, 2017, and A330 ALS Part 1, “Safe Life Airworthiness Limitation Items (SL-ALI),” Variation 9.2, dated November 28, 2017.
(iii) The life limit specified in Airbus A340 Airworthiness Limitations Section (ALS) Part 1, “Safe Life Airworthiness Limitation Items (SL-ALI),” Revision 09, dated September 18, 2017, and A340 ALS Part 1, “Safe Life Airworthiness Limitation Items (SL-ALI),” Variation 9.2, dated November 28, 2017.
Within 3 months after the effective date of this AD: Identify the part number and serial number of each main fitting, bogie beam, and sliding piston of the MLG, NLG, and CLG installed on the airplane; identify the airplane's weight variant; and determine the applicable reduced life limit; in accordance with the Accomplishment Instructions of the applicable service information identified in paragraph (h)(1), (h)(2), or (h)(3) of this AD. A review of airplane maintenance records is acceptable for identification of the installed main fittings, bogie beams, and sliding pistons of the MLG, NLG, and CLG, provided the part number and serial number of each component can be conclusively identified by that review.
(1) Airbus Service Bulletin A330-32-3281, Revision 02, dated June 16, 2017, including Appendixes 01 through 06.
(2) Airbus Service Bulletin A340-32-4310, Revision 02, dated June 16, 2017, including Appendixes 01 through 06.
(3) Airbus Service Bulletin A340-32-5119, Revision 01, dated January 31, 2017, including Appendixes 01 through 07.
Prior to exceeding the applicable life limit, as specified in the applicable service information identified in paragraph (h)(1), (h)(2), or (h)(3) of this AD, or within 3 months after the effective date of this AD, whichever occurs later: Replace each affected part (as defined in paragraph (g)(1) of this AD) with a serviceable part (as defined in paragraph (g)(2) of this AD).
As of the effective date of this AD, any affected part (as defined in paragraph (g)(1) of this AD) may be used as a replacement part, provided the affected part is also a serviceable part (as defined in paragraph (g)(2) of this AD), and following installation, the affected part is replaced prior to exceeding the applicable life limit as specified in paragraph (g)(2) of this AD.
The following provisions also apply to this AD:
(1)
(2)
(3)
(1) Refer to Mandatory Continuing Airworthiness Information (MCAI) EASA AD 2017-0185, dated September 22, 2017, for related information. This MCAI may be found in the AD docket on the internet at
(2) For more information about this AD, contact Vladimir Ulyanov, Aerospace Engineer, International Section, Transport Standards Branch, FAA, 2200 South 216th St., Des Moines, WA 98198-6547; telephone and fax 206-231-3229.
(3) For service information identified in this AD, contact Airbus SAS, Airworthiness Office—EAL, 1 Rond Point Maurice Bellonte, 31707 Blagnac Cedex, France; telephone +33 5 61 93 36 96; fax +33 5 61 93 45 80; email
Federal Aviation Administration (FAA), Department of Transportation (DOT).
Notice of proposed rulemaking (NPRM).
We propose to supersede Airworthiness Directive (AD) 98-16-03 for SOCATA Models TB 9 and TB 10 airplanes. This proposed AD results from mandatory continuing airworthiness information (MCAI) originated by an aviation authority of another country to identify and correct an unsafe condition on an aviation product. The MCAI describes the unsafe condition as fatigue cracking of the wing front attachments on the wing and fuselage sides. We are issuing this proposed AD to require actions to address the unsafe condition on these products.
We must receive comments on this proposed AD by June 25, 2018.
You may send comments by any of the following methods:
•
•
•
•
For service information identified in this proposed AD, contact SOCATA, Direction des services, 65921 Tarbes Cedex 9, France; phone: +33 (0) 5 62 41 73 00; fax: +33 (0) 5 62 41 76 54; email:
You may examine the AD docket on the internet at
Albert Mercado, Aerospace Engineer, FAA, Small Airplane Standards Branch, 901 Locust, Room 301, Kansas City, Missouri 64106; telephone: (816) 329-4119; fax: (816) 329-4090; email:
We invite you to send any written relevant data, views, or arguments about this proposed AD. Send your comments to an address listed under the
We will post all comments we receive, without change, to
We issued AD 98-16-03, Amendment 39-10677 (63 FR 40359; July 29, 1998). That AD required actions intended to address an unsafe condition on SOCATA Models TB 9 and TB 10 airplanes and was based on mandatory continuing airworthiness information (MCAI) originated by an aviation authority of another country.
Since we issued AD 98-16-03, SOCATA developed improved repair procedures and increased the applicability to include Model TB 200 airplanes.
The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Community, has issued EASA AD No. 2018-0030, dated January 31, 2018 (referred to after this as “the MCAI”), to correct an unsafe condition for the specified products. The MCAI states:
During a scheduled maintenance inspection, cracks were found on the wing front attachments of a TB 10 aeroplane.
This condition, if not detected and corrected, could affect the structural integrity of the aeroplane.
Prompted by these findings, SOCATA issued SB 10-081-57 to provide inspection and modification instructions, and DGAC France issued AD 94-264(A), later revised, to require repetitive inspections of wing front attachments of TB 9 and TB 10 aeroplanes (all MSN up to 822 inclusive, with some excluded). That [DGAC France] AD also required installation of reinforcement kits, applied as repair (if cracks were found) or as modification (if no cracks were found), of the wing front attachments, on both wing and fuselage sides, and repetitive replacement of those reinforcements afterwards.
Since DGAC France AD 94-264(A) R1 was issued, cracks have been found on wing front attachments, on the wing side, on TB10 aeroplanes to which the AD did not apply,
For the reason described above, this [EASA] AD retains the requirements of DGAC France AD 94-264(A) R1, which is superseded, expands the Applicability to all MSN for TB 9 and TB 10 aeroplanes and includes TB 200 aeroplanes, and requires an improved repair solution of the wing front attachment on wing side.
You may examine the MCAI on the internet at
SOCATA has issued Daher Service Bulletin SB 10-081, Revision 3, dated December 2017. The service bulletin describes procedures for inspecting the front attachments and installing modification kits. This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the
This product has been approved by the aviation authority of another country, and is approved for operation in the United States. Pursuant to our bilateral agreement with this State of Design Authority, they have notified us of the unsafe condition described in the MCAI and service information referenced above. We are proposing this AD because we evaluated all information and determined the unsafe condition exists and is likely to exist or develop on other products of the same type design.
We estimate that this proposed AD will affect 126 products of U.S. registry. We also estimate that it would take about 3 work-hours per product to comply with the inspection requirements of this proposed AD. We also estimate that it would take about 25 work-hours per product to comply with the replacement/modification (wing and fuselage sides) requirements of this proposed AD. The average labor rate is $85 per work-hour. Required parts would cost about $3,000 per product.
Based on these figures, we estimate the cost of the proposed AD on U.S. operators to be $677,880, or $5,380 per product.
In addition, we estimate that any necessary follow-on actions to replace the wing attachment on the wing side, resulting from the repetitive inspections, would take about 9 work-hours and require parts costing $3,000, for a cost of $3,765 per product. We have no way of determining the number of products that may need these actions.
Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. “Subtitle VII: Aviation Programs,” describes in more detail the scope of the Agency's authority.
We are issuing this rulemaking under the authority described in “Subtitle VII, Part A, Subpart III, Section 44701: General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.
This AD is issued in accordance with authority delegated by the Executive Director, Aircraft Certification Service, as authorized by FAA Order 8000.51C. In accordance with that order, issuance of ADs is normally a function of the Compliance and Airworthiness Division, but during this transition period, the Executive Director has delegated the authority to issue ADs applicable to small airplanes, gliders, balloons, airships, domestic business jet transport airplanes, and associated appliances to the Director of the Policy and Innovation Division.
We determined that this proposed AD would not have federalism implications under Executive Order 13132. This proposed AD would not have a substantial direct effect on the States, on the relationship between the national Government and the States, or on the distribution of power and responsibilities among the various levels of government.
For the reasons discussed above, I certify this proposed regulation:
(1) Is not a “significant regulatory action” under Executive Order 12866,
(2) Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979),
(3) Will not affect intrastate aviation in Alaska, and
(4) Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.
Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety.
Accordingly, under the authority delegated to me by the Administrator, the FAA proposes to amend 14 CFR part 39 as follows:
49 U.S.C. 106(g), 40113, 44701.
We must receive comments by June 25, 2018.
This AD replaces AD 98-16-03, Amendment 39-10677 (63 FR 40359; July 29, 1998) (“AD 98-16-03”).
This AD applies to SOCATA airplanes listed in the following groups, certificated in any category:
(1) Group 1 airplanes: Model TB 9, all manufacturer serial numbers (MSN); and Model TB 10, MSN 001 through 803, 805, 806, 809 through 815, and 820 through 822; and
(2) Group 2 airplanes: Model TB 10, MSN 804, 807, 808, 816 through 819, and 823 through 2229; and Model TB 200, all MSNs.
Air Transport Association of America (ATA) Code 57: Wings.
This AD was prompted by mandatory continuing airworthiness information (MCAI) originated by an aviation authority of another country to identify and correct an unsafe condition on an aviation product. The MCAI describes the unsafe condition as fatigue cracking of the wing front attachments on the wing and fuselage sides. We are issuing this AD to prevent fatigue cracking of the wing front attachments, which could lead to structural failure of the airplane and loss of control.
Unless already done, do the following actions listed in paragraphs (g) through (j) of this AD. The compliance times of this AD are presented in landings instead of hours time-in-service (TIS). If the number of landings is unknown, multiply the number of hours TIS by 1.5. For the purposes of this AD, “XX” can be any numerical value.
(1) Within the compliance time specified in table 1 to paragraph (g)(1) of this AD, do an initial inspection of the wing front attachments on the wing side. Inspect repetitively thereafter at intervals not to exceed 3,000 landings. Follow the Description of Accomplishment Instructions in SOCATA Daher Service Bulletin SB 10-081, Revision 3, December 2017.
(2) If a crack was found during any inspection required in paragraph (g)(1) of this AD, before further flight, install the modification reinforcement kit OPT10911002 for the front attachment on the wing side following the Description of Accomplishment Instructions in SOCATA Daher Service Bulletin SB 10-081, Revision 3, December 2017.
(3) Within the compliance time specified in table 2 to paragraph (g)(3) of this AD, unless already done as corrective action as specified in paragraph (g)(2) of this AD, install the modification reinforcement kit OPT10911002 for the front attachment on the wing side following the Description of Accomplishment Instructions in SOCATA Daher Service Bulletin SB 10-081, Revision 3, December 2017.
(1) Within the compliance time specified in table 3 to paragraph (h)(1) of this AD, do an initial inspection of the reinforced front attachment on the wing side. Inspect repetitively thereafter at intervals not to exceed 3,000 landings. Follow the Description of Accomplishment Instructions in SOCATA Daher Service Bulletin SB 10-081, Revision 3, December 2017.
(2) Replacing kit OPT109110XX with kit OPT10911002 on an airplane, at intervals not to exceed 6,000 landings is acceptable to comply with the inspection requirements of paragraph (h)(1) of this AD for that airplane. Follow the Description of Accomplishment Instructions in SOCATA Daher Service Bulletin SB 10-081, Revision 3, December 2017.
(3) If a crack was found during any inspection required in paragraph (h)(1) of this AD, before further flight, do the applicable corrective actions following the Description of Accomplishment Instructions in SOCATA Daher Service Bulletin SB 10-081, Revision 3, December 2017.
(1) Within the compliance time specified in table 4 to paragraph (i)(1) of this AD, do an initial inspection of the wing front attachments on the fuselage side. Inspect repetitively thereafter at intervals not to exceed 3,000 landings. Follow the Description of Accomplishment Instructions in SOCATA Daher Service Bulletin SB 10-081, Revision 3, December 2017.
(2) If a crack was found during any inspection required in paragraph (i)(1) of this AD, before further flight, do the applicable corrective actions following the Description of Accomplishment Instructions in SOCATA Daher Service Bulletin SB 10-081, Revision 3, December 2017.
(3) Unless already done as corrective action required in paragraph (i)(2) of this AD, within the compliance time specified in table 5 to paragraph (i)(3) of this AD, reinforce the front attachment on fuselage side following the Description of Accomplishment Instructions in SOCATA Daher Service Bulletin SB 10-081, Revision 3, December 2017.
(4) Before or upon accumulating 12,000 landings after the reinforcement modification required in paragraph (i)(2) or (3) of this AD, replace the reinforced front attachment on the fuselage side following the Description of Accomplishment Instructions in SOCATA Daher Service Bulletin SB 10-081, Revision 3, December 2017.
Replacement of the reinforced front attachment on the wing side and/or replacement of the reinforced front attachment on the fuselage side, does not terminate the inspections required in paragraphs (h)(1) and (i)(1) of this AD. After replacement, the initial and repetitive inspection cycle starts over.
This AD allows credit for the initial inspection required in paragraphs (g)(1) and (i)(1) of this AD and any replacement that may have been required based on the initial inspection, if done before the effective date of this AD, following Socata Service Bulletin No. SB 10-081-57, Revison 1, dated August 1996 or Revision 2, dated January 2017. Any inspections or replacements done after the effective date must be done following SOCATA Daher Service Bulletin SB 10-081, Revision 3, December 2017 as specified in the Actions and Compliance of this AD.
The following provisions also apply to this AD:
(1)
(2)
Refer to MCAI EASA No. 2018-0030, dated January 31, 2018; and Daher Service Bulletin SB 10-081, Revision 3, dated December 2017, for related information. You may examine the MCAI on the internet at
Securities and Exchange Commission.
Proposed interpretation; request for comment.
The Securities and Exchange Commission (the “SEC” or the “Commission”) is publishing for comment a proposed interpretation of the standard of conduct for investment
Comments should be received on or before August 7, 2018.
Comments may be submitted by any of the following methods:
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
Studies, memoranda or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the Commission's website. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at
Jennifer Songer, Senior Counsel, or Sara Cortes, Assistant Director, at (202) 551-6787 or
The Commission is publishing for comment a proposed interpretation of the standard of conduct for investment advisers under the Advisers Act [15 U.S.C. 80b].
An investment adviser is a fiduciary, and as such is held to the highest standard of conduct and must act in the best interest of its client.
Today, the Commission is proposing a rule that would require all broker-dealers and natural persons who are associated persons of broker-dealers to act in the best interest of retail customers
An investment adviser's fiduciary duty is similar to, but not the same as, the proposed obligations of broker-
The Advisers Act establishes a federal fiduciary standard for investment advisers.
An investment adviser's fiduciary duty under the Advisers Act comprises a duty of care and a duty of loyalty. Several commenters responding to Chairman Clayton's June 2017 request for public input
As fiduciaries, investment advisers owe their clients a duty of care.
We have addressed an adviser's duty of care in the context of the provision of personalized investment advice. In this context, the duty of care includes a duty to make a reasonable inquiry into a client's financial situation, level of financial sophistication, investment experience, and investment objectives (which we refer to collectively as the client's “investment profile”) and a duty to provide personalized advice that is suitable for and in the best interest of the client based on the client's investment profile.
An adviser must, before providing any personalized investment advice and as appropriate thereafter, make a reasonable inquiry into the client's investment profile. The nature and extent of the inquiry turn on what is reasonable under the circumstances, including the nature and extent of the agreed-upon advisory services, the nature and complexity of the anticipated investment advice, and the investment profile of the client. For example, to formulate a comprehensive financial plan for a client, an adviser might obtain a range of personal and financial information about the client, including current income, investments, assets and debts, marital status, insurance policies, and financial goals.
An adviser must update a client's investment profile in order to adjust its advice to reflect any changed circumstances.
An investment adviser must also have a reasonable belief that the personalized advice is suitable for and in the best interest of the client based on the client's investment profile. A reasonable belief would involve considering, for example, whether investments are recommended only to those clients who can and are willing to tolerate the risks of those investments and for whom the potential benefits may justify the risks.
The cost (including fees and compensation) associated with investment advice would generally be one of many important factors—such as the investment product's or strategy's investment objectives, characteristics (including any special or unusual features), liquidity, risks and potential benefits, volatility and likely performance in a variety of market and economic conditions—to consider when determining whether a security or investment strategy involving a security or securities is in the best interest of the client. Accordingly, the fiduciary duty does not necessarily require an adviser to recommend the lowest cost investment product or strategy. We believe that an adviser could not reasonably believe that a recommended security is in the best interest of a client if it is higher cost than a security that is otherwise identical, including any special or unusual features, liquidity, risks and potential benefits, volatility and likely performance. For example, if an adviser advises its clients to invest in a mutual fund share class that is more expensive than other available options when the adviser is receiving compensation that creates a potential conflict and that may reduce the client's return, the adviser may violate its fiduciary duty and the antifraud provisions of the Advisers Act if it does not, at a minimum, provide full and fair disclosure of the conflict and its impact on the client and obtain informed client consent to the conflict.
We have addressed an investment adviser's duty of care in the context of trade execution where the adviser has the responsibility to select broker-dealers to execute client trades (typically in the case of discretionary accounts). We have said that, in this context, an adviser has the duty to seek best execution of a client's transactions.
An investment adviser's duty of care also encompasses the duty to provide advice and monitoring over the course of a relationship with a client.
The duty of loyalty requires an investment adviser to put its client's interests first. An investment adviser must not favor its own interests over those of a client or unfairly favor one client over another.
Because an adviser must serve the best interests of its clients, it has an obligation not to subordinate its clients' interests to its own. For example, an adviser cannot favor its own interests over those of a client, whether by favoring its own accounts or by favoring certain client accounts that pay higher fee rates to the adviser over other client accounts.
An adviser must seek to avoid conflicts of interest with its clients, and, at a minimum, make full and fair disclosure to its clients of all material conflicts of interest that could affect the advisory relationship.
Full and fair disclosure of all material facts that could affect an advisory relationship, including all material conflicts of interest between the adviser and the client, can help clients and prospective clients in evaluating and selecting investment advisers. Accordingly, we require advisers to deliver to their clients a “brochure,” under Part 2A of Form ADV, which sets out minimum disclosure requirements, including disclosure of certain conflicts.
The Commission requests comment on our proposed interpretation regarding certain aspects of the fiduciary duty under section 206 of the Advisers Act.
• Does the Commission's proposed interpretation offer sufficient guidance with respect to the fiduciary duty under section 206 of the Advisers Act?
• Are there any significant issues related to an adviser's fiduciary duty that the proposed interpretation has not addressed?
• Would it be beneficial for investors, advisers or broker-dealers for the Commission to codify any portion of our proposed interpretation of the fiduciary duty under section 206 of the Advisers Act?
The Commission is sensitive to the potential economic effects of the proposed interpretation provided above.
The Commission's interpretation of the standard of conduct for investment advisers under the Advisers Act set forth in this Release would affect investment advisers and their associated persons as well as the clients of those investment advisers, and the market for financial advice more broadly.
These investment advisers currently incur ongoing costs related to their compliance with their legal and regulatory obligations, including costs related to their understanding of the standard of conduct. We believe, based on the Commission's experience, that the interpretations we are setting forth in this Release are generally consistent with investment advisers' current understanding of the practices necessary to comply with their fiduciary duty under the Advisers Act; however, we recognize that there may be certain current investment advisers who have interpreted their fiduciary duty to require something less, or something more, than the Commission's interpretation. We lack data to identify which investment advisers currently understand the practices necessary to comply with their fiduciary duty to be different from the standard of conduct in the Commission's interpretation. Based on our experience, however, we generally believe that it is not a significant portion of the market.
Based on our experience as the long-standing regulator of the investment adviser industry, the Commission's interpretation of the fiduciary duty under section 206 of the Advisers Act described in this Release generally reaffirms the current practices of investment advisers. Therefore, we expect there to be no significant economic impacts from the interpretation. We do acknowledge, however, to the extent certain investment advisers currently understand the practices necessary to comply with their fiduciary duty to be different from those discussed in this interpretation, there could be some potential economic effects, which we discuss below.
The typical relationship between an investment adviser and a client is a principal-agent relationship, where the principal (the client) hires an agent (the investment adviser) to perform some service (investment advisory services) on the client's behalf.
To the extent the Commission's interpretation of investment adviser fiduciary duty would cause a change in behavior of those investment advisers, if any, who currently interpret their fiduciary duty to require something different from the Commission's interpretation, we expect a potential reduction in agency problems and, consequently, a reduction of agency costs to the client. The extent to which agency costs would be reduced is difficult to assess given that we are unable to ascertain whether any investment advisers currently interpret their fiduciary duty to be something different from the Commission's interpretation, and consequently we are not able to estimate the agency costs these advisers, if any, currently impose on investors. However, we believe that there may be potential benefits for clients of those investment advisers, if any, to the extent the Commission's interpretation is effective at strengthening investment advisers' understanding of their obligations to their clients. For example, to the extent that the Commission's interpretation enhances the understanding of any investment advisers of their duty of care, it may potentially raise the quality of investment advice given and that advice's fit with a client's individual profile and preferences or lead to increased compliance with the duty to provide advice and monitoring over the course of the relationship.
Additionally, to the extent the Commission's interpretation enhances the understanding of any investment advisers of their duty of loyalty it may potentially benefit the clients of those investment advisers. Specifically, to the extent this leads to a higher quality of disclosures about conflicts for clients of some investment advisers, the nature and extent of such conflict disclosures would help investors better assess the quality of the investment advice they receive, therefore providing an important benefit to investors.
Further, to the extent that the interpretation causes some investment advisers to properly identify circumstances in which disclosure alone cannot cure a conflict of interest, the proposed interpretation may lead those investment advisers to take additional steps to mitigate or eliminate the conflict. The interpretation may also cause some investment advisers to conclude in some circumstances that even if disclosure would be enough to meet their fiduciary duty, such disclosure would have to be so expansive or complex that they instead voluntarily mitigate or eliminate the conflicts of interest. Thus, to the extent the Commission's interpretation would cause investment advisers to better understand their obligations as part of their fiduciary duty and therefore to make changes to their business practices in ways that reduce the likelihood of conflicted advice or the magnitude of the conflicts, it may ameliorate the agency conflict between investment advisers and their clients and, in turn, may improve the quality of advice that the clients receive. This less-conflicted advice may therefore produce higher overall returns for clients and increase the efficiency of portfolio allocation. However, as discussed above, we would generally expect these effects to be minimal. Finally, this interpretation would also benefit clients of investment advisers to the extent it assists the Commission in its oversight of investment advisers' compliance with their regulatory obligations.
In general, we expect the Commission's interpretation of an investment adviser's fiduciary duty would affirm investment advisers' understanding of the obligations they owe their clients, reduce uncertainty for advisers, and facilitate their compliance. Furthermore, by addressing in one release certain aspects of the fiduciary duty that an investment adviser owes to its clients, the Commission's interpretation could reduce the costs associated with comprehensively assessing their compliance obligations. We acknowledge that, as with other
Moreover, to the extent any investment advisers that understood their fiduciary obligation to be different from the Commission's interpretation change their behavior to align with this interpretation, there could potentially also be some economic effects on the market for investment advice. For example, any improved compliance may not only reduce agency costs in current investment advisory relationships and increase the value of those relationships to current clients, it may also increase trust in the market for investment advice among all investors, which may result in more investors seeking advice from investment advisers. This may, in turn, benefit investors by improving the efficiency of their portfolio allocation. To the extent it is costly or difficult, at least in the short term, to expand the supply of investment advisory services to meet an increase in demand, any such new demand for investment adviser services could potentially put some upward price pressure on fees. At the same time, however, if any such new demand increases the overall profitability of investment advisory services, then we expect it would encourage entry by new investment advisers—or hiring of new representatives, by current investment advisers—such that competition would increase over time. Indeed, we recognize that the recent growth in the investment adviser segment of the market, both in terms of firms and number of representatives,
Additionally, we acknowledge that to the extent certain investment advisers recognize, due to the Commission's interpretation, that their obligations to clients are stricter than how they currently interpret their fiduciary duty, it could potentially affect competition. Specifically, the Commission's interpretation of certain aspects of the standard of conduct for investment advisers may result in additional compliance costs to meet their fiduciary obligation under the Commission's interpretation. This increase in compliance costs, in turn, may discourage competition for client segments that generate lower revenues, such as clients with relatively low levels of financial assets, which could reduce the supply of investment adviser services and raise fees for these client segments. However, the investment advisers who already are complying with the understanding of their fiduciary duty reflected in the Commission's interpretation, and may therefore currently have a comparative cost disadvantage, could potentially find it more profitable to compete for the customers of those investment advisers who would face higher compliance costs as a result of the proposed interpretation, which would mitigate negative effects on the supply of investment adviser services. Furthermore, as noted above, there has been a recent growth trend in the supply of investment advisory services, which is likely to mitigate any potential negative supply effects from the Commission's interpretation.
Finally, to the extent the proposed interpretation would cause some investment advisers to reassess their compliance with their disclosure obligations, it could lead to a reduction in the expected profitability of certain products associated with particularly conflicted advice for which compliance costs would increase following the reassessment.
In 2011, the Commission issued the staff's 913 Study, pursuant to section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, in which the staff recognized several areas for potential harmonization of broker-dealer and investment adviser regulation.
Associated persons of broker-dealers that effect securities transactions are required to be registered with the Financial Industry Regulatory Authority (“FINRA”),
We request comment on whether there should be federal licensing and continuing education requirements for personnel of SEC-registered investment advisers. Such requirements could be designed to address minimum and ongoing competency requirements for the personnel of SEC-registered advisers.
• Should investment adviser representatives be subject to federal continuing education and licensing requirements?
• Which advisory personnel should be included in these requirements? For example, should persons whose functions are solely clerical or ministerial be excluded, similar to the exclusion in the FINRA rules regarding broker-dealer registered representatives? Should a subset of registered investment adviser personnel (such as supervised persons, individuals for whom an adviser must deliver a Form ADV brochure supplement, “investment adviser representatives” as defined in the Advisers Act, or some other group) be required to comply with such requirements?
• How should the continuing education requirement be structured? How frequent should the certification be? How many hours of education should be required? Who should determine what qualifies as an authorized continuing education class?
• How could unnecessary duplication of any existing continuing education requirement be avoided?
• Should these individuals be required to register with the Commission? What information should these individuals be required to disclose on any registration form? Should the registration requirements mirror the requirements of existing Form U4 or require additional information? Should such registration requirements apply to individuals who provide advice on behalf of SEC-registered investment advisers but fall outside the definition of “investment adviser representative” in rule 203A-3 (because, for example, they have five or fewer clients who are natural persons, they provide impersonal investment advice, or ten percent or less of their clients are individuals other than qualified clients)? Should these individuals be required to pass examinations, such as the Series 65 exam required by most states, or to hold certain designations, as part of any registration requirements? Should other steps be required as well, such as a background check or fingerprinting? Would a competency or other examination be a meritorious basis upon which to determine competency and proficiency? Would a competency or other examination requirement provide a false sense of security to advisory clients of competency or proficiency?
• If continuing education requirements are a part of any licensing requirements, should specific topics or types of training be required? For example, these individuals could be required to complete a certain amount of training dedicated to ethics, regulatory requirements or the firm's compliance program.
• What would the expected benefits of continuing education and licensing be? Would it be an effective way to increase the quality of advice provided to investors? Would it provide better visibility into the qualifications and education of personnel of SEC-registered investment advisers?
• What would the expected costs of continuing education and licensing be? How expensive would it be to obtain the continuing education or procure the license? Do those costs scale, or would they fall more heavily on smaller advisers? Would these requirements result in a barrier to entry that could decrease the number of advisers and advisory personnel (and thus potentially increase the cost of advice)?
• What would the effects be of continuing education and licensing for investment adviser personnel in the market for investment advice (
• What other types of qualification requirements should be considered, such as minimum experience requirements or standards regarding an individual's fitness for serving as an investment adviser representative?
Fees and costs are important to retail investors,
Broker-dealers are required to provide confirmations of transactions with detailed information concerning commissions and certain other remuneration, as well as account statements containing a description of any securities positions, money balances or account activity during the period since the last statement was sent to the customer.
We request comment on whether we should propose rules to require registered investment advisers to provide account statements, either directly or via the client's custodian, regardless of whether the adviser is deemed to have custody of client assets under Advisers Act Rule 206(4)-2 or the adviser is a sponsor (or a designee of a sponsor) of a managed account program relying on the safe harbor in Investment Company Act rule 3a-4.
• To what extent do retail clients of registered investment advisers already receive account statements? To what extent do those account statements specify the dollar amounts charged for advisory fees and other fees (
• What information, in addition to fees and expenses, would be most useful for retail clients to receive in account statements? Should any requirement to provide account statements have prescriptive requirements as to presentation, content, and delivery? Should they resemble the account statements required to be provided by broker-dealers, under NASD Rule 2340 with the addition of fee disclosure?
• How often should clients receive account statements?
• How costly would it be to provide account statements? Does that cost depend on how those account statements could be delivered (
Broker-dealers are subject to a comprehensive financial responsibility program. Pursuant to Exchange Act rule 15c3-1 (the net capital rule), broker-dealers are required to maintain minimum levels of net capital designed to ensure that a broker-dealer under financial stress has sufficient liquid assets to satisfy all non-subordinated liabilities without the need for a formal liquidation proceeding.
Under Advisers Act rule 206(4)-2, investment advisers with custody must generally maintain client assets with a “qualified custodian,” which includes banks and registered broker-dealers, and must comply with certain other requirements.
In light of these disparities, we request comment on whether SEC-registered investment advisers should be subject to financial responsibility requirements along the lines of those that apply to broker-dealers.
• What is the frequency and severity of client losses due to investment advisers' inability to satisfy a judgment or otherwise compensate a client for losses due to the investment adviser's wrongdoing?
• Should investment advisers be subject to net capital or other financial responsibility requirements in order to ensure they can meet their obligations, including compensation for clients if the adviser becomes insolvent or advisory personnel misappropriate clients' assets?
• Should advisers be required to obtain a fidelity bond from an insurance company? If so, should some advisers be excluded from this requirement?
• Alternatively, should advisers be required to maintain a certain amount of capital that could be the source of compensation for clients?
• What would be the expected cost of either maintaining some form of reserve capital or purchasing a fidelity bond? Specifically, in addition to setting aside the initial sum or purchasing the initial bond, what would be the ongoing cost and the opportunity cost for investment advisers? Would one method or the other be more feasible for certain types of investment advisers (particularly, smaller advisers)?
• Would the North American Securities Administrators Association Minimum Financial Requirements For Investment Advisers Model Rule 202(d)-1
• Although investment advisers are required to report specific information about the assets that they manage on behalf of clients, they are not required to report specific information about their own assets.
By the Commission.
Coast Guard, DHS.
Notice of proposed rulemaking.
The Coast Guard proposes to amend its regulations on ballast water management by eliminating the requirement for vessels operating on voyages exclusively between ports or places within a single Captain of the Port Zone to submit an Annual Ballast Water Summary Report for calendar year 2018. The Coast Guard views this current reporting requirement as unnecessary to analyze and understand ballast water management practices. This proposal would also serve to reduce the administrative burden on the
Comments and related material must be received by the Coast Guard on or before June 8, 2018. Comments sent to the Office of Management and Budget (OMB) on collection of information must reach OMB on or before June 8, 2018.
You may submit comments identified by docket number USCG-2018-0245 using the Federal eRulemaking Portal at
For information about this document call or email Mr. John Morris, Program Manager, Environmental Standards Division, Coast Guard; telephone 202-372-1402, email
We view public participation as essential to effective rulemaking, and will consider all comments and material received during the comment period. Your comment can help shape the outcome of this rulemaking. If you submit a comment, please include the docket number for this rulemaking, indicate the specific section of this document to which each comment applies, and provide a reason for each suggestion or recommendation.
We encourage you to submit comments through the Federal eRulemaking Portal at
We accept anonymous comments. All comments received will be posted without change to
The Non-Indigenous Aquatic Nuisance Prevention and Control Act of 1990 (NANPCA, Pub. L. 101-646), as amended by the National Invasive Species Act of 1996 (NISA), (Pub. L. 104-332), requires the Secretary of the Department of Homeland Security (DHS) to ensure, to the maximum extent practicable, that aquatic nuisance species are not discharged into U.S. waters from vessels (16 U.S.C. 4701
Coast Guard regulations regarding BWM are located in 33 CFR 151, subparts C (§§ 151.1500 through 151.1518) and D (§§ 151.2000 through 151.2080). The regulations we propose to amend, §§ 151.2015 and 151.2060, were issued in 2015 and deal with BWM reporting and recordkeeping requirements. See “Ballast Water Management Reporting and Recordkeeping” final rule (80 FR 73105, Nov. 24, 2015).
You may find a full discussion of the statutory and regulatory history of the Coast Guard's broader actions to implement both NANPCA and NISA in the preamble of our 2012 final rule, “Standards for Living Organisms in Ships' Ballast Water Discharged in U.S. Waters,” published on March 23, 2012 (77 FR 17254, 17255).
We have determined that the annual reporting requirement in § 151.2060 for vessels operating in a single Captain of the Port (COTP) Zone is unnecessary to analyze and understand ballast water management practices and is an unnecessary burden that should be removed. Our proposal to amend §§ 151.2015 and 151.2060 is in accordance with 16 U.S.C. 4711(e) which authorizes the Secretary to revise such regulations, as necessary, on the basis of best scientific information, and in accordance with criteria developed by the Aquatic Nuisance Species Task Force.
The 2015 final rule established a 3-year requirement starting in 2016 for the master, owner, operator, agent, or person in charge of certain vessels with ballast tanks to submit an annual report of their BWM practices. The requirement applies to U.S. non-recreational vessels that operate on voyages exclusively between ports or places within a single COTP Zone. These reports contain information, specified in § 151.2060(f), about the vessel, the number of ballast tanks, total ballast water capacity, and a record of ballast water loading and discharges. These reports are submitted to the
The annual reports for calendar years 2016, 2017, and 2018, are due on March 31 of the following year. March 31, 2019 is the due date for the last report required by regulation. This proposed rule seeks to eliminate this annual reporting requirement in § 151.2060(e) before the 2018 report is due. It would also amend § 151.2015(c) to exempt vessels that operate on voyages exclusively between ports or places within a single COTP Zone from § 151.2060 reporting requirements.
The Coast Guard is proposing to remove this requirement because it views the existing reporting requirement as not meeting the necessary objective. We have reviewed the 2016 annual reports and have concluded that they do not contribute to the quality and breadth of BWM data as originally intended. A discussion of the objective of this requirement can be found in the preamble of the 2015 final rule.
We received recommendations supporting this proposed action in response to our June 8, 2017 (82 FR 26632) request to the public to identify rules that should be repealed, replaced, or modified to alleviate unnecessary regulatory burdens. To view these recommendations, see submissions 102, 143, and 147 under docket number USCG-2017-0480. One commenter correctly points out that a vessel operator cannot indicate in the Annual Ballast Water Summary Report whether the vessel uses water from a U.S. public water system as ballast.
In this section, we describe how we propose to remove the Annual Ballast Water Ballast Water Summary Report requirement through changes to §§ 151.2015 and 151.2060. Our proposed amendatory instructions and regulatory text appear at the end of this document.
We also propose to amend Table 1 to § 151.2015, which lists specific exemptions for types of vessels. We propose to amend the column “151.2060 (Reporting)” to reflect vessels that operate exclusively on voyages between ports or places within a single COTP Zone are exempt from the reporting requirements in § 151.2060. We would also add a footnote to the table for non-seagoing vessels. This footnote would replace the current lengthy qualifying language in the “151.2070 (Recordkeeping)” column of the table for those non-seagoing vessels that operate exclusively on voyages between ports or places within a single COTP zone. We would also apply the footnote to the table's “151.2060 (Reporting)” column in that row based on our proposed amendment to § 151.2015(c). Non-seagoing vessels are the only category of vessels in the table that may need this potential exemption reminder. The other categories of vessels are either exempt or operate in multiple COTP zones.
The Coast Guard developed this proposed rule after considering numerous statutes and Executive orders related to rulemaking. A summary of our analyses based on these statutes or Executive orders follows.
Executive Orders 13563 (Improving Regulation and Regulatory Review) and 12866 (Regulatory Planning and Review) direct agencies to assess the costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. Executive Order 13771 (Reducing Regulation and Controlling Regulatory Costs) directs agencies to reduce regulation and control regulatory costs and provides that “for every one new regulation issued, at least two prior regulations be identified for elimination, and that the cost of planned regulations be prudently managed and controlled through a budgeting process.”
The Office of Management and Budget (OMB) has not designated this rule a “significant regulatory action,” under section 3(f) of Executive Order 12866. Accordingly, OMB has not reviewed it. OMB considers this rule to be an Executive Order 13771 deregulatory action. See OMB's Memorandum “Guidance Implementing Executive Order 13771, Titled `Reducing Regulation and Controlling Regulatory Costs'” (April 5, 2017). A regulatory analysis follows.
The Coast Guard considers all estimates and analysis in this regulatory analysis subject to change in consideration of public comments. Table 1 presents a summary of the economic impact of the proposed rule. A detailed description of the estimates follows in the next section.
Under this proposed rule, the Coast Guard would no longer require owners or operators of vessels with ballast tanks operating exclusively on voyages between ports or places within a single COTP Zone to submit an annual summary report of their ballast water management practices.
Since 2016, owners or operators of vessels affected by the 2015 final rule provision in § 151.2060(e) have submitted annual summary reports as required to the NBIC. These summary reports were used to estimate the number of vessels that operated and the amount of ballast water discharged within a single COTP Zone. Based on the data received and analyzed by the NBIC, the Coast Guard is able to determine the actual number of vessels affected by the 2015 final rule. The NBIC data confirms that 67 owners or operators of 166 U.S.-flagged vessels
We estimated in the 2015 final rule that the total annual amount of burden hours for owners or operators completing the reporting requirement at 40 minutes per vessel per year. We break down those 40 minutes as 25 minutes to account for time needed throughout the year to record ballast management operations and 15 minutes for time needed by owners or operators to aggregate and calculate the recorded ballast water discharge information and to complete the electronic form submitted to the NBIC.
This proposed rulemaking has been scheduled to enable the Coast Guard to issue a final rule by the end of fiscal year 2018, which is September 30, 2018, and to make the rule effective October 1, 2018. The current regulation only requires annual reports through the calendar year 2018. Therefore, any realized savings from this proposed rule would account for the last 3 months of calendar year 2018. We estimate that the total time saved by this proposed rule would be 21.25 minutes per vessel (15 minutes for submission of report + 6.25 total minutes from the last 3 months of 2018). Converting this time to an hourly equivalent, we arrive at 0.35 hours (21.25 minutes/60 minutes).
We anticipate that the person charged with collecting and reporting the information to NBIC would be a vessel Captain, Mate or Vessel Pilot. The mean hourly wage rate associated with these professions is reported by the Bureau of Labor Statistics (BLS) to be $39.19 per hour.
We anticipate that by eliminating the reporting requirement from the last quarter of the year, this proposed rule would reduce industry's economic burden by 58.1 hours (166 vessels × 0.35 hours). We calculate that the dollar value saved would be $20.85 per vessel ($59.57 wage × 0.35 hours). The estimated one-time total savings for removing the reporting requirement for the 166 vessels operating exclusively between port or places within a single COTP Zone would be $3,461 ($20.85 per vessel savings × 166 vessels) (non-discounted). Table 3 presents the total savings to the affected population.
This proposed rulemaking would not have annual recurring savings. This proposed rule would not require additional Coast Guard resources to implement and would be budget neutral.
In addition, a one-time savings of $3,461 in 2018 is equivalent to approximately $197.76 in 2016 dollars using perpetual discounting at 7 percent.
Under the Regulatory Flexibility Act, 5 U.S.C. 601-612, we have considered whether this proposed rule would have a significant economic impact on a substantial number of small entities. The term “small entities” comprises small businesses, not-for-profit organizations that are independently owned and operated and are not dominant in their fields, and governmental jurisdictions with populations of less than 50,000.
As described in the “Regulatory Planning and Review” section, we expect that the savings per vessel would be $20.85 for the remainder of 2018. The Coast Guard is eliminating the reporting requirement under § 151.2060(e), which applies to owners or operators of vessels operating exclusively between ports or places within a single COTP Zone. Based on our economic assessment of the proposed rule, we conclude that this proposed rule would have no cost burden to industry.
Accordingly, the Coast Guard certifies under 5 U.S.C. 605(b) that this proposed rule would not have a significant economic impact on a substantial number of small entities. If you think that your business, organization, or governmental jurisdiction qualifies as a small entity and that this proposed rule would have a significant economic impact on it, please submit a comment to the docket at the address under
Under section 213(a) of the Small Business Regulatory Enforcement Fairness Act of 1996, Public Law 104-121, we want to assist small entities in understanding this proposed rule so that they can better evaluate its effects on them and participate in the rulemaking. If the proposed rule would affect your small business, organization, or governmental jurisdiction and you have questions concerning its provisions or options for compliance, please contact the person in the
Small businesses may send comments on the actions of Federal employees who enforce, or otherwise determine compliance with, Federal regulations to the Small Business and Agriculture Regulatory Enforcement Ombudsman and the Regional Small Business Regulatory Fairness Boards. The Ombudsman evaluates these actions annually and rates each agency's responsiveness to small business. If you wish to comment on actions by employees of the Coast Guard, call 1-888-REG-FAIR (1-888-734-3247).
This proposed rule would call for a change to an existing collection of information under the Paperwork Reduction Act of 1995, 44 U.S.C. 3501-3520. As defined in 5 CFR 1320.3(c), “collection of information” comprises reporting, recordkeeping, monitoring, posting, labeling, and other similar actions. The title and description of the information collections, a description of those who must collect the information, and an estimate of the total annual burden follow.
(a)
Moreover, due to the establishment of a sunset clause in the 2015 final rule, all recordkeeping and reporting burden associated with this regulation would be eliminated. This adjustment would only reduce current ICR burden levels prior to the 2015 final rule. We show the burden hour calculations in the table 5.
(b)
As required by 44 U.S.C. 3507 (d), we will submit a copy of this proposed rule to OMB for its review of the collection of information.
If you submit comments on the collection of information, submit them both to OMB and to the docket where indicated under
You need not respond to a collection of information unless it displays a currently valid control number from OMB. Before the Coast Guard could enforce the collection of information requirements in this proposed rule, OMB would need to approve the Coast Guard's request to collect this information.
A rule has implications for federalism under Executive Order 13132 (Federalism) if it has a substantial direct effect on States, on the relationship between the national government and the States, or on the distribution of
This proposed rule would revise the Coast Guard's BWM reporting and recordkeeping requirements promulgated under the authority of NANPCA, as amended by NISA. Specifically, we propose to remove the requirement that an Annual Ballast Water Summary Report for calendar year 2018 be submitted for vessels operating on voyages exclusively between ports or places within a single Captain of the Port Zone. NANPCA, as amended by NISA, contains a “savings provision” that saves to States their authority to “adopt or enforce control measures” for aquatic nuisance species (16 U.S.C. 4725). Nothing in the Act would diminish or affect the jurisdiction of any State over species of fish and wildlife. This type of BWM reporting and recordkeeping is a “control measure” saved to States under the savings provision and would not be preempted unless State law makes compliance with Coast Guard requirements impossible or frustrates the purpose of Congress. Additionally, the Coast Guard has long interpreted this savings provision to be a congressional mandate for a Federal-State cooperative regime in which federal preemption under NANPCA, as amended by NISA, would be unlikely. The Coast Guard does not intend for the removal of this Federal reporting requirement to be a determination, or have any implications, with regard to the necessity of existing or future state BWM reporting requirements. Therefore, this proposed rule is consistent with the fundamental federalism principles and preemption requirements described in Executive Order 13132.
The Coast Guard recognizes the key role that State and local governments may have in making regulatory determinations. Additionally, for rules with federalism implications and preemptive effect, Executive Order 13132 specifically directs agencies to consult with State and local governments during the rulemaking process. If you believe this rule has implications for federalism under Executive Order 13132, please contact the person listed in the
The Unfunded Mandates Reform Act of 1995, 2 U.S.C. 1531-1538, requires Federal agencies to assess the effects of their discretionary regulatory actions. In particular, the Act addresses actions that may result in the expenditure by a State, local, or tribal government, in the aggregate, or by the private sector of $100 million (adjusted for inflation) or more in any one year. Though this proposed rule would not result in such an expenditure, we do discuss the effects of this proposed rule elsewhere in this preamble.
This proposed rule would not cause a taking of private property or otherwise have taking implications under Executive Order 12630 (Governmental Actions and Interference with Constitutionally Protected Property Rights).
This proposed rule meets applicable standards in sections 3(a) and 3(b)(2) of Executive Order 12988, (Civil Justice Reform), to minimize litigation, eliminate ambiguity, and reduce burden.
We have analyzed this proposed rule under Executive Order 13045 (Protection of Children from Environmental Health Risks and Safety Risks). This proposed rule is not an economically significant rule and would not create an environmental risk to health or risk to safety that might disproportionately affect children.
This proposed rule does not have tribal implications under Executive Order 13175 (Consultation and Coordination with Indian Tribal Governments), because it would not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes.
We have analyzed this proposed rule under Executive Order 13211 (Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use). We have determined that it is not a “significant energy action” under that order because it is not a “significant regulatory action” under Executive Order 12866 and is not likely to have a significant adverse effect on the supply, distribution, or use of energy.
The National Technology Transfer and Advancement Act, codified as a note to 15 U.S.C. 272, directs agencies to use voluntary consensus standards in their regulatory activities unless the agency provides Congress, through OMB, with an explanation of why using these standards would be inconsistent with applicable law or otherwise impractical. Voluntary consensus standards are technical standards (
This proposed rule does not use technical standards. Therefore, we did not consider the use of voluntary consensus standards.
We have analyzed this proposed rule under Department of Homeland Security Management Directive 023-01 and Commandant Instruction M16475.1D which guide the Coast Guard in complying with the National Environmental Policy Act of 1969 (42 U.S.C. 4321-4370f), and have made a preliminary determination that this action is one of a category of actions that do not individually or cumulatively have a significant effect on the human environment. A preliminary Record of Environmental Consideration (REC) supporting this determination is available in the docket where indicated under the “Public Participation and Request for Comments” section of this preamble. This proposed rule would be categorically excluded under paragraph L54 of Appendix A, Table 1 of DHS Instruction Manual 023-01-001-01, Rev. 01. Paragraph L54 pertains to regulations which are editorial or procedural.
This proposed rule involves the removal of the last year of a 3-year annual ballast water reporting requirement. We seek any comments or information that may lead to the discovery of a significant environmental impact from this proposed rule.
Administrative practice and procedure, Ballast water management, Oil pollution, Penalties, Reporting and recordkeeping requirements, Water pollution control.
For the reasons discussed in the preamble, the Coast Guard proposes to
16 U.S.C. 4711; Department of Homeland Security Delegation No. 0170.1, para. II, (57).
United States Patent and Trademark Office, Department of Commerce.
Notice of proposed rulemaking.
The United States Patent and Trademark Office (“USPTO” or “Office”) proposes changes to the claim construction standard for interpreting claims in
Comments should be sent by electronic mail message over the internet addressed to:
Comments may also be submitted by postal mail addressed to: Mail Stop Patent Board, Director of the United States Patent and Trademark Office, P.O. Box 1450, Alexandria, VA 22313-1450, marked to the attention of “Vice Chief Administrative Patent Judges Michael Tierney or Jacqueline Wright Bonilla, PTAB Notice of Proposed Rulemaking 2018.”
Although comments may be submitted by postal mail, the Office prefers to receive comments by electronic mail message to more easily share all comments with the public. The Office prefers the comments to be submitted in plain text, but also accepts comments submitted in searchable ADOBE® portable document format or MICROSOFT WORD® format. Comments not submitted electronically should be submitted on paper in a format that accommodates digital scanning into ADOBE® portable document format.
The comments will be available for public inspection at the Patent Trial and Appeal Board, located in Madison East, Ninth Floor, 600 Dulany Street, Alexandria, Virginia. Comments also will be available for viewing via the Office's internet website,
Michael Tierney and Jacqueline Wright Bonilla, Vice Chief Administrative Patent Judges, by telephone at (571) 272-9797.
On September 16, 2011, the AIA was enacted into law (Pub. L. 112-29, 125 Stat. 284 (2011)), and within one year, the Office implemented rules to govern Office practice for AIA trials, including IPR, PGR, CBM, and derivation proceedings pursuant to 35 U.S.C. 135, 316 and 326 and AIA 18(d)(2).
Previously, in an effort to gauge the effectiveness of the rules governing AIA trial proceedings, the Office led a nationwide listening tour in April and May of 2014. During the listening tour, the Office solicited feedback on how to make the AIA trial proceedings more transparent and effective by adjusting the rules and guidance to the public where necessary. To elicit even more input, in June of 2014, the Office published a Request for Comments in the
Upon receiving comments from the public and carefully reviewing the comments, the Office published two final rules in response to the public feedback with respect to the AIA trial proceedings. In the first final rule, the Office changed the existing rules, among other things, to: (1) Increase the page limit for Patent Owner's motion to amend by ten pages and allow a claims appendix to be filed with the motion; and (2) increase the page limit for Petitioner's reply to Patent Owner's response by ten pages. Amendments to the Rules of Practice for Trials Before the Patent Trial and Appeal Board, 80 FR 28561 (May 19, 2015). In the second final rule, the Office changed the existing rules to: (1) Allow new testimonial evidence to be submitted with a patent owner's preliminary response; (2) allow a claim construction approach that emulates the approach used by a district court for claims of patents that will expire before entry of a final written decision; (3) replace page limits with word count limits for major briefing; and (4) add a Rule 11-type certification for papers filed in a proceeding. Amendments to Rules of Practice for Trials Before the Patent Trial and Appeal Board, 81 FR 18750 (April 1, 2016).
The Board currently construes unexpired patent claims and proposed claims in AIA trial proceedings using the BRI standard, as directed by 37 CFR 42.100(b), 42.200(b), and 42.300(b) (“A claim in an unexpired patent that will not expire before a final written decision is issued shall be given its broadest reasonable construction in light of the specification of the patent in which it appears.”). The BRI standard differs from the standard used in federal district courts and the ITC, which construe patent claims in accordance with the principles that the United States Court of Appeals for the Federal Circuit articulated in
However, although the BRI standard is consistent with longstanding agency practice, the fact that the Office uses a claim construction standard that is different from that used by federal district courts and the ITC means that decisions construing the same or similar claims in those fora may be different from those in AIA trial proceedings and vice versa. Minimizing differences between claim construction standards used in the various fora could lead to greater uniformity and predictability of the patent grant. In addition, using the
Having AIA trial proceedings use the same claim construction standard that is applied in federal district courts and ITC proceedings also addresses the concern that potential unfairness could result from using an arguably broader standard in AIA trial proceedings. According to some patent owners, the same claim construction standard should apply to both validity (or patentability) determination and infringement determination. Because the BRI standard potentially reads on a broader universe of prior art than does the
The Office's goal is to implement a fair and balanced approach, providing greater predictability and certainty in the patent system. The Office has carefully considered “the effect of [the proposed] regulation on the economy, the integrity of the patent system, the efficient administration of the Office, and the ability of the Office to complete timely the proceedings in promulgating regulations.” 35 U.S.C. 316(b) and 326(b). Under 35 U.S.C. 316(a)(4) and 326(a)(4), the Office must prescribe regulations establishing and governing IPR, PGR, and CBM proceedings and the relationship of such review to other proceedings, including civil actions to invalidate a patent under 35 U.S.C. 282(b). Congress intended these administrative trial proceedings to provide “quick and cost effective alternatives” to litigation in the courts. H.R. Rep. No. 112-98, pt. 1, at 48 (2011), as reprinted in 2011 U.S.C.C.A.N. 67, 78;
In this notice of proposed rulemaking, the Office proposes to change the relevant rules to provide that a patent claim, or a claim proposed in a motion to amend, shall be construed using the same claim construction standard that would be used to construe such claim in a civil action to invalidate a patent under 35 U.S.C. 282(b), including construing the claim in accordance with the ordinary and customary meaning of such claim as understood by one of ordinary skill in the art and the prosecution history pertaining to the patent. This proposed change would replace the BRI standard for construing unexpired patent claims and proposed claims in IPR, PGR, and CBM proceedings with an approach that follows the framework set forth in
Under the proposed approach, the Office would construe patent claims and proposed claims based on the record of the IPR, PGR, or CBM proceeding, taking into account the claim language itself, specification, and prosecution history pertaining to the patent. The Office would apply the principles that the Federal Circuit articulated in
Additionally, consistent with
The Court has not applied that doctrine broadly, and has “certainly not endorsed a regime in which validity analysis is a regular component of claim construction.”
The prosecution history taken into account would be the prosecution history that occurred previously at the USPTO, including before an examiner during examination, reissue,
During an AIA trial proceeding, the patent owner may file a motion to amend an unexpired patent claim to propose a reasonable number of substitute claims, but the proposed claims “may not enlarge the scope of the claims of the patent or introduce new matter.” 35 U.S.C. 316(d) and 326(d); 37 CFR 42.121(a)(2) and 42.221(a)(2);
In addition, the Office intends that any proposed rule changes adopted in a final rule would be applied to all pending IPR, PGR, and CBM proceedings before PTAB.
In light of the foregoing considerations, the Office requests input from the public on the proposed rule changes in this notice of proposed rulemaking and on how the Office should implement the changes if adopted.
Title 37 of the Code of Federal Regulations, part 42, is proposed to be amended as follows:
The Office has considered using different claim construction standards for IPR, PGR, and CBM proceedings, but, for consistency, the Office proposes the same claim construction to be applied in all IPR, PGR, and CBM proceedings.
Each of §§ 42.100(b), 42.200(b), and 42.300(b) also is proposed to be amended to add the sentence “Any prior claim construction determination concerning a term of the claim in a civil action, or a proceeding before the International Trade Commission, that is timely made of record in the . . . proceeding will be considered.” Under this proposed provision, the Office would consider any prior claim construction determination in a civil action or ITC proceeding if a federal court or the ITC has construed a term of the involved claim previously using the same standard, and the claim construction determination has been timely made of record in the IPR, PGR, or CBM proceeding.
Each of §§ 42.100(b), 42.200(b), and 42.300(b) further is proposed to be amended to delete the second and third sentences, eliminating the procedure for requesting a district court-type claim construction approach for a patent expiring during an IPR, PGR, or CBM proceeding. Such a procedure would not be needed should the Office adopt the same claim construction standard, as proposed, for construing claims of unexpired patents as well as for construing claims of expired patents in an IPR, PGR, or CBM proceeding.
Accordingly, prior notice and opportunity for public comment are not required pursuant to 5 U.S.C. 553(b) or (c) (or any other law).
The Office, nevertheless, is publishing this proposed rule for comment to seek the benefit of the public's views on the Office's proposed changes to the claim construction standard for reviewing patent claims and proposed claims in AIA trial proceedings before the Board.
B. Regulatory Flexibility Act: For the reasons set forth herein, the Deputy General Counsel for General Law of the United States Patent and Trademark Office has certified to the Chief Counsel for Advocacy of the Small Business Administration that changes proposed
The changes proposed in this notice of proposed rulemaking are to revise certain trial practice procedures before the Board. Any requirements resulting from these proposed changes are of minimal or no additional burden to those practicing before the Board.
For the foregoing reasons, the proposed changes in this notice of proposed rulemaking would not have a significant economic impact on a substantial number of small entities.
C. Executive Order 12866 (Regulatory Planning and Review): This rulemaking has been determined to be not significant for purposes of Executive Order 12866 (Sept. 30, 1993).
D. Executive Order 13563 (Improving Regulation and Regulatory Review): The Office has complied with Executive Order 13563. Specifically, the Office has, to the extent feasible and applicable: (1) Made a reasoned determination that the benefits justify the costs of the rule; (2) tailored the rule to impose the least burden on society consistent with obtaining the regulatory objectives; (3) selected a regulatory approach that maximizes net benefits; (4) specified performance objectives; (5) identified and assessed available alternatives; (6) involved the public in an open exchange of information and perspectives among experts in relevant disciplines, affected stakeholders in the private sector and the public as a whole, and provided on-line access to the rulemaking docket; (7) attempted to promote coordination, simplification, and harmonization across government agencies and identified goals designed to promote innovation; (8) considered approaches that reduce burdens and maintain flexibility and freedom of choice for the public; and (9) ensured the objectivity of scientific and technological information and processes.
E. Executive Order 13771 (Reducing Regulation and Controlling Regulatory Costs): This proposed rule is not expected to be an Executive Order 13771 regulatory action because this proposed rule is not significant under Executive Order 12866.
F. Executive Order 13132 (Federalism): This rulemaking does not contain policies with federalism implications sufficient to warrant preparation of a Federalism Assessment under Executive Order 13132 (Aug. 4, 1999).
G. Executive Order 13211 (Energy Effects): This rulemaking is not a significant energy action under Executive Order 13211 because this rulemaking is not likely to have a significant adverse effect on the supply, distribution, or use of energy. Therefore, a Statement of Energy Effects is not required under Executive Order 13211 (May 18, 2001).
H. Executive Order 12988 (Civil Justice Reform): This rulemaking meets applicable standards to minimize litigation, eliminate ambiguity, and reduce burden as set forth in sections 3(a) and 3(b)(2) of Executive Order 12988 (Feb. 5, 1996).
I. Executive Order 13045 (Protection of Children): This rulemaking does not concern an environmental risk to health or safety that may disproportionately affect children under Executive Order 13045 (Apr. 21, 1997).
J. Executive Order 12630 (Taking of Private Property): This rulemaking will not affect a taking of private property or otherwise have taking implications under Executive Order 12630 (Mar. 15, 1988).
K. Congressional Review Act: Under the Congressional Review Act provisions of the Small Business Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801
L. Unfunded Mandates Reform Act of 1995: The proposed changes set forth in this rulemaking do not involve a Federal intergovernmental mandate that will result in the expenditure by State, local, and tribal governments, in the aggregate, of 100 million dollars (as adjusted) or more in any one year, or a Federal private sector mandate that will result in the expenditure by the private sector of 100 million dollars (as adjusted) or more in any one year, and will not significantly or uniquely affect small governments. Therefore, no actions are necessary under the provisions of the Unfunded Mandates Reform Act of 1995.
M. National Environmental Policy Act: This rulemaking will not have any effect on the quality of the environment and is thus categorically excluded from review under the National Environmental Policy Act of 1969.
N. National Technology Transfer and Advancement Act: The requirements of section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) are not applicable because this rulemaking does not contain provisions which involve the use of technical standards.
O. Paperwork Reduction Act: The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3549) requires that the Office consider the impact of paperwork and other information collection burdens imposed on the public. This proposed rule involves information collection requirements which are subject to review by the Office of Management and Budget (OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3549). This rulemaking does not add any additional information requirements or fees for parties before the Board. Therefore, the Office is not resubmitting information collection packages to OMB for its review and approval because the revisions in this rulemaking do not materially change the information collections approved under OMB control number 0651-0069.
Notwithstanding any other provision of law, no person is required to respond to, nor shall any person be subject to, a penalty for failure to comply with a collection of information subject to the requirements of the Paperwork Reduction Act unless that collection of information displays a currently valid OMB control number.
Administrative practice and procedure, Inventions and patents.
For the reasons set forth in the preamble, the Office proposes to amend part 42 of title 37 of the Code of Federal Regulations as follows:
35 U.S.C. 2(b)(2), 6, 21, 23, 41, 135, 311, 312, 316, and 321-326; Public Law 112-29, 125 Stat. 284; and Pub. L. 112 274, 126 Stat. 2456.
(b) In an
(b) In a post-grant review proceeding, a claim of a patent, or a claim proposed in a motion to amend under § 42.221, shall be construed using the same claim construction standard that would be used to construe such claim in a civil action to invalidate a patent under 35 U.S.C. 282(b), including construing the claim in accordance with the ordinary and customary meaning of such claim as understood by one of ordinary skill in the art and the prosecution history pertaining to the patent. Any prior claim construction determination concerning a term of the claim in a civil action, or a proceeding before the International Trade Commission, that is timely made of record in the post-grant review proceeding will be considered.
(b) In a covered business method patent review proceeding, a claim of a patent, or a claim proposed in a motion to amend under § 42.221, shall be construed using the same claim construction standard that would be used to construe such claim in a civil action to invalidate a patent under 35 U.S.C. 282(b), including construing the claim in accordance with the ordinary and customary meaning of such claim as understood by one of ordinary skill in the art and the prosecution history pertaining to the patent. Any prior claim construction determination concerning a term of the claim in a civil action, or a proceeding before the International Trade Commission, that is timely made of record in the covered business method patent review proceeding will be considered.
Environmental Protection Agency (EPA).
Proposed rule.
The Environmental Protection Agency (EPA) is proposing to approve portions of State Implementation Plan (SIP) submissions from Colorado, Montana, North Dakota, South Dakota and Wyoming addressing the Clean Air Act (CAA or Act) interstate transport SIP requirements for the 2012 annual Fine Particulate Matter (PM
Comments must be received on or before June 8, 2018.
Submit your comments, identified by Docket ID No EPA-R08-OAR-2018-0055 at
Adam Clark, Air Program, U.S. EPA Region 8, (303) 312-7104,
On December 14, 2012, the EPA revised the primary annual PM
Section 110(a)(2)(D)(i) includes four distinct components, commonly referred to as “prongs,” that must be addressed in infrastructure SIP submissions. The first two prongs, which are codified in section 110(a)(2)(D)(i)(I), are provisions that prohibit any source or other type of emissions activity in one state from contributing significantly to nonattainment of the NAAQS in another state (prong 1) and from interfering with maintenance of the NAAQS in another state (prong 2). The third and fourth prongs, which are codified in section 110(a)(2)(D)(i)(II), are provisions that prohibit emissions activity in one state from interfering with measures required to prevent significant deterioration of air quality in another state (prong 3) or from interfering with measures to protect visibility in another state (prong 4).
In this action, the EPA is proposing to approve the prong 1 and prong 2 portions of infrastructure SIP submissions submitted by: Colorado on December 1, 2015; Montana on December 17, 2015; North Dakota on August 23, 2015; South Dakota on January 25, 2016; and Wyoming on June 24, 2016, as containing adequate provisions to ensure that air emissions in these states will not significantly contribute to nonattainment or interfere with maintenance of the 2012 annual PM
We review each state's submission to see how it evaluates the transport of air pollution to other states for a given air pollutant, the types of information the state used in its analysis, how that analysis compares with prior EPA rulemakings, modeling, and guidance, and the conclusions drawn by the state.
The EPA has developed a consistent framework for addressing interstate transport with respect to the PM
To help states identify the receptors expected to have problems attaining or maintaining the 2012 annual PM
To develop the projected values presented in the 2016 Memo, the EPA used the results of nationwide photochemical air quality modeling that it recently performed to support several ozone NAAQS-related rulemakings. Base year modeling was performed for 2011. Future year modeling was performed for 2017 to support the Cross-State Air Pollution Rule (CSAPR) Update for the 2008 Ozone NAAQS.
Areas that were designated as moderate PM
Based on this approach, the EPA identified 19 potential nonattainment and/or maintenance receptors. All of the 17 potential nonattainment receptors are located in California. One of the potential maintenance-only receptors is located in Shoshone County, Idaho, and the other potential maintenance-only receptor is located in Allegheny County, Pennsylvania.
In the 2016 Memo, the EPA noted that because of data quality problems, nonattainment and maintenance projections were not done for all or portions of Florida, Illinois, Idaho, Tennessee and Kentucky. Data quality problems were since resolved for Tennessee, Kentucky and Florida, identifying no additional potential receptors, with those areas having design values below the 2012 annual PM
After identifying potential receptors, the next step is to identify whether upwind states contribute to air pollution at each of the identified receptors in other states. In the 2016 Memo, the EPA did not calculate the portion of any downwind state's predicted PM
In this section, we provide an overview of each state's 2012 annual PM
The EPA notes that, because Colorado's analysis focused on designated nonattainment areas, it does not independently address whether the SIP contains adequate provisions prohibiting emissions that will interfere with maintenance of the 2012 PM
The EPA reviewed the information in Colorado's submittal, as well as the 2016 Memo and additional supplemental information for our evaluation, and we propose to come to the same conclusion as the state. This includes Colorado's conclusion that the state will not interfere with maintenance in downwind states, because we supplemented the state's analysis by identifying and assessing impacts on potential maintenance receptors. In our evaluation, we identified potential downwind nonattainment and maintenance receptors using the 2016 Memo. We then evaluated these receptors to determine whether Colorado emissions could significantly contribute to nonattainment or interfere with maintenance at them. Below, we provide an overview of our analysis. A more detailed evaluation of how the SIP revisions meet the requirements of CAA section 110(a)(2)(D)(i)(I) may be found in the Colorado TSD.
With regard to the 17 California receptors, our analysis showed that elevated PM
With regard to the Shoshone County, Idaho receptor, our analysis showed that elevated PM
With regard to the Allegheny County, Pennsylvania receptor, our analysis included review of previous modeling data conducted for the EPA's 2011 CSAPR, which addressed the 1997 and 2006 PM
Based on these analyses, the EPA is proposing to approve the SIP submittal as meeting the CAA section 110(a)(2)(D)(i)(I) requirement that Colorado emissions will not contribute significantly to nonattainment or interfere with maintenance of the 2012 PM
The EPA notes that, because Montana's analysis focused on designated nonattainment areas, it does not independently address whether the SIP contains adequate provisions prohibiting emissions that will interfere with maintenance of the 2012 PM
The EPA reviewed the information in Montana's submittal, as well as the 2016 Memo and additional supplemental information for our evaluation, and we propose to come to the same conclusion as the state. This includes Montana's conclusion that the state will not interfere with maintenance in downwind states, because we supplemented the state's analysis by identifying and assessing impacts on potential maintenance receptors. In our evaluation, we identified potential downwind nonattainment and maintenance receptors using the 2016 Memo. We then evaluated these receptors to determine whether Montana emissions could significantly contribute to nonattainment or interfere with maintenance at them. Below, we provide an overview of our analysis. A more detailed evaluation of how the SIP revisions meet the requirements of CAA section 110(a)(2)(D)(i) may be found in the TSD.
With regard to the Shoshone County, Idaho receptor, our analysis indicated that elevated PM
With regard to the 17 California receptors, our analysis showed that elevated PM
With regard to the Allegheny County, Pennsylvania receptor, our analysis included review of previous modeling data conducted for the EPA's 2011 CSAPR.
Based on our analyses, the EPA is proposing to approve the SIP submittal as meeting the CAA section 110(a)(2)(D)(i)(I) requirement that Montana emissions will not contribute significantly to nonattainment or interfere with maintenance of the 2012 PM
The EPA reviewed the information in North Dakota's submittal, as well as the 2016 Memo and additional supplemental information for our evaluation, and we propose to come to the same conclusion as the state. In our evaluation, we identified potential downwind nonattainment and maintenance receptors using the 2016 Memo. We then evaluated these receptors to determine whether North Dakota emissions could significantly contribute to nonattainment or interfere with maintenance at them. Below, we provide an overview of our analysis. A more detailed evaluation of how the SIP revisions meet the requirements of CAA section 110(a)(2)(D)(i) may be found in the North Dakota TSD.
With regard to the 17 California receptors, our analysis showed that elevated PM
With regard to the Shoshone County, Idaho receptor, our analysis showed that elevated PM
With regard to the Allegheny County, Pennsylvania receptor, our analysis included review of previous modeling data conducted for the EPA's 2011 CSAPR.
Based on these analyses, the EPA is proposing to approve the SIP submittal as meeting the CAA section 110(a)(2)(D)(i)(I) requirement that North Dakota emissions will not contribute significantly to nonattainment or interfere with maintenance of the 2012 PM
The EPA notes that, because South Dakota's analysis focused on designated nonattainment areas, it does not independently address whether the SIP contains adequate provisions prohibiting emissions that will interfere with maintenance of the 2012 PM
The EPA reviewed the information in South Dakota's submittal, as well as the 2016 Memo and additional supplemental information for our evaluation, and we propose to come to the same conclusion as the state. This includes South Dakota's conclusion that the state will not interfere with maintenance in downwind states, because we supplemented the state's analysis by identifying and assessing impacts on potential maintenance
With regard to the 17 California receptors, our analysis showed that elevated PM
With regard to the Shoshone County, Idaho receptor, our analysis showed that elevated PM
With regard to the Allegheny County, Pennsylvania receptor, our analysis included review of previous modeling data conducted for the EPA's 2011 CSAPR.
Based on these analyses, the EPA is proposing to approve the SIP submittal as meeting the CAA section 110(a)(2)(D)(i)(I) requirement that South Dakota emissions will not contribute significantly to nonattainment or interfere with maintenance of the 2012 PM
The EPA notes that, because Wyoming's analysis focused on designated nonattainment areas, it does not independently address whether the SIP contains adequate provisions prohibiting emissions that will interfere with maintenance of the 2012 PM
The EPA reviewed the information in Wyoming's submittal, as well as the 2016 Memo and additional supplemental information for our evaluation, and we propose to come to the same conclusion as the state. This includes Wyoming's conclusion that the state will not interfere with maintenance in downwind states, because we supplemented the state's analysis by identifying and assessing impacts on potential maintenance receptors. In our evaluation, we identified potential downwind nonattainment and maintenance receptors using the 2016 Memo. We then evaluated these receptors to determine whether Wyoming emissions could significantly contribute to nonattainment or interfere with maintenance at them. Below, we provide an overview of our analysis. A more detailed evaluation of how the SIP revisions meet the requirements of CAA section 110(a)(2)(D)(i) may be found in the Wyoming TSD.
With regard to the Shoshone County, Idaho receptor, our analysis showed that elevated PM
With regard to the 17 California receptors, our analysis showed that elevated PM
With regard to the Allegheny County, Pennsylvania receptor, our analysis included review of previous modeling data conducted for the EPA's 2011 CSAPR.
Based on these analyses, the EPA is proposing to approve the SIP submittal as meeting the CAA section 110(a)(2)(D)(i)(I) requirement that Wyoming emissions will not contribute significantly to nonattainment or interfere with maintenance of the 2012 PM
The EPA is proposing to approve the following submittals as meeting the interstate transport requirements of CAA section 110(a)(2)(D)(i)(I) for the 2012 PM
Under the Clean Air Act, the Administrator is required to approve a SIP submission that complies with the provisions of the Act and applicable federal regulations. 42 U.S.C. 7410(k); 40 CFR 52.02(a). Thus, in reviewing SIP submissions, the EPA's role is to approve state choices, provided that they meet the criteria of the CAA. Accordingly, these proposed actions merely approve state law as meeting federal requirements and do not impose additional requirements beyond those imposed by state law. For that reason, these proposed actions:
• Are not significant regulatory actions subject to review by the Office of Management and Budget under Executive Order 12866 (58 FR 51735, October 4, 1993) and 13563 (76 FR 3821, January 21, 2011);
• Are not Executive Order 13771 (82 FR 9339, February 2, 2017) regulatory actions because SIP approvals are exempted under Executive Order 12866;
• do not impose an information collection burden under the provisions of the Paperwork Reduction Act (44 U.S.C. 3501
• are certified as not having a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601
• do not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4);
• do not have Federalism implications as specified in Executive Order 13132 (64 FR 43255, August 10, 1999);
• are not economically significant regulatory actions based on health or safety risks subject to Executive Order 13045 (62 FR 19885, April 23, 1997);
• are not significant regulatory actions subject to Executive Order 13211 (66 FR 28355, May 22, 2001);
• are not subject to requirements of Section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) because application of those requirements would be inconsistent with the CAA; and
• do not provide the EPA with the discretionary authority to address, as appropriate, disproportionate human health or environmental effects, using practicable and legally permissible methods, under Executive Order 12898 (59 FR 7629, February 16, 1994).
In addition, these SIPs are not approved to apply on any Indian reservation land or in any other area where the EPA or an Indian tribe has demonstrated that a tribe has jurisdiction. In those areas of Indian country, the rule does not have tribal implications and will not impose substantial direct costs on tribal governments or preempt tribal law as specified by Executive Order 13175 (65 FR 67249, November 9, 2000).
Environmental protection, Air pollution control, Incorporation by reference, Intergovernmental relations, Nitrogen dioxide, Particulate matter, Reporting and recordkeeping requirements, Sulfur dioxide, Volatile organic compounds.
42 U.S.C. 7401
Environmental Protection Agency (EPA).
Proposed rule.
The Environmental Protection Agency (EPA) is proposing to approve a state implementation plan (SIP) revision submitted by the Commonwealth of Virginia (the Commonwealth or Virginia). This revision pertains to the infrastructure requirement for interstate transport of pollution with respect to the 2012 fine particulate matter (PM
Written comments must be received on or before June 8, 2018.
Submit your comments, identified by Docket ID No. EPA-R03-OAR-2017-0337 at
Joseph Schulingkamp, (215) 814-2021, or by email at
On June 16, 2015, Virginia, through the Department of Environmental Quality (VADEQ), submitted a SIP revision to address the elements of CAA section 110(a)(2) with the exception of section 110(a)(2)(D)(i). EPA approved that SIP revision on June 16, 2016.
Particle pollution is a complex mixture of extremely small particles and liquid droplets in the air. When inhaled, these particles can reach the deepest regions of the lungs. Exposure to particle pollution is linked to a variety of significant health problems. Particle pollution also is the main cause of visibility impairment in the nation's cities and national parks. PM
Pursuant to section 110(a)(1) of the CAA, states are required to submit a SIP revision to address the applicable requirements of section 110(a)(2) within three years after promulgation of a new or revised NAAQS or within such shorter period as EPA may prescribe. Section 110(a)(2) requires states to address basic SIP elements to assure attainment and maintenance of the NAAQS—such as requirements for monitoring, basic program requirements, and legal authority. Section 110(a) imposes the obligation upon states to make a SIP submission to EPA for a new or revised NAAQS, but the contents of that submission may vary depending upon the facts and circumstances of each NAAQS and what is in each state's existing SIP. In particular, the data and analytical tools available at the time the state develops and submits the SIP revision for a new or revised NAAQS affect the content of the submission. The content of such SIP submission may also vary depending upon what provisions the state's existing SIP already contains.
Specifically, section 110(a)(1) provides the procedural and timing requirements for SIP submissions. Section 110(a)(2) lists specific elements that states must meet for infrastructure SIP requirements related to a newly established or revised NAAQS such as requirements for monitoring, basic program requirements, and legal authority that are designed to assure attainment and maintenance of the NAAQS.
Section 110(a)(2)(D)(i)(I) of the CAA requires a state's SIP to address any emissions activity in one state that contributes significantly to nonattainment, or interferes with maintenance, of the NAAQS in any downwind state. The EPA sometimes refers to these requirements as prong 1 (significant contribution to nonattainment) and prong 2 (interference with maintenance), or jointly as the “good neighbor” provision of the CAA. On March 17, 2016, EPA issued a memorandum providing information on the development and review of SIPs that address CAA section 110(a)(2)(D)(i) for the 2012 PM
Virginia's May 16, 2017 SIP submittal includes a summary of annual emissions of oxides of nitrogen (NO
Virginia also discussed EPA's 2016 PM
Additionally, Virginia described in its submittal several existing SIP-approved measures and other federally enforceable source-specific measures, pursuant to permitting requirements under the CAA, that apply to sources of PM
EPA used the information in the 2016 PM
EPA is proposing to approve the May 16, 2017 Virginia SIP revision addressing the interstate transport requirements for the 2012 PM
In 1995, Virginia adopted legislation that provides, subject to certain conditions, for an environmental assessment (audit) “privilege” for voluntary compliance evaluations performed by a regulated entity. The legislation further addresses the relative burden of proof for parties either asserting the privilege or seeking disclosure of documents for which the privilege is claimed. Virginia's legislation also provides, subject to certain conditions, for a penalty waiver for violations of environmental laws when a regulated entity discovers such violations pursuant to a voluntary compliance evaluation and voluntarily discloses such violations to the Commonwealth and takes prompt and appropriate measures to remedy the violations. Virginia's Voluntary Environmental Assessment Privilege Law, Va. Code Sec. 10.1-1198, provides a privilege that protects from disclosure documents and information about the content of those documents that are the product of a voluntary environmental assessment. The Privilege Law does not extend to documents or information that: (1) Are generated or developed before the commencement of a voluntary environmental assessment; (2) are prepared independently of the assessment process; (3) demonstrate a clear, imminent, and substantial danger to the public health or environment; or (4) are required by law.
On January 12, 1998, the Commonwealth of Virginia Office of the Attorney General provided a legal opinion that states that the Privilege law, Va. Code Sec. 10.1-1198, precludes granting a privilege to documents and information “required by law,” including documents and information “required by federal law to maintain program delegation, authorization or approval,” since Virginia must “enforce federally authorized environmental programs in a manner that is no less stringent than their federal counterparts. . . .” The opinion concludes that “[r]egarding § 10.1-1198, therefore, documents or other information needed for civil or criminal enforcement under one of these programs could not be privileged because such documents and information are essential to pursuing enforcement in a manner required by federal law to maintain program delegation, authorization or approval.”
Virginia's Immunity law, Va. Code Sec. 10.1-1199, provides that “[t]o the extent consistent with requirements imposed by federal law,” any person making a voluntary disclosure of information to a state agency regarding a violation of an environmental statute, regulation, permit, or administrative order is granted immunity from administrative or civil penalty. The Attorney General's January 12, 1998
Therefore, EPA has determined that Virginia's Privilege and Immunity statutes will not preclude the Commonwealth from enforcing its program consistent with the federal requirements. In any event, because EPA has also determined that a state audit privilege and immunity law can affect only state enforcement and cannot have any impact on federal enforcement authorities, EPA may at any time invoke its authority under the CAA, including, for example, sections 113, 167, 205, 211 or 213, to enforce the requirements or prohibitions of the state plan, independently of any state enforcement effort. In addition, citizen enforcement under section 304 of the CAA is likewise unaffected by this, or any, state audit privilege or immunity law.
Under the CAA, the Administrator is required to approve a SIP submission that complies with the provisions of the CAA and applicable federal regulations. 42 U.S.C. 7410(k); 40 CFR 52.02(a). Thus, in reviewing SIP submissions, EPA's role is to approve state choices, provided that they meet the criteria of the CAA. Accordingly, this action merely approves state law as meeting federal requirements and does not impose additional requirements beyond those imposed by state law. For that reason, this proposed action:
• Is not a “significant regulatory action” subject to review by the Office of Management and Budget under Executive Orders 12866 (58 FR 51735, October 4, 1993) and 13563 (76 FR 3821, January 21, 2011);
• is not an Executive Order 13771 (82 FR 9339, February 2, 2017) regulatory action because SIP approvals are exempted under Executive Order 12866.
• does not impose an information collection burden under the provisions of the Paperwork Reduction Act (44 U.S.C. 3501
• is certified as not having a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601
• does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4);
• does not have federalism implications as specified in Executive Order 13132 (64 FR 43255, August 10, 1999);
• is not an economically significant regulatory action based on health or safety risks subject to Executive Order 13045 (62 FR 19885, April 23, 1997);
• is not a significant regulatory action subject to Executive Order 13211 (66 FR 28355, May 22, 2001);
• is not subject to requirements of Section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) because application of those requirements would be inconsistent with the CAA; and
• does not provide EPA with the discretionary authority to address, as appropriate, disproportionate human health or environmental effects, using practicable and legally permissible methods, under Executive Order 12898 (59 FR 7629, February 16, 1994).
This action, proposing approval of Virginia's interstate transport submittal for the 2012 PM
Environmental protection, Air pollution control, Incorporation by reference, Particulate matter.
42 U.S.C. 7401
Environmental Protection Agency (EPA).
Proposed rule.
The Environmental Protection Agency (EPA) is proposing to approve a revision to the Yolo-Solano Air Quality Management District (YSAQMD or “District”) portion of the California State Implementation Plan (SIP). This revision concerns the District's negative declarations for several volatile organic compound (VOC) source categories included in its Reasonably Available Control Technology (RACT) State Implementation Plan Analysis. We are proposing to approve these negative declarations under the Clean Air Act (CAA or “the Act”). We are taking comments on this proposal and plan to follow with a final action.
Any comments must arrive by June 8, 2018.
Submit your comments, identified by Docket ID No. EPA-R09-OAR-2018-0160 at
Stanley Tong, EPA Region IX, (415) 947-4122,
Throughout this document, “we,” “us” and “our” refer to the EPA.
On September 13, 2017, YSAQMD adopted its Reasonably Available Control Technology State Implementation Plan Analysis for the 2008 ozone National Ambient Air Quality Standards (NAAQS). Included in the District's RACT SIP analysis were several negative declarations where the District stated that it did not have sources subject to the Control Techniques Guidelines (CTG) documents listed below in Table 1. The District's RACT SIP further stated that the negative declarations were for the 1997 and 2008 ozone NAAQS. On November 13, 2017, the California Air Resources Board (CARB) submitted YSAQMD's RACT SIP, including the following negative declarations, to the EPA as a SIP revision.
On April 11, 2018, the EPA determined that the negative declarations submitted as part of YSAQMD's RACT SIP met the completeness criteria in 40 CFR part 51 Appendix V, which must be met before formal EPA review.
On April 6, 2018 (83 FR 14754), we approved YSAQMD's RACT SIP certification, including several negative declarations for the 1997 8-hour ozone NAAQS.
Volatile Organic Compounds (VOCs) and nitrogen oxides (NO
The EPA's rule to implement the 2008 8-hour ozone NAAQS (80 FR 12264 at 12278, March 6, 2015) states in part “. . . RACT SIPs must contain adopted RACT regulations, certifications where appropriate that existing provisions are RACT . . . and/or negative declarations that there are no sources in the nonattainment area covered by a specific CTG source category.” YSAQMD's RACT SIP submittal includes the negative declarations listed in Table 1 to certify that it has no stationary sources within its jurisdiction that are covered by the listed CTGs.
SIP rules must require RACT for each category of sources covered by a CTG document as well as each major source of VOC or NO
The EPA reviewed YSAQMD's list of negative declarations and compared the District's list against a list of stationary sources of VOCs derived from CARB's emissions inventory database for the years 2006 and 2015. The EPA selected these years based on when the RACT SIPs were due for the 1997 and 2008 8-hour ozone standards. Since the CTGs only cover VOC sources and do not cover NO
As authorized in section 110(k)(3) of the Act, the EPA proposes to fully approve the submitted negative declarations for the 1997 and 2008 8-hour ozone NAAQS because they fulfill all relevant requirements. We will accept comments from the public on this proposal until June 8, 2018. If we take final action to approve the submitted negative declarations, our final action will incorporate them into the federally enforceable SIP.
Under the Clean Air Act, the Administrator is required to approve a SIP submission that complies with the provisions of the Act and applicable federal regulations. 42 U.S.C. 7410(k); 40 CFR 52.02(a). Thus, in reviewing SIP submissions, the EPA's role is to approve state choices, provided that they meet the criteria of the Clean Air Act. Accordingly, this proposed action merely proposes to approve state law as meeting federal requirements and does not impose additional requirements beyond those imposed by state law. For that reason, this proposed action:
• Is not a “significant regulatory action” subject to review by the Office of Management and Budget under Executive Orders 12866 (58 FR 51735, October 4, 1993) and 13563 (76 FR 3821, January 21, 2011);
• Is not an Executive Order 13771 (82 FR 9339, February 2, 2017) regulatory action because SIP approvals are exempted under Executive Order 12866;
• Does not impose an information collection burden under the provisions of the Paperwork Reduction Act (44 U.S.C. 3501
• Is certified as not having a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601
• Does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4);
• Does not have Federalism implications as specified in Executive Order 13132 (64 FR 43255, August 10, 1999);
• Is not an economically significant regulatory action based on health or safety risks subject to Executive Order 13045 (62 FR 19885, April 23, 1997);
• Is not a significant regulatory action subject to Executive Order 13211 (66 FR 28355, May 22, 2001);
• Is not subject to requirements of section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) because application of those requirements would be inconsistent with the Clean Air Act; and
• Does not provide the EPA with the discretionary authority to address disproportionate human health or environmental effects with practical, appropriate, and legally permissible methods under Executive Order 12898 (59 FR 7629, February 16, 1994).
In addition, the SIP is not approved to apply on any Indian reservation land or in any other area where the EPA or an Indian tribe has demonstrated that a tribe has jurisdiction. In those areas of Indian country, the rule does not have tribal implications and will not impose substantial direct costs on tribal governments or preempt tribal law as specified by Executive Order 13175 (65 FR 67249, November 9, 2000).
Environmental protection, Air pollution control, Incorporation by reference, Intergovernmental relations, Nitrogen dioxide, Ozone, Reporting and recordkeeping requirements, Volatile organic compounds.
42 U.S.C. 7401
Environmental Protection Agency (EPA).
Proposed rule.
The Environmental Protection Agency (EPA) is proposing to approve, as a revision of the California state implementation plan (SIP), the State's request to redesignate the Chico nonattainment area to attainment for the 2006 24-hour fine particulate matter (PM
Any comments on this proposal must arrive by June 8, 2018.
Submit comments, identified by docket number EPA-R09-OAR-2018-0181, at
Ginger Vagenas, EPA Region IX, 415-972-3964,
Throughout this document, the terms “we,” “us,” and “our” mean the EPA.
Under Clean Air Act (CAA or “the Act”) section 107(d)(3)(D), the EPA is proposing to approve California's request to redesignate the Chico nonattainment area to attainment for the 2006 24-hour fine particulate matter (PM
In addition, the EPA is proposing to approve the Chico PM
The EPA is proposing these actions because the SIP revision meets the requirements of the CAA and EPA guidance for such plans.
Particulate matter includes particles with diameters that are generally 2.5 microns or smaller (PM
Under section 109 of the CAA, the EPA has established national ambient air quality standards for certain pervasive air pollutants (referred to as “criteria pollutants”) and conducts periodic reviews of the NAAQS to determine whether they should be revised or whether new NAAQS should be established. The EPA sets the NAAQS for criteria pollutants at levels required to protect public health and
On July 18, 1997, the EPA revised the NAAQS for particulate matter to add new standards for PM
On October 17, 2006, the EPA retained the annual average NAAQS at 15 µg/m
On December 14, 2012, the EPA promulgated the 2012 PM
Following promulgation of a new or revised NAAQS, the EPA is required by CAA section 107(d) to designate areas throughout the nation as attaining or not attaining the NAAQS. On April 25, 2007, the EPA promulgated its Clean Air Fine Particle Implementation Rule, codified at 40 CFR part 51, subpart Z, in which the Agency provided guidance for state and tribal plans to implement the PM
The United States Court of Appeals District of Columbia Circuit (D.C. Circuit) remanded the Clean Air Fine Particle Implementation Rule and the final rule entitled “Implementation of the New Source Review (NSR) Program for Particulate Matter Less than 2.5 Micrometers (PM
On July 29, 2016, EPA issued a rule entitled, “Fine Particulate Matter National Ambient Air Quality Standards: State Implementation Plan Requirements” (“PM
The Chico PM
The local air district with primary responsibility for air quality planning in this area is the BCAQMD. Authority for regulating sources under State jurisdiction in the Chico nonattainment area is split between the District, which has responsibility for regulating stationary and most area sources, and the California Air Resources Board (CARB), which has responsibility for regulating most mobile sources. The District worked cooperatively with CARB in preparing the Chico PM
Within three years of the effective date of designations, states with areas designated as nonattainment for the 2006 24-hour PM
Effective October 10, 2013, the EPA determined that the Chico nonattainment area had attained the
Section 110(l) of the Act requires states to provide reasonable notice and public hearing prior to adoption of SIP revisions. CARB's December 18, 2017 submittal of the Chico PM
On November 16, 2017, CARB adopted the Chico PM
Section 110(k)(1)(B) of the CAA requires the EPA to determine whether a SIP submittal is complete within 60 days of receipt. This section also provides that any plan that we have not affirmatively determined to be complete or incomplete will become complete by operation of law six months after the day of submittal. A completeness review allows us to determine if the submittal includes all the necessary items and information we need to act on it.
We make completeness determinations using criteria we have established in 40 CFR part 51, Appendix V. These criteria fall into two categories: administrative information and technical support information. The administrative information provides documentation that the state has followed basic administrative procedures during the SIP adoption process. The technical support information provides the information we need to determine the impact of the proposed revisions on attainment and maintenance of the air quality standard.
We notify a state of our completeness determination by letter unless the submittal becomes complete by operation of law. A finding of completeness does not approve a submittal as part of the SIP nor does it indicate that the SIP is approvable. It does start a 12-month clock for the EPA to act on the SIP submittal. On April 5, 2018, we notified CARB that we had determined the submittal of the Chico PM
The CAA establishes the requirements for redesignation of a nonattainment area to attainment. Specifically, section 107(d)(3)(E) allows for redesignation provided that the following criteria are met: (1) The EPA determines that the area has attained the applicable NAAQS; (2) the EPA has fully approved the applicable implementation plan for the area under 110(k); (3) the EPA determines that the improvement in air quality is due to permanent and enforceable reductions; (4) the EPA has fully approved a maintenance plan for the area as meeting the requirements of CAA 175A; and (5) the state containing such area has met all requirements applicable to the area under section 110 and part D of the CAA. Section 110 identifies a comprehensive list of elements that SIPs must include, and part D establishes the SIP requirements for nonattainment areas. Part D is divided into six subparts. The generally-applicable nonattainment SIP requirements are found in part D, subpart 1, and the particulate matter-specific SIP requirements are found in part D, subpart 4.
The EPA provided guidance on redesignations in a document entitled “State Implementation Plans; General Preamble for the Implementation of Title I of the Clean Air Act Amendments of 1990,” published in the
For reasons set forth in section V. of this document, we propose to approve CARB's request for redesignation of the Chico nonattainment area to attainment for the 2006 24-hour PM
Section 107(d)(3)(E)(i) of the CAA requires that for an area to be redesignated to attainment the EPA must determine that the area has attained the relevant NAAQS. In this case, the relevant NAAQS is the 2006 24-hour PM
Generally, the EPA determines whether an area's air quality is meeting the 2006 24-hour PM
Data from air monitoring sites operated by state, local, or tribal agencies in compliance with EPA monitoring requirements must be submitted to AQS. These monitoring agencies certify annually that these data are accurate to the best of their knowledge. Accordingly, the EPA relies primarily on data in AQS when determining the attainment status of an area.
As described previously, the 2006 24-hour PM
The California Air Resources Board is responsible for monitoring ambient air quality within Butte County and operates the PM
During the 2014-2016 period, CARB operated one PM
Consistent with the requirements contained in 40 CFR part 50, the EPA has reviewed the quality-assured and certified PM
Table 1 below shows the 24-hour PM
Sections 107(d)(3)(E)(ii) and (v) require the EPA to determine that the area has a fully approved applicable SIP under section 110(k) that meets all applicable requirements under section 110 and part D for the purposes of redesignation.
The general SIP elements and requirements set forth in section 110(a)(2) include, but are not limited to, the following: Submittal of a SIP that has been adopted by the state after reasonable public notice and hearing; provisions for establishment and operation of appropriate procedures needed to monitor ambient air quality; implementation of a source permitting program; provision for the implementation of part C requirements for prevention of significant deterioration; provisions for the implementation of part D requirements for nonattainment new source review permit programs; provisions for air pollution modeling; and provisions for public and local agency participation in planning and emission control rule development.
We note that SIPs must be fully approved only with respect to applicable requirements for purposes of redesignation in accordance with section 107(d)(3)(E)(ii). The section 110(a)(2) (and part D) requirements that are linked to a particular nonattainment area's designation and classification are the relevant measures to evaluate in reviewing a redesignation request. Requirements that apply regardless of the designation of any particular area of a state are not applicable requirements for the purposes of redesignation, and the State will remain subject to these requirements after the Chico PM
For example, CAA section 110(a)(2)(D) requires that SIPs contain certain measures to prevent sources in a state from significantly contributing to air quality problems in another state: These SIPs are often referred to as “transport SIPs.” Because the section 110(a)(2)(D) requirements for transport SIPs are not linked to a particular nonattainment area's designation and classification, but rather apply regardless of the area's attainment status, these are not applicable requirements for the purposes of redesignation under section 107(d)(3)(E).
Similarly, the EPA believes that other section 110(a)(2) (and part D) requirements that are not linked to nonattainment plan submissions or to an area's attainment status are not applicable requirements for purposes of redesignation. The EPA believes that the section 110 (and part D) requirements that relate to a particular nonattainment area's designation and classification are the relevant measures to evaluate in reviewing a redesignation request. This view is consistent with the EPA's existing policy on applicability of the conformity SIP requirement for redesignations.
On numerous occasions, CARB and BCAQMD have submitted and we have approved provisions addressing the basic CAA section 110 provisions. The Butte County portion of the California SIP
Subparts 1 and 4 of part D, title 1 of the CAA contain air quality planning requirements for PM
As noted in Section II.C.of this document, the EPA determined in 2013 that the Chico PM
Moreover, in the context of evaluating an area's eligibility for redesignation, there is a separate and additional justification for finding that requirements associated with attainment are not applicable for purposes of redesignation. Prior to and independently of the Clean Data Policy,
Thus, even if the requirements associated with attainment had not previously been suspended, they would not apply for purposes of evaluating whether an area that has attained the standard qualifies for redesignation. The EPA has enunciated this position since the General Preamble was published more than 25 years ago, and it represents the Agency's interpretation of what constitutes applicable requirements under section 107(d)(3)(E). The courts have recognized the scope of the EPA's authority to interpret “applicable requirements” in the redesignation context.
The remaining applicable Part D requirements for moderate PM
The Chico redesignation request substantively meets the Part D requirements for redesignation purposes. We discuss each of these requirements below.
Section 172(c)(3) of the CAA requires states to submit a comprehensive, accurate, current inventory of relevant PM
On November 15, 2012, CARB submitted a SIP revision for the Chico nonattainment area that provided a 2011 winter-time emissions inventory with emissions estimates in tons per day (tpd) for PM
CAA sections 172(c)(5) and 189(a)(1)(A) require that states submit SIP revisions that establish certain requirements for new or modified stationary sources in nonattainment areas, including provisions to ensure that new major sources or major modifications of existing sources of nonattainment pollutants incorporate the highest level of control, referred to as the lowest achievable emission rate, and that increases in emissions from such stationary sources are offset so as to provide for reasonable further progress towards attainment in the nonattainment area.
The process for reviewing permit applications and issuing permits for new or modified major stationary sources of air pollution is referred to as new source review (NSR). With respect to nonattainment pollutants in nonattainment areas, this process is referred to as nonattainment NSR (NNSR). Areas that are designated as attainment or unclassifiable for one or more NAAQS are required to submit SIP revisions that ensure that major new stationary sources or major modifications of existing stationary sources meet the federal requirements for prevention of significant deterioration (PSD), including application of best available control technology for each applicable pollutant emitted in significant amounts, among other requirements.
The District is responsible for stationary source emissions units, and its regulations govern air permits issued for such units. Although BCAQMD does not have a fully approved NNSR rule,
The District has a SIP-approved PSD program (Rule 1107) that will apply to PM
We conclude that Butte County's portion of the California SIP adequately meets the requirements of section 172(c)(5) and 189(a)(1)(A) for purposes of this redesignation.
CAA section 189(e) provides that control requirements for major stationary sources of direct PM
Therefore, because the requirement of section 189(e) is primarily actionable in the context of addressing precursors in an attainment plan, a precursor exemption analysis under section 189(e) and the EPA's implementing regulations is not an applicable requirement that needs to be fully approved in the context of a redesignation under CAA section 107(d)(3)(E)(ii). As discussed above, for areas that are attaining the standard, the EPA does not interpret attainment planning requirements of subparts 1 and 4 to be applicable requirements for the purposes of redesignating an area to attainment.
As previously noted, the EPA determined in 2013 that the Chico PM
Section 172(c)(7) requires the SIP to meet the applicable provisions of section 110(a)(2). As described in section V.B. of this document, we conclude the California SIP meets the requirements of section 110(a)(2) applicable for purposes of this redesignation.
Under section 176(c) of the CAA, states are required to establish criteria and procedures to ensure that federally supported or funded projects conform to the air quality planning goals in the applicable SIP. Section 176(c) further provides that state conformity provisions must be consistent with federal conformity regulations that the CAA requires the EPA to promulgate. The EPA's conformity regulations are codified at 40 CFR part 93, subparts A (referred to herein as “transportation conformity”) and B (referred to herein as “general conformity”). Transportation conformity applies to transportation plans, programs, and projects developed, funded, and approved under title 23 U.S.C. or the Federal Transit Act, and general conformity applies to all other federally-supported or funded projects. SIP revisions intended to address the conformity requirements are referred to herein as “conformity SIPs.” The EPA believes it is reasonable to interpret the conformity SIP requirements as not applying for purposes of a redesignation request under section 107(d) because state conformity rules are still required after redesignation and federal conformity rules apply where state rules have not been approved.
In order to approve a redesignation to attainment, section 107(d)(3)(E)(iii) of the CAA requires the EPA to determine that the improvement in air quality is due to emission reductions that are permanent and enforceable, and that the improvement results from the implementation of the applicable SIP and applicable federal air pollution control regulations and other permanent and enforceable regulations. Under this criterion, a state must be able to reasonably attribute the improvement in air quality to emissions reductions that are permanent and enforceable. Attainment resulting from temporary reductions in emission rates (
In its demonstration that improvements in air quality are reasonably attributable to emissions reductions that are permanent and enforceable, BCAQMD evaluated several factors: The composition of PM
Using chemical composition data from speciation samplers located at the Chico monitoring site, the District calculated the average contribution of different components to the PM
The Chico PM
The large contribution of wood smoke on days when the ambient concentrations are elevated illustrates the dominance of this source category. BCAQMD managed three woodstove replacement programs between 2005 and 2015. The District calculated that these programs reduced PM
Source categories for which CARB has primary responsibility for reducing emissions in California include most new and existing on- and off-road engines and vehicles, motor vehicle fuels, and consumer products. In addition, California has unique authority under CAA section 209 (subject to a waiver by EPA) to adopt and implement new emission standards for many categories of on-road vehicles and engines, and new and in-use off-road vehicles and engines.
California has been a leader in the development of some of the most stringent control measures nationwide for on-road and off-road mobile sources and the fuels that power them. These standards have reduced new car emissions by 99 percent and new truck emissions by 90 percent from uncontrolled levels.
Finally, in addition to the local district and State rules discussed above, the Chico PM
Wintertime emissions of the two largest contributors to ambient PM
The Plan demonstrates that the air quality improvement in the Chico PM
We find that the improvement in air quality in the Chico PM
Section 175A of the CAA sets forth the required elements of a maintenance plan for areas seeking redesignation from nonattainment to attainment. Under section 175A, the plan must demonstrate continued attainment of the applicable NAAQS for at least 10 years after the Administrator approves a redesignation to attainment. Eight years after redesignation, the State must submit a revised maintenance plan that demonstrates continued attainment for the subsequent ten-year period following the initial ten-year maintenance period. To address the possibility of future NAAQS violations, the maintenance plan must contain such contingency provisions as the EPA deems necessary to promptly correct any violation of the NAAQS that occurs after redesignation of the area. The Calcagni memo provides further guidance on the content of a maintenance plan, explaining that a maintenance plan should include an attainment emissions inventory, maintenance demonstration, monitoring and verification of continued attainment, and a contingency plan. Based on our review and evaluation of the Plan, as detailed below, we are proposing to approve the Chico PM
In demonstrating maintenance in accordance with CAA section 175A and the Calcagni memo, a state should provide an attainment year emissions inventory to identify the level of emissions in the area sufficient to attain the NAAQS.
Section 175A requires a state seeking redesignation to attainment to submit a SIP revision to provide for the maintenance of the NAAQS for a period of at least ten years following redesignation. This can be shown either by demonstrating that future emissions of a pollutant and its precursors will not exceed the level of the attainment inventory or by conducting modeling that shows the future emissions will not cause a violation of the standard. In accordance with EPA guidance, the state should project emissions for the 10-year period following redesignation, for either purpose (Calcagni memo, p. 9). Projected emissions inventories for future years must account for, among other things, the ongoing effects of economic growth and adopted emissions control requirements, and the inventories are expected to be the best available representation of future emissions. The plan submission should include documentation explaining how the state calculated the emissions data for the base year and projected inventories.
The specific PM
The emissions inventories are presented in Chapter 4 of the Plan and in Attachment D, Emissions Inventory Data. Additional information regarding the development of the emissions inventories in the Plan was provided by CARB on February 15, 2018.
The Chico PM
The 2015 base year inventory provides the foundation for demonstrating maintenance for a 10-year period. A summary of the 2015 winter episode average-season-day emissions inventory for the Chico PM
Areawide sources occur over a wide geographic area. Examples of these sources are consumer products, paved and unpaved road dust, fireplaces, farming operations, and prescribed burning. Emissions for these categories are estimated by both CARB and the BCAQMD using various models and methodologies.
The Plan uses the EMFAC (short for EMissions FACtor) model to assess emissions from on-road vehicles. Off- road mobile source emissions are estimated using various models with the back-up model being OFFROAD2007. On-road and off-road models account for the effects of various adopted regulations, technology types, and seasonal conditions on emissions.
Emissions from on-road mobile sources, which include passenger vehicles, buses, and trucks, were estimated using outputs from CARB's EMFAC2014 model.
Emissions from off-road mobile sources, which include cargo handling equipment, pleasure craft, recreational vehicles, and locomotives, were grown from the 2012 emissions inventory.
Projected inventories are derived by applying expected growth trends for each source category and expected emissions reductions resulting from adopted control measures to the base year inventory. In this instance, emissions projections for 2025 and 2030 were generated by applying growth and control profiles to the 2015 base year inventory. Growth profiles for point and areawide sources are derived from surrogates (
The EPA has reviewed the results, procedures, and methodologies for the Chico PM
As noted previously, the requirement that maintenance plans must demonstrate attainment of the NAAQS for at least 10 years after the redesignation can be met in one of two ways: By showing that future emissions will not exceed the level of the attainment inventory or by using modeling to show that the future emissions will not cause a violation of the NAAQS. Modeling predicts future ambient concentrations for comparison to the NAAQS, making use of information such as ambient concentrations, meteorology, and current and projected emission inventories, including the effect of control measures in the plan.
The main EPA source of guidance on modeling is the
For areas such as the Chico area that are dominated by primary PM
For any of the rollback approaches, assumptions must be made about secondary PM
Because some precursors increase slightly over the 10-year maintenance period, the Chico PM
The speciation data show that days with high PM
Secondarily formed PM
The instruments and techniques used to measure speciated PM
Ambient concentrations of PM
To perform the rollback analysis, the species groups must be matched to emission inventory categories that affect those species' concentrations. Since the highest PM
The maintenance demonstration base year was 2015, the center of the 2014—2016 period upon which the 2016 design value is based. The predicted emission changes between base year 2015 and future year 2030 were used to scale the species components of the 2016 design value. A bank of ERCs is maintained by the District for equipment shutdowns and voluntary controls at permitted sources; these are emissions that are not occurring presently, but potentially could occur in the future if the credits were used by new sources to offset their emissions as part of the NSR permitting process. The ERCs were added to 2030 emissions for each pollutant but not to 2015 emissions. ERCs are not maintained for direct PM
Fugitive dust emissions for the geological component are projected to increase by 14 percent, mainly due to increased paved road dust, residential building, and road construction,
The last steps in rollback are summing the emissions-scaled concentrations for the species groups and then adding the background concentrations back in. Considered individually, projected reductions in NO
The choice of an appropriate model for the District's maintenance demonstration was informed by particular circumstances of the Chico nonattainment area, most notably the dominance of primary PM
The EPA also finds that the Plan correctly implemented the calculations needed for rollback, used an appropriate mapping of ambient PM
The main drawback to rollback for Chico PM
Under CAA section 175A, a maintenance plan must demonstrate continued attainment of the applicable NAAQS for at least ten years after EPA approves a redesignation to attainment. Eight years after redesignation, the State must submit a revised maintenance plan that demonstrates continued attainment for the subsequent ten-year period following the initial ten-year maintenance period. To address the possibility of future NAAQS violations, the maintenance plan must contain such contingency provisions that EPA deems necessary to promptly correct any violation of the NAAQS that occurs after redesignation of the area. Based on our review and evaluation of the plan, as detailed below, we are proposing to approve the Chico PM
In demonstrating maintenance, continued attainment of the NAAQS can be verified through operation of an appropriate air quality monitoring network. The Calcagni memo (p. 11) states that the maintenance plan should contain provisions for continued operation of air quality monitors that will provide such verification. As discussed in section V.A. of this document, PM
In addition, CARB and BCAQMD must inventory emissions sources and report to EPA on a periodic basis under 40 CFR part 51, subpart A (“Air Emissions Reporting Requirements”). These emissions inventory updates will provide a second way to evaluate emissions trends in the area and thereby verify continued attainment of the NAAQS. The District commits to monitoring the emissions inventory for unexpected changes that could affect
Section 175A(d) of the CAA requires that maintenance plans include contingency provisions, as EPA deems necessary, to promptly correct any violations of the NAAQS that occur after redesignation of the area. Such provisions must include a requirement that the state will implement all measures with respect to the control of the air pollutant concerned that were contained in the SIP for the area before redesignation of the area as an attainment area. These contingency provisions are distinguished from those generally required for nonattainment areas under CAA section 172(c)(9) in that they are not required to be fully-adopted measures that will take effect without further action by the state in order for the maintenance plan to be approved. However, the contingency plan is considered to be an enforceable part of the SIP and should ensure that the contingency measures are adopted expeditiously once they are triggered by a specified event. The maintenance plan should clearly identify the measures to be adopted, a schedule and procedure for adoption and implementation, and a specific timeline for action by the State. As a necessary part of the plan, the State should also identify the specific indicators or triggers that will be used to determine when the contingency measures need to be implemented.
The District has adopted a contingency plan to address possible future PM
(1) Within 60 days of the trigger, BCAQMD will commence an analysis to determine if the violation was caused by an exceptional event or instrument malfunction, and evaluate meteorological conditions and emissions inventory.
(2) BCAQMD will consult with interested parties, community organizations, and industry to identify and implement, within nine months after the trigger, voluntary and incentive measures to reduce directly emitted PM
(3) If voluntary and incentive based measures do not bring the area back into attainment 12 months after the contingency plan is triggered, the BCAQMD will propose for adoption and implementation any necessary new rules to the BCAQMD Governing Board within 24 months of the trigger date. The measures that BCAQMD would consider and analyze include but are not limited to those listed in Table 4-6 in the Plan.
Upon our review of the Plan, as summarized above, we find that the contingency provisions of the Chico PM
Section 176(c) of the CAA requires federal actions in nonattainment and maintenance areas to conform to the SIP's goals of eliminating or reducing the severity and number of violations of the NAAQS and achieving expeditious attainment of the standards. Conformity to the SIP's goals means that such actions will not: (1) Cause or contribute to violations of a NAAQS, (2) worsen the severity of an existing violation, or (3) delay timely attainment of any NAAQS or any interim milestone.
Actions involving Federal Highway Administration (FHWA) or Federal Transit Administration (FTA) funding or approval are subject to the EPA's transportation conformity rule, codified at 40 CFR part 93, subpart A. Under this rule, metropolitan planning organizations (MPOs) in nonattainment and maintenance areas coordinate with state and local air quality and transportation agencies, the EPA, FHWA, and FTA to demonstrate that an area's regional transportation plans and transportation improvement programs conform to the applicable SIP. This demonstration is typically done by showing that estimated emissions from existing and planned highway and transit systems are less than or equal to the motor vehicle emissions budgets (“budgets”) contained in all control strategy SIPs.
Under the CAA, states are required to submit, at various times, control strategy SIPs and maintenance plans in nonattainment areas. These control strategy SIPs and maintenance plans typically set budgets for criteria pollutants and/or their precursors to address pollution from cars and trucks. Budgets are generally established for specific years and specific pollutants or precursors and must reflect the motor vehicle control measures contained in the RFP plan and the attainment or maintenance demonstration. Per 40 CFR part 93, budgets must be established for the last year of the maintenance plan for direct PM
The Transportation Conformity Rule allows areas to forgo establishment of a budget where it is demonstrated that the regional motor vehicle emissions for a particular pollutant or precursor are an insignificant contributor to the air quality problem in an area. The criteria for insignificance determinations can be found in 40 CFR 93.109(f). In order for a pollutant or precursor to be considered an insignificant contributor, the SIP would have to demonstrate that it would be unreasonable to expect that such an area would experience enough motor vehicle emissions growth in that pollutant/precursor for a NAAQS violation to occur. Insignificance determinations are based on a number of factors, including (1) the current state of air quality as determined by monitoring data for that NAAQS; (2) the absence of SIP motor vehicle control measures; (3) historical trends and future projections of the growth of motor vehicle emissions; and (4) the percentage of motor vehicle emissions in context of the total SIP inventory. The EPA's rationale for providing for insignificance determinations is described in the July 1, 2004, revision to the transportation conformity rule (69 FR 40004). Specifically, the rationale is explained on p. 40061 under the subsection entitled “XXIII. B. Areas With Insignificant Motor Vehicle Emissions.”
As part of the Chico PM
The information provided by BCAQMD to the EPA as part of the SIP revision addresses each of the factors listed in 40 CFR 93.109(f), and is summarized below. Design values for the area are trending downward from 69 μg/m
The EPA determined that the Chico nonattainment area attained the 2006 24-hour PM
As discussed in more detail in sections V.C. and V.D.2. of this document, the control measures relied upon in the Chico PM
Trends and projections in emissions of PM
As shown in Table 7, the percentage contribution of motor vehicle emissions to total emissions for both NO
Although both the total NO
After evaluating the information provided by BCAQMD and weighing the factors for the insignificance determination outlined in 40 CFR 93.109(f), the EPA is proposing to approve the determination that the PM
If the EPA's insignificance finding is finalized, the Butte County Association of Governments would no longer be required to perform regional emissions analyses for either directly emitted PM
Pursuant to sections 107(d)(3)(E) and 175A of the CAA and based on our review of the Chico PM
First, under CAA section 107(d)(3)(D), we are proposing to approve CARB's request, which accompanied the submittal of the Chico PM
Second, in connection with the Chico PM
We are soliciting comments on these proposed actions. We will accept comments from the public on this proposal for 30 days following publication of this proposal in the
Under the CAA, the Administrator is required to approve a SIP submission that complies with the provisions of the Act and applicable federal regulations. 42 U.S.C. 7410(k); 40 CFR 52.02(a). Thus, in reviewing SIP submissions, the EPA's role is to approve state choices, provided that they meet the criteria of the CAA. Accordingly, this proposed action merely proposes to approve State law as meeting federal requirements and does not impose additional requirements beyond those imposed by State law. For that reason, this proposed action:
• Is not a “significant regulatory action” subject to review by the Office of Management and Budget under Executive Orders 12866 (58 FR 51735, October 4, 1993) and 13563 (76 FR 3821, January 21, 2011);
• is not an Executive Order 13771 (82 FR 9339, February 2, 2017) regulatory action because SIP approvals are exempted under Executive Order 12866;
• does not impose an information collection burden under the provisions of the Paperwork Reduction Act (44 U.S.C. 3501
• is certified as not having a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601
• does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4);
• does not have Federalism implications as specified in Executive Order 13132 (64 FR 43255, August 10, 1999);
• is not an economically significant regulatory action based on health or safety risks subject to Executive Order 13045 (62 FR 19885, April 23, 1997);
• is not a significant regulatory action subject to Executive Order 13211 (66 FR 28355, May 22, 2001);
• is not subject to requirements of Section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) because application of those requirements would be inconsistent with the Clean Air Act; and
• does not provide the EPA with the discretionary authority to address
In addition, the SIP is not approved to apply on any Indian reservation land or in any other area where the EPA or an Indian tribe has demonstrated that a tribe has jurisdiction. In those areas of Indian country, the rule does not have tribal implications and will not impose substantial direct costs on tribal governments or preempt tribal law as specified by Executive Order 13175 (65 FR 67249, November 9, 2000). We have offered to consult with the Enterprise Rancheria of Maidu Indians of California, the Berry Creek Rancheria of Maidu Indians of California, the Mooretown Rancheria of Maidu Indians of California, and the Mechoopda Indian Tribe of Chico Rancheria, which have lands within the Chico PM
Environmental protection, Air pollution control, Incorporation by reference, Intergovernmental relations, Nitrogen dioxide, Particulate matter, Reporting and recordkeeping requirements, Sulfur oxides, Volatile organic compounds.
Environmental protection, Air pollution control, National parks, Wilderness areas.
42 U.S.C. 7401
Environmental Protection Agency (EPA).
Proposed rule; reopening of the public comment period.
The Environmental Protection Agency (EPA) issued a proposed rule in the
Written comments on the proposed rule published in the
Submit your comments, identified by Docket ID No. EPA-R01-OAR-2018-0011 at
Eric Wortman, Office of Ecosystem Protection, U.S. Environmental Protection Agency, EPA New England Regional Office, 5 Post Office Square (Mail Code OEP05-2), Boston, MA 02109, (617) 918-1624,
Throughout this document whenever “we,” “us,” or “our” is used, we mean EPA.
On February 12, 2018, the EPA published a proposed rulemaking in the
Among other things, the EPA's February 12, 2018 action proposed to incorporate into 40 CFR part 55 the applicable provisions of 310 Code of Massachusetts Regulations (CMR) 7.00: Air Pollution Control, as amended through January 16, 2018. On March 9, 2018, the MassDEP promulgated amendments to the regulations at 310 CMR 7.00. Pursuant to 40 CFR 55.12, consistency reviews will occur if the EPA finds that part 55 is inconsistent
To submit comments, or access the docket, please follow the detailed instructions provided in the
In the February 12, 2018 action, the EPA proposed to include in a final EPA rule regulatory text that includes incorporation by reference. The EPA is including the updated regulatory text below to reflect the March 9, 2018 effective date of the Commonwealth's amended regulations discussed in this document. In accordance with the requirements of 1 CFR 51.5, the EPA is proposing to incorporate by reference the Code of Massachusetts Regulations rules set forth below. The EPA has made, and will continue to make, these materials available through
Environmental protection, Administrative practice and procedure, Air pollution control, Carbon monoxide, Incorporation by reference, Intergovernmental relations, Lead, Nitrogen dioxide, Outer continental shelf, Ozone, Particulate matter, Permits, Reporting and recordkeeping requirements, Sulfur oxides, Volatile organic compounds.
For the reasons set out in the preamble, title 40 of the Code of Federal Regulations, part 55, is proposed to be amended as follows:
Section 328 of the Clean Air Act (42 U.S.C. 7401
(e) * * *
(11) * * *
(i) * * *
(A) Commonwealth of Massachusetts Requirements Applicable to OCS Sources, March 9, 2018.
(a) State requirements.
(1) The following Commonwealth of Massachusetts requirements are applicable to OCS Sources, March 9, 2018, Commonwealth of Massachusetts—Department of Environmental Protection.
The following sections of 310 CMR 4.00, 310 CMR 6.00, 310 CMR 7.00 and 310 CMR 8.00:
(2) [Reserved]
The Commodity Credit Corporation (CCC) announces that it is inviting proposals for the 2019 Quality Samples Program (QSP). The QSP is administered by personnel of the Foreign Agricultural Service (FAS) on behalf of CCC. The intended effect of this notice is to solicit proposals from eligible applicants for fiscal year 2019 and to set out the criteria for the awarding of funds under the program. Future announcements of funding availability for the QSP program will be made through the
To be considered for funding, applications must be received by 5 p.m. Eastern Daylight Time, on Friday, June 8, 2018. Any proposals received after that date will be considered only if funds remain available. FAS anticipates that the initial funding selections will be made by the end of December 2018, with the initial award dates estimated to be by the end of February 2019.
Applicants needing assistance should contact the Program Operations Division, Office of Trade Programs, Foreign Agricultural Service
QSP participants will be responsible for procuring (or arranging for the procurement of) the commodity samples, exporting the samples, and providing the on-site technical assistance necessary to facilitate successful use of the samples by importers. Participants that are funded under this announcement may seek reimbursement from FAS for the sample purchase price and for the cost of transporting the samples domestically to the port of export and then to the first foreign port or first point of entry. Transportation costs from the first foreign port or first point of entry to the final destination are not eligible for reimbursement. FAS will not reimburse the costs incidental to purchasing and transporting samples, such as: Inspection or documentation fees, certificates of any kind, tariffs, demurrage, etc. Although providing technical assistance is required for all projects, the costs of providing such technical assistance are not reimbursable under the program. A QSP participant will be reimbursed after FAS reviews its reimbursement claim and determines that the claim is complete.
• Projects should benefit the represented U.S. industry and not a specific company or brand;
• Projects should develop a new market for a U.S. product, promote a new U.S. product, or promote a new use for a U.S. product rather than promote the substitution of one established U.S. product for another;
• Commodities provided under a QSP project must be available on a commercial basis and in sufficient supply;
• The QSP project must either subject the commodity sample to further processing or substantial transformation in the importing country, or the sample must be used in technical seminars in the importing country designed to demonstrate the proper preparation or use of the sample in the creation of an end product;
• Samples provided in a QSP project shall not be directly used as part of a retail promotion or supplied directly to consumers. However, the end product (that is, the product resulting from further processing, substantial transformation, or a technical preparation seminar) may be provided to end-use consumers to demonstrate the consumer preference for that end product to importers;
• Samples shall be in quantities less than a typical commercial sale and limited to the amount sufficient to achieve the project goal (
• Projects should be completed within one year of FAS approval.
QSP projects shall target foreign importers and audiences who:
• Have not previously purchased the U.S. commodity that will be supplied under QSP;
• Are unfamiliar with the variety, quality attributes, or end-use characteristics of the U.S. commodity;
• Have been unsuccessful in previous attempts to import, process, or market the U.S. commodity (
• Are interested in testing or demonstrating the benefits of the U.S. commodity; or
• Need technical assistance in processing or using the U.S. commodity.
It is anticipated that FAS will award approximately 15 awards under the 2019 QSP, subject to programmatic approval and available funding. In general, all qualified proposals received before the submission deadline will be reviewed against the evaluation criteria contained herein and funds will be awarded on a competitive basis. Funding for successful proposals will be provided through specific agreements between the applicant and FAS. These agreements will incorporate the proposal as approved by FAS. FAS must approve in advance any subsequent changes to the project.
Once an award reaches its completion date, FAS will confirm that the participant has provided all of the required reports and will review the reports for completeness and content. Once the required reports are approved, FAS will prepare a closeout letter that advises the participant of the award closeout procedures. Closeout letters must be countersigned and returned to FAS as soon as the final claim is submitted and paid, but within 60 days of receipt. Once the closeout procedures have been completed, any remaining funding on the agreement will be deobligated.
1.
Applicants must contact FAS' Program Operations Division to obtain UES website access information. The internet-based application may be found at the following URL address:
Applicants experiencing difficulty or otherwise needing assistance applying to the program should contact the Program Operations Division, Office of Trade Programs, Foreign Agricultural Service
Proposals should contain, at a minimum, the following:
(a) Organizational information, including:
• Organization's name, address, Chief Executive Officer (or designee), Federal Tax Identification Number (TIN), and DUNS number;
• Type of organization;
• Name, telephone number, fax number, and email address of the primary contact person;
• A description of the organization and its membership;
• A description of the organization's prior export promotion experience; and
• A description of the organization's ability to implement the required trade/technical assistance component.
(b) Market information, including:
• An assessment of the market;
• A long-term strategy in the market; and
• Appropriate trade data for the years 2016 through 2022.
(c) Project information, including:
• A brief project title;
• The amount of funding requested;
• The beginning and end dates for the proposed project;
• A brief description of the specific market development trade constraint or opportunity to be addressed by the project;
• A description of the activities planned to address the constraint or opportunity, including how the sample will be used in the end-use performance trial, the attributes of the sample to be demonstrated and its end-use benefit, and details of the trade/technical servicing component (including who will provide and fund this component);
• Projects should include performance measures for quantifying progress and demonstrating results. In the development of performance measures, FAS believes the measures should meet the following criteria:
○ Aligned: The indicator should, as closely as possible, measure exactly the relevant result.
○ Clear: The indicator should be precise and unambiguous about what is being measured and how. There should be no doubt on how to measure or interpret the indicator.
○ Quantifiable: The indicator(s) should sufficiently capture all of the elements of a result.
○ Include an identified methodology: The data can be obtained to inform the indicator in a timely and efficient manner and the data are of high-quality.
• A description of the sample to be provided (
• An itemized list of all estimated costs associated with the project for which reimbursement will be sought; and
• The importer's role in the project regarding handling and processing the commodity sample.
(d) Information indicating all funding sources and the amounts to be contributed by each entity in support of the proposed project. This may include the organization that submitted the proposal, private industry entities, host governments, foreign third parties, FAS, or other Federal agencies. Contributed resources may include cash, goods, or services.
In addition, in accordance with 2 CFR part 25, each entity that applies to the QSP and does not qualify for an exemption under 2 CFR 25.110 must:
(i) Be registered in the System for Award Management (SAM) prior to submitting an application or plan; and
(ii) Maintain an active SAM registration with current information at all times during which it has an active Federal award or an application or plan under consideration by FAS; and
(iii) Provide its DUNS number in each application or plan it submits to FAS.
FAS may not make an award to an applicant until the applicant has complied with all applicable unique entity identifier and SAM requirements, and, if an applicant has not fully complied with the requirements by the time FAS is ready to make the award, FAS may determine that the applicant is not qualified to receive an award and use that determination as a basis for making an award to another applicant.
Similarly, in accordance with 2 CFR part 170, each entity that applies to the QSP and does not qualify for an exception under 2 CFR 170.110(b) must ensure it has the necessary processes and systems in place to comply with the applicable reporting requirements of 2 CFR part 170 should it receive QSP funding.
• Proposals received by 5 p.m. Eastern Daylight Time, on Friday, June 8, 2018, will be considered for funding with other proposals received by that date;
• Proposals not approved for funding during the initial review period will be reconsidered for funding after the review period only if the applicant specifically requests such reconsideration in writing and only if funding remains available;
• Proposals received after 5 p.m. Eastern Daylight Time, on Friday, June 8, 2018, will be considered for funding in the order received only if funding remains available.
• Whether or not appropriate trade data for the years 2016-2022 is provided;
• Whether the benefits of the project would accrue to the entire industry;
• The appropriateness of the proposed sample size for the project;
• The ability of the organization to provide an experienced staff with the requisite technical and trade experience to execute the proposal;
• The extent to which the proposal is targeted to a market in which the United States is generally competitive;
• The potential for expanding commercial sales in the proposed market;
• The nature of the specific market constraint or opportunity identified and how well it is addressed by the proposal;
• The extent to which the importer's contribution in terms of handling and processing enhances the potential outcome of the project;
• The amount of reimbursement requested and the organization's willingness to contribute resources towards the project, including cash, goods, and services of the U.S. industry and foreign third parties; and
• How well the proposed technical assistance component assures that performance trials will effectively demonstrate the intended end-use benefit.
FAS will also review and evaluate how well the following unweighted criteria are addressed in the proposal:
• The quality of the performance measures and how effective they will be in demonstrating the impact of the project;
• The assessment of the market;
• The long-term strategy in the market; and
• Export goals in each country.
2.
In addition, FAS, prior to making a Federal award with a total amount of Federal share greater than the simplified acquisition threshold, is required to review and consider any information about the applicant that is in the designated integrity and performance system accessible through SAM (currently FAPIIS) (see 41 U.S.C. 2313). An applicant, at its option, may review information in the designated integrity and performance systems accessible through SAM and comment on any information about itself that a Federal awarding agency previously entered and is currently in the designated integrity and performance system accessible through SAM. FAS will consider any comments by the applicant, in addition to the other information in the designated integrity and performance system, in making a judgment about the applicant's integrity, business ethics, and record of performance under Federal awards when completing the review of risk posed by applicants as described in 2 CFR 200.205 “Federal awarding agency review of risk posed by applicants.”
1.
All successful applicants for all grant and cooperative agreements are required to comply with the Standard Administrative Terms and Conditions, which are available online at:
Before accepting the award the potential awardee should carefully read the approval letter and program agreement for instructions on administering the grant award and the terms and conditions associated with responsibilities under Federal Awards. Recipients must accept all conditions in this NOFA as well as any special terms and conditions in the approval letter and program agreement to receive an award under this program.
QSP projects are subject to review and verification by FAS' Compliance, Security, and Emergency Planning Division. Upon request, a QSP participant shall provide to FAS the original documents that support the participant's reimbursement claims. FAS may deny a claim for reimbursement if the claim is not supported by adequate documentation.
The Commodity Credit Corporation (CCC) announces that it is inviting proposals for the 2019 Technical Assistance for Specialty Crops (TASC) program. The TASC program is administered by personnel of the Foreign Agricultural Service (FAS) on behalf of CCC. The intended effect of this notice is to solicit proposals from the U.S. private sector and government agencies for fiscal year 2019 and to set out the criteria for the awarding of funds under the program. Future announcements of funding availability for the TASC program will be made through the
To be considered for funding, proposals must be received by 5 p.m. Eastern Daylight Time, on Friday, June 8, 2018. Any proposals received after this time will be considered only if funds remain available. FAS anticipates that the initial funding selections will be made by the end of December 2018, with the initial award dates estimated to be by the end of February 2019.
Applicants needing assistance should contact the Program Operations Division, Office of Trade Programs, Foreign Agricultural Service
This NOFA is being released prior to Congress appropriating funding for the TASC program for FY 2019. USDA makes no commitment to fund any particular application or to make a specific number of awards regardless of whether or at what level program funding for FY 2019 is provided.
Foreign organizations, whether government or private, may participate as third parties in activities carried out by eligible organizations, but are not
• Projects should identify and address a clear sanitary, phytosanitary, or technical barrier that prohibits or threatens the export of U.S. specialty crops;
• Projects should demonstrably benefit the represented industry rather than a specific company or brand;
• Projects must address barriers to exports of commercially-available U.S. specialty crops;
• Projects should include an explanation as to what specifically could not be accomplished without Federal funding assistance and why the eligible organization(s) would be unlikely to carry out the project without such assistance; and
• Projects should include performance measures for quantifying progress and demonstrating results. In the development of performance measures, FAS believes the measures should meet the following criteria:
○ Aligned: The indicator should, as closely as possible, measure exactly the relevant result.
○ Clear: The indicator should be precise and unambiguous about what is being measured and how. There should be no doubt on how to measure or interpret the indicator.
○ Quantifiable: The indicator(s) should sufficiently capture all of the elements of a result.
○ Include an identified methodology: The data can be obtained to inform the indicator in a timely and efficient manner and the data are of high-quality.
The full set of indicators selected to monitor project performance should be sufficient to inform project management and oversight.
Applicants may submit more than one proposal, and applicants with previously approved TASC proposals may apply for additional funding. However, the maximum number of approved projects that a TASC participant can have underway at any given time is five.
It is anticipated that FAS will award approximately 30 awards under the 2019 TASC, subject to programmatic approval and available funding. In general, all qualified proposals received before the submission deadline will compete for funding. FAS will review all proposals against the evaluation criteria contained in the program regulations.
Funding for successful proposals will be provided through specific agreements. These agreements will incorporate the proposal as approved by FAS. FAS must approve in advance any subsequent changes to the agreement. FAS or another Federal agency may be involved in the implementation of approved agreements.
Once an award reaches its completion date, FAS will confirm that the participant has provided all of the required reports and will review the reports for completeness and content. Once the required reports are approved, FAS will prepare a closeout letter that advises the participant of the award closeout procedures. Closeout letters must be countersigned and returned to FAS as soon as the final claim is submitted and paid, but within 60 days of receipt. Once the closeout procedures have been completed, any remaining funding on the agreement will be deobligated.
Although FAS highly recommends applying via the web-based UES, applicants have the option of submitting an application to FAS via email at
Applicants experiencing difficulty or otherwise needing assistance applying to the program should contact the Program Operations Division, Office of Trade Programs, Foreign Agricultural Service
In addition, in accordance with 2 CFR part 25, each entity that applies to the TASC and does not qualify for an exemption under 2 CFR 25.110 must:
(i) Be registered in the System for Award Management (SAM) prior to submitting an application or plan; and
(ii) Maintain an active SAM registration with current information at all times during which it has an active Federal award or an application or plan under consideration by FAS; and
(iii) Provide its DUNS number in each application or plan it submits to FAS.
FAS may not make an award to an applicant until the applicant has complied with all applicable unique entity identifier and SAM requirements, and, if an applicant has not fully complied with the requirements by the time FAS is ready to make the award, FAS may determine that the applicant is not qualified to receive an award and use that determination as a basis for making an award to another applicant.
Similarly, in accordance with 2 CFR part 170, each eligible organization that applies to the TASC program and does not qualify for an exception under 2 CFR 170.110(b) must ensure it has the necessary processes and systems in place to comply with the applicable reporting requirements of 2 CFR part 170 should it receive TASC funding.
• All proposals received via the UES or email by 5 p.m. Eastern Daylight Time, on Friday, June 8, 2018, will be considered for funding with other proposals received by that date;
• Proposals not approved for funding during the initial review period will be reconsidered for funding after the review period only if the applicant specifically requests such reconsideration in writing and only if funding remains available;
• Proposals received after 5 p.m. Eastern Daylight Time, on Friday, June 8, 2018, will be considered for funding in the order received only if funding remains available.
(1) The nature of the specific export barrier and the extent to which the proposal is likely to successfully remove, resolve, or mitigate that barrier (12.5%);
(2) The potential trade impact of the proposed project on market retention, market access, and market expansion, including the potential for expanding commercial sales in the targeted market (12.5%);
(3) The completeness and viability of the proposal. Among other things, this can include the cost of the project and the amount of other resources dedicated to the project, including cash, goods, and services of the U.S. industry and foreign third parties (15%);
(4) The ability of the organization to provide an experienced staff with the requisite technical and trade experience to execute the proposal (15%);
(5) The extent to which the proposal is targeted to a market in which the United States is generally competitive (17.5%);
(6) The degree to which time is essential to addressing specific export barriers (5%);
(7) The nature of the applicant organization, with a greater weight given to those organizations with the broadest base of producer representation (12.5%); and
(8) The effectiveness of the performance measures and potential of the performance measures to measure project results (10%).
In addition, FAS, prior to making a Federal award with a total amount of Federal share greater than the simplified acquisition threshold, is required to review and consider any information about the applicant that is in the designated integrity and performance system accessible through SAM (currently FAPIIS) (see 41 U.S.C. 2313). An applicant, at its option, may review information in the designated integrity and performance systems accessible through SAM and comment on any information about itself that a Federal awarding agency previously entered and is currently in the designated integrity and performance system accessible through SAM. FAS will consider any comments by the applicant, in addition to the other information in the designated integrity and performance system, in making a judgment about the applicant's integrity, business ethics, and record of performance under Federal awards when completing the review of risk posed by applicants as described in 2 CFR 200.205 “Federal awarding agency review of risk posed by applicants.”
Before accepting the award the potential awardee should carefully read the approval letter and program agreement for instructions on administering the grant award and the terms and conditions associated with responsibilities under Federal Awards. Recipients must accept all conditions in this NOFA as well as any special terms and conditions in the approval letter and program agreement to receive an award under this program.
The Commodity Credit Corporation (CCC) announces that it is inviting applications for the 2019 Market Access Program (MAP). The MAP is administered by personnel of the Foreign Agricultural Service (FAS) on behalf of CCC. The intended effect of this notice is to solicit proposals from eligible applicants for fiscal year 2019 and to set out the criteria for the awarding of funds under the program.
All applications must be received by 5 p.m. Eastern Daylight Time, on Friday, June 8, 2018. Applications received after this date will not be considered. FAS anticipates that the initial funding selections will be made by the end of October 2018, with the initial award dates estimated to be by the end of December 2018.
Applicants needing assistance should contact the Program Operations Division, Office of Trade Programs, Foreign Agricultural Service
The MAP is authorized under Section 203 of the Agricultural Trade Act of 1978 (7 U.S.C. 5623), as amended. MAP regulations appear at 7 CFR part 1485.
FAS allocates funds in a manner that effectively supports the strategic decision-making initiatives of the Government Performance and Results Act (GPRA) of 1993. In deciding whether a proposed project will contribute to the effective creation, expansion, or maintenance of foreign markets, FAS considers whether the applicant provides a clear, long-term agricultural trade strategy and an effective program time line against which results can be measured at specific intervals using quantifiable product or country goals. FAS also considers the extent to which a proposed project targets markets with the greatest growth potential. These factors are part of the FAS resource allocation strategy to fund applicants who can best demonstrate performance and address the objectives of the GPRA.
The degree of commitment of an applicant to the promotional strategies contained in its application, as represented by the cost-share contributions specified therein, is considered by FAS when determining which applications will be approved for funding. Cost-share may be actual cash invested or in-kind contributions, such as professional staff time spent on the design and implementation of activities. The MAP regulations, in section 1485.16, provide a detailed discussion of eligible and ineligible cost-share contributions.
It is anticipated that FAS will award approximately 70 awards under the 2019 MAP, subject to programmatic approval and available funding. In general, all qualified proposals received before the submission deadline will compete for funding. FAS will review all proposals against the evaluation criteria contained in the program regulations.
Funding for successful proposals will be provided through specific agreements. FAS must approve in advance any subsequent changes to the agreement. FAS or another Federal agency may be involved in the implementation of approved agreements.
Once an award reaches its completion date, FAS will confirm that the participant has provided all of the required reports and will review the reports for completeness and content. Once the required reports are approved, FAS will prepare a closeout letter that advises the participant of the award closeout procedures. Once the closeout procedures have been completed, any remaining funding on the agreement will be deobligated.
Applicants experiencing difficulty or otherwise needing assistance applying to the program should contact the Program Operations Division, Office of Trade Programs, Foreign Agricultural Service
In addition, in accordance with 2 CFR part 25, each entity that applies to the MAP and does not qualify for an exemption under 2 CFR 25.110 must:
(i) Be registered in the System for Award Management (SAM) prior to submitting an application or plan; and
(ii) Maintain an active SAM registration with current information at all times during which it has an active Federal award or an application or plan under consideration by FAS; and
(iii) Provide its DUNS number in each application or plan it submits to FAS.
FAS may not make an award to an applicant until the applicant has complied with all applicable unique entity identifier and SAM requirements, and, if an applicant has not fully complied with the requirements by the time FAS is ready to make the award, FAS may determine that the applicant is not qualified to receive an award and use that determination as a basis for making an award to another applicant.
Similarly, in accordance with 2 CFR part 170, each entity that applies to MAP and does not qualify for an exception under 2 CFR 170.110(b) must ensure it has the necessary processes and systems in place to comply with the applicable reporting requirements of 2 CFR part 170 should it receive MAP funding.
(1) Phase 1—Sufficiency Review and FAS Divisional Review: Applications received by the closing date will be reviewed by FAS to determine the eligibility of the applicants and the completeness of the applications. These requirements appear in sections 1485.12 and 1485.13 of the MAP regulations. Applications that meet the requirements will then be further evaluated by the appropriate Commodity Branch office of FAS' Cooperator Programs Division. The Commodity Branches will review each application against the criteria listed in section 1485.14(b) and (c) of the MAP regulations as well as in this Notice. The purpose of this review is to identify meritorious proposals and to recommend an appropriate funding level for each application based upon these criteria.
(2) Phase 2—Competitive Review: Meritorious applications then will be passed on to the Office of the Deputy Administrator, Office of Trade Programs, for the purpose of allocating available funds among the applicants. Applicants will compete for funds on the basis of the following allocation criteria as applicable (the number in parentheses represents the percentage weight factor):
(a) Applicant's Contribution Level (40): The applicant's 4-year average share (2016-2019) of all contributions under the MAP compared to the applicant's 4-year average share (2016-2019) of the funding level for all MAP Participants.
(b) Past U.S. Export Performance (30): The 3-year average share (2015-2017) of the value of U.S. exports promoted by the applicant compared to the applicant's 2-year average share (2017-2018) of the funding level for all MAP Participants plus, for those groups participating in the Cooperator program, the 2-year average share (2017-2018) of all Cooperator program budgets.
(c) Projected U.S. Export Goals (15): The total dollar value of projected U.S. exports of the commodities being promoted by the applicant for the year 2019 compared to the applicant's requested funding level.
(d) Accuracy of Past U.S. Export Projections (15): The actual dollar value share of U.S. exports of the commodities being promoted by the applicant for the year 2017 as reported in the 2019 MAP application compared to the projection of U.S. exports for 2017 as specified in the 2017 MAP application.
The Commodity Branches' recommended funding levels for each applicant are adjusted by each weight factor as described above to determine the amount of funds allocated to each applicant.
In addition, FAS, prior to making a Federal award with a total amount of Federal share greater than the simplified acquisition threshold, is required to review and consider any information about the applicant that is in the designated integrity and performance system accessible through SAM (currently FAPIIS) (see 41 U.S.C. 2313). An applicant, at its option, may review information in the designated integrity and performance systems accessible through SAM and comment on any information about itself that a Federal awarding agency previously entered and is currently in the designated integrity and performance system accessible through SAM. FAS will consider any comments by the applicant, in addition to the other information in the designated integrity and performance system, in making a judgment about the applicant's integrity, business ethics, and record of performance under Federal awards when completing the review of risk posed by applicants as described in 2 CFR 200.205 “Federal awarding agency review of risk posed by applicants.”
Before accepting the award the potential awardee should carefully read the approval letter and program agreement for instructions on administering the grant award and the terms and conditions associated with responsibilities under Federal Awards. Recipients must accept all conditions in this NOFA as well as any special terms and conditions in the approval letter and program agreement to receive an award under this program.
The Commodity Credit Corporation (CCC) announces that it is inviting proposals for the 2019 Emerging Markets Program (EMP). The EMP is administered by personnel of the Foreign Agricultural Service (FAS) on
To be considered for funding, proposals must be received by 5 p.m. Eastern Daylight Time, on Friday, June 8, 2018. Any proposals received after this time will be considered only if funds remain available. FAS anticipates that the initial funding selections will be made by the end of December 2018, with the initial award dates estimated to be by the end of February 2019.
Applicants needing assistance should contact the Program Operations Division, Office of Trade Programs, Foreign Agricultural Service
(a) Assistance to teams consisting primarily of U.S. individuals expert in assessing the food and rural business systems of other countries to enable such teams to make assessments of the food and rural business systems needs of the target market. This type of EMP project must include all three of the following:
• Conduct an assessment of the food and rural business system needs of an emerging market;
• Make recommendations on measures necessary to enhance the effectiveness of those systems; and
• Identify opportunities and projects to enhance the effectiveness of the emerging market's food and rural business systems in order to grow U.S. exports.
To be eligible, such proposals must clearly demonstrate that experts are primarily agricultural consultants, farmers, other persons from the private sector, or government officials and that they have expertise in assessing the food and rural business systems of other countries.
(b) Assistance to enable individuals from emerging markets to travel to the United States so that these individuals can, for the purpose of enhancing the food and rural business systems in their countries, consult with food and rural business system experts in the United States.
(c) Assistance to enable U.S. agricultural producers and other individuals knowledgeable in agricultural and agribusiness matters to travel to emerging markets to assist in transferring their knowledge and expertise to entities in the emerging market to enhance the market's food and rural business systems in support of U.S. exports. Such travel must be to emerging markets. Travel to developed markets is not eligible under the program even if the targeted market is an emerging market.
(d) Technical assistance to implement the recommendations or to carry out projects and/or opportunities identified under 4(a) above. Technical assistance that does not implement the recommendations, projects, and/or opportunities identified under 4(a) above is not eligible under the EMP.
Proposals that do not fall into one or more of the four categories above, regardless of previous guidance provided regarding the EMP, are not eligible for consideration under the program.
It is anticipated that FAS will award approximately 40 awards under the 2019 EMP, subject to programmatic approval and available funding. In general, all qualified proposals received before the application deadline will compete for EMP funding. The applicant's willingness to contribute resources towards the project, including cash, goods, and services, is an important factor in determining which proposals are funded under the EMP. Each proposal will also be judged on the potential benefits to the industry represented by the applicant and the degree to which the proposal demonstrates industry support.
Funding for successful proposals will be provided through specific agreements. Applicants approved for funding must provide annual progress reports and a final performance report to FAS. Changes in the original project timelines and adjustments within project budgets must be approved in advance by FAS. All reports will be submitted through the Unified Export Strategy system.
Once an award reaches its completion date, FAS will confirm that the participant has provided all of the required reports and will review the reports for completeness and content. Once the required reports are approved, FAS will prepare a closeout letter that advises the participant of the award closeout procedures. Closeout letters must be countersigned and returned to FAS as soon as the final claim is submitted and paid, but within 60 days of receipt. Once the closeout procedures have been completed, any remaining funding on the agreement will be deobligated.
EMP funds awarded to government agencies must be expended or otherwise obligated by close of business September 30, 2019.
Applicants are strongly encouraged to submit their applications to FAS through the web-based UES application. The internet-based format reduces paperwork and expedites FAS' processing and review cycle. Applicants planning to use the on-line UES system must first contact the Program Operations Division to obtain site access information. The internet-based application is located at the following URL address:
Although FAS highly recommends applying via the UES, applicants also have the option of submitting an electronic application to FAS via email to
Applicants experiencing difficulty or otherwise needing assistance applying to the program should contact the Program Operations Division, Office of Trade Programs, Foreign Agricultural Service
Applications should be no longer than ten (10) pages and include the following information:
(a) Date of proposal;
(b) Name of organization submitting proposal;
(c) Organization address, telephone, and fax;
(d) Tax ID number;
(e) DUNS number;
(f) Primary contact person;
(g) Full title of proposal;
(h) Target market(s);
(i) Specific description of activity/activities to be undertaken;
(j) Clear demonstration that successful implementation will enhance the emerging market's food and rural business system, including, if applicable, potential reductions in trade barriers, and will benefit the industry as a whole and not just the applicant(s);
(k) Current conditions and market analysis (production, supply, demand, import competition, U.S. trade) in the target market(s) affecting the commodity or product;
(l) Description of the need to assess the food and rural business systems of the emerging market, or of the recommendations, projects, and/or opportunities previously identified by an approved EMP assessment that are to be addressed by the project;
(m) Project objectives that are focused and clearly explained and for which there is a clear and logical connection between the constraints, project objectives, activity descriptions, and expected results;
(n) Projects should include performance measures for quantifying progress and demonstrating results. In the development of performance measures, FAS believes the measures should meet the following criteria:
•
•
•
•
(o) Explanation of the underlying reasons for the project proposal and its approach, the anticipated benefits, and any additional pertinent analysis;
(p) Explanation as to what specifically could not be accomplished without Federal funding assistance and why the participating organization(s) would be unlikely to carry out the project without such assistance;
(q) Timeline(s) for implementation of activity, including start and end dates;
(r) Information on whether similar activities are or have previously been funded with USDA or U.S. Government resources in the target country or countries (
(s) Detailed line item activity budgets:
• Individual expense items (
(1) Which items are to be covered by EMP funding;
(2) Which are to be covered by the participating U.S. organization(s); and
(3) Which are to be covered by foreign third parties (if applicable);
• Cost line items for consultant fees should show the calculation of the daily rate and the number of days;
• Cost line items for travel expenses should show the number of trips and the destination, the number of travelers, cost, and objective for each trip; and
(t) Qualifications of applicant(s) should be included as an attachment.
In addition, in accordance with 2 CFR part 25, each entity that applies to the EMP and does not qualify for an exemption under 2 CFR 25.110 must:
(i) Be registered in the System for Award Management (SAM) prior to submitting an application or plan; and
(ii) Maintain an active SAM registration with current information at all times during which it has an active Federal award or an application or plan under consideration by FAS; and
(iii) Provide its DUNS number in each application or plan it submits to FAS.
FAS may not make an award to an applicant until the applicant has complied with all applicable unique entity identifier and SAM requirements, and, if an applicant has not fully complied with the requirements by the time FAS is ready to make the award, FAS may determine that the applicant is not qualified to receive an award and use that determination as a basis for making an award to another applicant.
Similarly, in accordance with 2 CFR part 170, each entity that applies to the EMP and does not qualify for an exception under 2 CFR 170.110(b) must ensure it has the necessary processes and systems in place to comply with the applicable reporting requirements of 2 CFR part 170 should it receive EMP funding.
• All proposals received via the UES or email by 5 p.m. Eastern Daylight Time, on Friday, June 8, 2018, will be considered for funding with other proposals received by that date;
• Proposals not approved for funding during the initial review period will be reconsidered for funding after the review period only if the applicant specifically requests such reconsideration in writing and only if funding remains available;
• Proposals received after 5 p.m. Eastern Daylight Time, on Friday, June 8, 2018, will be considered for funding in the order received only if funding remains available.
• Appropriateness of the Activity (30%), which will vary based on the type of proposal but will include:
•
•
•
• Market Impact (50%), including the degree to which the proposed project is likely to contribute to the development, maintenance, or expansion of U.S. agricultural exports to emerging markets; the conditions or constraints affecting the level of U.S. exports and
• Completeness and Viability of the proposal (20%), including evidence that the organization has the knowledge, expertise, ability, and resources to successfully implement the project, the entity's willingness to contribute resources to the project, and the applicant's reported past EMP results and evaluations, if applicable.
Before accepting the award the potential awardee should carefully read the award package for instructions on administering the grant award and the terms and conditions associated with responsibilities under Federal Awards. Recipients must accept all conditions in this NOFA as well as any special terms and conditions in the approval letter and program agreement to receive an award under this program.
The Commodity Credit Corporation (CCC) announces that it is inviting proposals for the 2019 Foreign Market Development Cooperator (Cooperator) program. The Cooperator program is administered by personnel of the Foreign Agricultural Service (FAS) on behalf of CCC. The intended effect of this notice is to solicit applications from eligible applicants for fiscal year 2019 and to set out criteria for the awarding of funds under the program.
All applications must be received by 5 p.m. Eastern Daylight Time, on Friday, June 8, 2018. Applications received after this date will not be considered. FAS anticipates that the initial funding selections will be made by the end of October 2018, with the initial award dates estimated to be by the end of December 2018.
Applicants needing assistance should contact the Program Operations Division, Office of Trade Programs, Foreign Agricultural Service
FAS allocates funds in a manner that effectively supports the strategic decision-making initiatives of the Government Performance and Results Act (GPRA) of 1993. In deciding whether a proposed project will contribute to the effective creation, expansion, or maintenance of foreign markets, FAS considers whether the applicant provides a clear, long-term agricultural trade strategy and an effective program time line against which results can be measured at specific intervals using quantifiable product or country goals. FAS also considers the extent to which a proposed project targets markets with the greatest growth potential. These factors are part of the FAS resource allocation strategy to fund applicants who can demonstrate performance and address the objectives of the GPRA.
The degree of commitment of an applicant to the promotional strategies contained in its application, as represented by the cost-share contributions specified therein, is considered by FAS when determining which applications will be approved for funding. Cost-share may be actual cash invested or in-kind contributions, such as professional staff time spent on the design and implementation of activities. The Cooperator program regulations, including sections 1484.50 and 1484.51, provide detailed discussion of eligible and ineligible cost-share contributions.
It is anticipated that FAS will award approximately 25 awards under the 2019 Cooperator program, subject to programmatic approval and available funding. In general, all qualified proposals received before the submission deadline will compete for funding. FAS will review all proposals against the evaluation criteria contained in the program regulations.
Funding for successful proposals will be provided through specific agreements. FAS must approve in advance any subsequent changes to the agreement. FAS or another Federal agency may be involved in the implementation of approved agreements.
Once an award reaches its completion date, FAS will confirm that the participant has provided all of the required reports and will review the reports for completeness and content. Once the required reports are approved, FAS will prepare a closeout letter that advises the participant of the award closeout procedures. Once the closeout procedures have been completed, any remaining funding on the agreement will be deobligated.
Applicants experiencing difficulty or otherwise needing assistance applying to the program should contact the Program Operations Division, Office of Trade Programs, Foreign Agricultural Service
In addition, in accordance with 2 CFR part 25, each entity that applies to the Cooperator program and does not qualify for an exemption under 2 CFR 25.110 must:
(i) Be registered in the System for Award Management (SAM) prior to submitting an application or plan; and
(ii) Maintain an active SAM registration with current information at all times during which it has an active Federal award or an application or plan under consideration by FAS; and
(iii) Provide its DUNS number in each application or plan it submits to FAS.
FAS may not make an award to an applicant until the applicant has complied with all applicable unique entity identifier and SAM requirements, and, if an applicant has not fully complied with the requirements by the time FAS is ready to make the award, FAS may determine that the applicant is not qualified to receive an award and use that determination as a basis for making an award to another applicant.
Similarly, in accordance with 2 CFR part 170, each entity that applies to the Cooperator program and does not qualify for an exception under 2 CFR 170.110(b) must ensure it has the necessary processes and systems in place to comply with the applicable reporting requirements of 2 CFR part 170 should it receive funding under the Cooperator program.
Applications received by the closing date will be reviewed by FAS to determine the eligibility of the applicants and the completeness of the applications. These requirements appear in sections 1484.14 and 1484.20 of the Cooperator program regulations as well as in this Notice. Applications that meet the requirements will be further evaluated by the appropriate Commodity Branch office of FAS' Cooperator Programs Division. The Commodity Branch will review each application against the criteria listed in section 1484.21 of the Cooperator program regulations as well as in this Notice. The purpose of this review is to identify meritorious proposals. The Commodity Branch then recommends an appropriate funding level for each application for consideration by the Office of the Deputy Administrator, Office of Trade Programs.
Meritorious applications are passed on to the Office of the Deputy Administrator, Office of Trade Programs, for the purpose of allocating available funds among those applicants. Applicants will compete for funds on the basis of the following allocation criteria as appropriate (the number in parentheses represents the percentage weight factor):
(a)
(b) Past U.S. Export Performance (20): The 6-year average share (2013-2018) of the value of U.S. exports promoted by the applicant compared to the applicant's 6-year average share (2013-2018) of the funding level for all Cooperator participants plus, for those groups participating in the MAP program, the 6-year average share (2013-2018) of all MAP budgets.
(c) Past Demand Expansion Performance (20): The 6-year average share (2013-2018) of the total value of world trade of the commodities promoted by the applicant compared to the applicant's 6-year average share (2013-2018) of all Cooperator program expenditures plus, for those groups participating in the MAP program, a 6-year average share (2013-2018) of all MAP expenditures.
The Commodity Branches' recommended funding levels for each applicant are adjusted by each weight factor as described above to determine the amount of funds allocated to each applicant.
In addition, FAS, prior to making a Federal award with a total amount of Federal share greater than the simplified acquisition threshold, is required to review and consider any information about the applicant that is in the designated integrity and performance system accessible through SAM (currently FAPIIS) (see 41 U.S.C. 2313). An applicant, at its option, may review information in the designated integrity and performance systems accessible through SAM and comment on any information about itself that a Federal awarding agency previously entered and is currently in the designated integrity and performance system accessible through SAM. FAS will consider any comments by the applicant, in addition to the other information in the designated integrity and performance system, in making a judgment about the applicant's integrity, business ethics, and record of performance under Federal awards when completing the review of risk posed by applicants as described in 2 CFR 200.205 “Federal awarding agency review of risk posed by applicants.”
Before accepting the award the potential awardee should carefully read the approval letter and program agreement for instructions on administering the grant award and the terms and conditions associated with responsibilities under Federal Awards. Recipients must accept all conditions in this NOFA as well as any special terms and conditions in the approval letter and program agreement to receive an award under this program.
National Institute of Standards and Technology, Department of Commerce.
Notice.
The National Institute of Standards and Technology (NIST) invites organizations to provide products and technical expertise to support and demonstrate security platforms for the Securing Picture Archiving and Communication System (PACS) Cybersecurity for the healthcare sector. This notice is the initial step for the National Cybersecurity Center of Excellence (NCCoE) in collaborating with technology companies to address cybersecurity challenges identified under the healthcare sector program. Participation in the use case is open to all interested organizations.
Collaborative activities will commence as soon as enough completed and signed letters of interest have been returned to address all the necessary components and capabilities, but no earlier than June 8, 2018.
The NCCoE is located at 9700 Great Seneca Highway, Rockville, MD 20850. Letters of interest must be submitted to
Andrea Arbelaez via email to
Interested parties must contact NIST to request a letter of interest template to be completed and submitted to NIST. Letters of interest will be accepted on a first come, first served basis. When the use case has been completed, NIST will post a notice on the NCCoE healthcare sector program website at
Interested parties should contact NIST using the information provided in the
To provide guidance and a referenceable architecture for securing the Picture Archiving and Communication System (PACS) ecosystem in Healthcare Delivery Organizations (HDOs), and to include an example solution using existing, commercially and open-source available cybersecurity products.
A detailed description of the Securing Picture Archiving and Communication System (PACS) Cybersecurity for the healthcare sector is available at:
Each responding organization's letter of interest should identify how their products address one or more of the following desired security characteristics in section 2 of the Securing Picture Archiving and Communication System (PACS) Cybersecurity for the healthcare sector use case (for reference, please see the link in the PROCESS section above):
The primary security functions and processes to be implemented for this project are listed below and are based on the NIST Cybersecurity Framework (CSF).
Responding organizations need to understand and, in their letters of interest, commit to provide:
1. Access for all participants' project teams to component interfaces and the organization's experts necessary to make functional connections among security platform components
2. Support for development and demonstration of the Securing Picture Archiving and Communication System (PACS) Cybersecurity for the healthcare sector use case in NCCoE facilities which will be conducted in a manner consistent with the following standards and guidance: FIPS 200, FIPS 201, SP 800-53 and FIPS 140-2, SP 800-30, SP 800-37, SP 800-39, SP 800-41, SP 800-52, SP 800-57, SP 800-63-3, SP 800-66, SP 800-77, SP 800-95, SP 800-144, SP 800-146, SP 800-171, SP 800-181, ISO 12052:2011 Health Informatics—Digital Imaging and Communication in Medicine (DICOM) including Workflow and Data Management, AAMI TIR57, ANSI/AAMI/IEC 80001-1:2010, IEC Technical Report 80001-2-1, IEC Technical Report 80001-2-2, internet Engineering Task Force Request for Comments 4301, Food & Drug Administration (FDA) Content of Premarket Submissions for Management of Cybersecurity in Medical Devices, FDA Postmark Management of Cybersecurity in Medical Devices, FDA Guidance for Industry—Cybersecurity for Networked Medical Devices Containing Off-the-Shelf Software, FDA Guidance for Submission of Premarket Notifications for Medical Image Management Devices, FDA Medical Device Data Systems, Medical Image Storage Devices, Medical Image Communications Device, Department of Health & Human Services Office for Civil Rights Health Insurance Portability and Accountability Act Security Rule Crosswalk to NIST Cybersecurity Framework, Department of Homeland Security Attack Surface: Healthcare and Public Sector, Integrating the Healthcare Enterprise Radiology Technical Framework.
Additional details about the Securing Picture Archiving and Communication System (PACS) Cybersecurity for the healthcare sector use case are available at:
NIST cannot guarantee that all of the products proposed by respondents will be used in the demonstration. Each prospective participant will be expected to work collaboratively with NIST staff and other project participants under the terms of the consortium CRADA in the development of the Securing Picture Archiving and Communication System (PACS) Cybersecurity for the healthcare sector capability. Prospective participants' contribution to the collaborative effort will include assistance in establishing the necessary interface functionality, connection and set-up capabilities and procedures, demonstration harnesses, environmental and safety conditions for use, integrated platform user instructions, and demonstration plans and scripts necessary to demonstrate the desired capabilities. Each participant will train NIST personnel, as necessary, to operate its product in capability demonstrations to the healthcare community. Following successful demonstrations, NIST will publish a description of the security platform and its performance characteristics sufficient to permit other organizations to develop and deploy security platforms that meet the security objectives of the Securing Picture Archiving and Communication System (PACS) Cybersecurity for the healthcare sector use case. These descriptions will be public information.
Under the terms of the consortium CRADA, NIST will support development of interfaces among participants' products by providing IT infrastructure, laboratory facilities, office facilities, collaboration facilities, and staff support to component composition, security platform documentation, and demonstration activities.
The dates of the demonstration of the Securing Picture Archiving and Communication System (PACS) Cybersecurity for the healthcare sector capability will be announced on the NCCoE website at least two weeks in advance at
For additional information on the NCCoE governance, business processes, and NCCoE operational structure, visit the NCCoE website
National Oceanic and Atmospheric Administration (NOAA), Commerce.
Notice.
The Department of Commerce, as part of its continuing effort to reduce paperwork and respondent burden, invites the general public and other Federal agencies to take this opportunity to comment on proposed and/or continuing information collections, as required by the Paperwork Reduction Act of 1995.
Written comments must be submitted on or before July 9, 2018.
Direct all written comments to Jennifer Jessup, Departmental Paperwork Clearance Officer, Department of Commerce, Room 6616, 14th and Constitution Avenue NW, Washington, DC 20230 (or via the internet at
Requests for additional information or copies of the information collection instrument and instructions should be directed to Liz Chilton, (301) 427-8201 or
The National Oceanic and Atmospheric Administration (NOAA), National Marine Fisheries Service (NMFS) deploys fishery observers on United States (U.S.) commercial fishing vessels and to fish processing plants in order to collect biological and economic data. NMFS has at least one observer program in each of its five Regions. These observer programs provide the most reliable and effective method for obtaining information that is critical for the conservation and management of living marine resources. Observer programs primarily obtain information through direct observations by employees or agents of NMFS; and such observations are not subject to the Paperwork Reduction Act (PRA). However, observer programs also collect the following information that requires clearance under the PRA: (1) Standardized questions of fishing vessel captains/crew or fish processing plant managers/staff, which include gear and performance questions, safety questions, and trip costs, crew size and other economic questions; (2) questions asked by observer program staff/contractors to plan observer deployments; (3) forms that are completed by observers and that fishing vessel captains are asked to review and sign; (4) questionnaires to evaluate observer performance; and (5) a form to certify that a fisherman is the permit holder when requesting observer data from the observer on the vessel. NMFS seeks to renew OMB PRA clearance for these information collections.
The information collected will be used to: (1) Monitor catch and bycatch in federally managed commercial fisheries; (2) understand the population status and trends of fish stocks and protected species, as well as the interactions between them; (3) determine the quantity and distribution of net benefits derived from living marine resources; (4) predict the biological, ecological, and economic impacts of existing management action and proposed management options; and (5) ensure that the observer programs can safely and efficiently collect the information required for the previous four uses. In particular, these biological and economic data collection programs contribute to legally mandated analyses required under the Magnuson-Stevens Fishery Conservation and Management Act (MSA), the Endangered Species Act (ESA), the Marine Mammal Protection Act (MMPA), the National Environmental Policy Act (NEPA), the Regulatory Flexibility Act (RFA), Executive Order 12866 (E.O. 12866), as well as a variety of state statutes. The confidentiality of the data will be protected as required by the MSA, Section 402(b).
The information will be collected by (1) NMFS observers while they are deployed on a vessel to observe a particular fishing trip; questions will be asked in-person to the captain, crew and/or owner (if on board the vessel) during the course of the observed trip; (2) via mail through follow up surveys of economic information not available during the trip; (3) via telephone or mail survey by the observer program staff or contractor planning to deploy observers; or (4) via feedback questionnaires mailed to the vessel owners or captains to evaluate observer performance.
Comments are invited on: (a) Whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility; (b) the accuracy of the agency's estimate of the burden (including hours and cost) of the proposed collection of information; (c) ways to enhance the quality, utility, and clarity of the information to be collected; and (d) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology.
Comments submitted in response to this notice will be summarized and/or included in the request for OMB approval of this information collection; they also will become a matter of public record.
National Oceanic and Atmospheric Administration (NOAA), Commerce.
Notice.
The Department of Commerce, as part of its continuing effort to reduce paperwork and respondent burden, invites the general public and other Federal agencies to take this opportunity to comment this continuing information collection, as required by the Paperwork Reduction Act of 1995.
Written comments must be submitted on or before July 9, 2018.
Direct all written comments to Jennifer Jessup, Departmental Paperwork Clearance Officer, Department of Commerce, Room 6616, 14th and Constitution Avenue NW, Washington, DC 20230 (or via the internet at
Requests for additional information or copies of the information collection instrument and instructions should be directed to Gabrielle Aberle, 907-586-7228.
This request is for extension of a currently approved information collection.
Amendment 82 to the Fishery Management Plan for Groundfish of the Bering Sea and Aleutian Islands Management Area (FMP) established a framework for the management of the Aleutian Islands subarea (AI) directed pollock fishery. An AI pollock fishery was allocated to the Aleut Corporation, Adak, Alaska, for the purpose of economic development in Adak, Alaska.
Each year at least 14 days before harvesting pollock or processing pollock in the AI directed pollock fishery, the Aleut Corporation selects harvesting vessels and processors for participation in this fishery. The Aleut Corporation submits its selected participants to the National Marine Fisheries Service (NMFS) for approval. On approval, NMFS mails the Aleut Corporation a letter that includes a list of the approved participants. A copy of this letter must be retained on board each participating vessel and on site each shoreside processor at all times.
The Aleut Corporation submits the participant letter to NMFS by mail.
Comments are invited on: (a) Whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility; (b) the accuracy of the agency's estimate of the burden (including hours and cost) of the proposed collection of information; (c) ways to enhance the quality, utility, and clarity of the information to be collected; and (d) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology.
Comments submitted in response to this notice will be summarized and/or included in the request for OMB approval of this information collection; they also will become a matter of public record.
The Department of Commerce will submit to the Office of Management and Budget (OMB) for clearance the following proposal for collection of information under the provisions of the Paperwork Reduction Act (44 U.S.C. Chapter 35).
The objective of the short survey will be to understand how anglers respond to changes in trip costs and fishing regulations in the Gulf of Mexico. We are conducting this survey to improve our ability to predict changes the number of fishing trips anticipated with changes in economic conditions or fishing regulations. This will improve the analysis of the economic effects of proposed changes in fishing regulations and changes in economic factors that affect the cost of fishing such as fuel prices.
The population consists of those anglers who fish in the Gulf of Mexico from Florida, including those who possess a license to fish, and those who are not required to have a license (
This information collection request may be viewed at
Written comments and recommendations for the proposed information collection should be sent within 30 days of publication of this notice to
National Marine Fisheries Service (NMFS), National Oceanic and Atmospheric Administration (NOAA), Commerce.
Notice; receipt of application for Letter of Authorization; request for comments and information.
NMFS has received a request from Hilcorp Alaska, LLC (Hilcorp) for authorization to take small numbers of marine mammals incidental to the construction and operation of the Liberty Drilling and Production Island (LDPI) in Foggy Island Bay, Beaufort Sea, Alaska, over the course of five years from the date of issuance. Pursuant to regulations implementing the Marine Mammal Protection Act (MMPA), NMFS is announcing receipt of Hilcorp's request for the development and implementation of regulations governing the incidental taking of marine mammals. NMFS invites the public to provide information, suggestions, and comments on Hilcorp's application and request.
Comments and information must be received no later than June 8, 2018.
Comments on the applications should be addressed to Jolie Harrison, Chief, Permits and Conservation Division, Office of Protected Resources, National Marine Fisheries Service. Physical comments should be sent to 1315 East-West Highway, Silver Spring, MD 20910 and electronic comments should be sent to
Jaclyn Daly, Office of Protected Resources, NMFS, (301) 427-8401. An electronic copy of the Hilcorp's application may be obtained online at
Sections 101(a)(5)(A) and (D) of the MMPA (16 U.S.C. 1361
An incidental take authorization shall be granted if NMFS finds that the taking will have a negligible impact on the species or stock(s), will not have an unmitigable adverse impact on the availability of the species or stock(s) for subsistence uses (where relevant), and if the permissible methods of taking and requirements pertaining to the mitigation, monitoring and reporting of such takings are set forth.
NMFS has defined “negligible impact” in 50 CFR 216.103 as an impact resulting from the specified activity that cannot be reasonably expected to, and is not reasonably likely to, adversely affect the species or stock through effects on annual rates of recruitment or survival.
The MMPA states that the term “take” means to harass, hunt, capture, kill or attempt to harass, hunt, capture, or kill any marine mammal.
Except with respect to certain activities not pertinent here, the MMPA defines “harassment” as any act of pursuit, torment, or annoyance, which (i) has the potential to injure a marine mammal or marine mammal stock in the wild (Level A harassment); or (ii) has the potential to disturb a marine mammal or marine mammal stock in the wild by causing disruption of behavioral patterns, including, but not limited to, migration, breathing, nursing, breeding, feeding, or sheltering (Level B harassment).
On April 26, 2018, NMFS received an adequate and complete application from Hilcorp requesting authorization for take of marine mammals incidental to construction, drilling, and production activities related to the construction and operation of the LDPI in Foggy Island Bay, Alaska. The requested regulations and LOA would be valid for five years from November 1, 2019 through October 31, 2024. Hilcorp plans to conduct necessary work, including impact and vibratory pile driving, ice road construction, drilling, and production to construct, install, and operate the LDPI. The proposed action may incidentally expose marine mammals occurring in the vicinity to elevated levels of underwater sound and human presence, thereby resulting in incidental take, by Level A and Level B harassment of cetaceans and pinnipeds, and potentially mortality of pinnipeds (from ice road construction) in Foggy Island Bay. Therefore, Hilcorp requests authorization to incidentally take marine mammals.
Hilcorp is proposing to develop the Liberty Oil Field reservoir, located on the Outer Continental Shelf in Foggy Island Bay, Beaufort Sea, Alaska. Total recovery over an estimated field life of 15 to 20 years is predicted to be in the range of 80 to 150 million stock tank barrels of oil. To extract the oil, Hilcorp is proposing to construct a 9.3 acre artificial island (the LDPI) in 19 feet (5.8 meters) of water in Foggy Island Bay, approximately 5 miles (8 kilometers) north of the Kadleroshilik River and install supporting infrastructure (
Interested persons may submit information, suggestions, and comments concerning Hilcorp's request (see
The Department of Commerce will submit to the Office of Management and Budget (OMB) for clearance the following proposal for collection of information under the provisions of the Paperwork Reduction Act (44 U.S.C. Chapter 35).
This information collection request may be viewed at
Written comments and recommendations for the proposed information collection should be sent within 30 days of publication of this notice to
Commodity Futures Trading Commission.
Notice of renewal.
The Commodity Futures Trading Commission (Commission) is publishing this notice to announce the renewal of the Market Risk Advisory Committee (MRAC). The Commission has determined that the renewal of the MRAC is necessary and in the public's interest, and the Commission has consulted with the General Services Administration's Committee Management Secretariat regarding the MRAC's renewal.
Alicia L. Lewis, MRAC Designated Federal Officer and Special Counsel to Commissioner Rostin Behnam, at 202-418-5862 or
In support of the Commission's mission of ensuring the integrity of the derivatives markets as well as the monitoring and management of systemic risk, the MRAC's objectives and scope of activities are to conduct public meetings, advise, and submit reports and recommendations to the Commission on: (1) Systemic issues that impact the stability of the derivatives markets and other related financial markets; and (2) the impact and implications of the evolving market structure of the derivatives markets and other related financial markets. The MRAC will operate for two years from the date of renewal unless the Commission directs that the MRAC terminate on an earlier date. A copy of the renewal charter will be posted on the Commission's website at
Bureau of Consumer Financial Protection.
Notice of public meeting.
Under the Federal Advisory Committee Act (FACA), this notice sets forth the announcement of a public meeting of the Community Bank Advisory Council (CBAC or Council) of the Bureau of Consumer Financial Protection (Bureau). The notice also describes the functions of the Council.
The meeting date is Thursday, May 24, 2018, from approximately 9:00 a.m. to 3:00 p.m. eastern daylight time. The CBAC Card, Payment, and Deposits Markets Subcommittee, CBAC Consumer Lending Subcommittee, and CBAC Mortgages and Small Business Lending Markets Subcommittee will take place on Thursday, May 24, 2018.
The meeting location is the Bureau of Consumer Financial Protection, 1700 G Street NW, Washington, DC 20552.
Crystal Dully, Outreach and Engagement Associate, 202-435-9588,
Section 2 of the CBAC Charter provides: Pursuant to the executive and administrative powers conferred on the Bureau by section 1012 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the Director established the Community Bank Advisory Council under agency authority.
Section 3 of the CBAC Charter states: “The purpose of the Advisory Council is to advise the Bureau in the exercise of its functions under the federal consumer financial laws as they pertain to community banks with total assets of $10 billion or less.”
The Community Bank Advisory Council will discuss the Home Mortgage Disclosure Act (HMDA), the Electronic Fund Transfer Act (Regulation E), debt collection, mortgage origination, and several of the Bureau's Requests for Information (RFI) related to the Call for Evidence initiative by Acting Director Mulvaney.
Persons who need a reasonable accommodation to participate should contact
Written comments will be accepted from interested members of the public and should be sent to
The Council's agenda will be made available to the public on Wednesday
A recording and summary of this meeting will be available after the meeting on the Bureau's website
Department of the Army, DOD.
30-day information collection notice.
The Department of Defense has submitted to OMB for clearance the following proposal for collection of information under the provisions of the Paperwork Reduction Act.
Consideration will be given to all comments received by June 8, 2018.
Comments and recommendations on the proposed information collection should be emailed to Ms. Jasmeet Seehra, DoD Desk Officer, at
Fred Licari, 571-372-0493, or
Participants will be recruited during a set nine month window in which Service Members have self-identified as transitioning out of the service within the six months. Participation in the study is voluntary and participants will be consented twice, once at baseline (time point 1) while the Service Member is still active duty and then again at time point 2 as civilians. This burden information only accounts for the public being affected.
You may also submit comments and recommendations, identified by Docket ID number and title, by the following method:
•
Requests for copies of the information collection proposal should be sent to Mr. Licari at
Office of the Under Secretary of Defense for Acquisition and Sustainment, DoD.
Information collection notice.
In compliance with the
Consideration will be given to all comments received by July 9, 2018.
You may submit comments, identified by docket number and title, by any of the following methods:
To request more information on this proposed information collection or to obtain a copy of the proposal and associated collection instruments, please write to the Department of Defense, Office of Economic Adjustment, 2231 Crystal Drive, Suite 520, Arlington, Virginia, 22202-3711, ATTN: Ms. Elizabeth Chimienti or call (703) 901-7644 or email
Office for Civil Rights (OCR), Department of Education (ED).
Notice.
In accordance with the Paperwork Reduction Act of 1995, ED is proposing an extension of an existing information collection.
Interested persons are invited to submit comments on or before June 8, 2018.
To access and review all the documents related to the information collection listed in this notice, please use
For specific questions related to collection activities, please contact Elizabeth Wiegman, 202-453-6039.
The Department of Education (ED), in accordance with the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3506(c)(2)(A)), provides the general public and Federal agencies with an opportunity to comment on proposed, revised, and continuing collections of information. This helps the Department assess the impact of its information collection requirements and minimize the public's reporting burden. It also helps the public understand the Department's information collection requirements and provide the requested data in the desired format. ED is soliciting comments on the proposed information collection request (ICR) that is described below. The Department of Education is especially interested in public comment addressing the following issues: (1) Is this collection necessary to the proper functions of the Department; (2) will this information be processed and used in a timely manner; (3) is the estimate of burden accurate; (4) how might the Department enhance the quality, utility, and clarity of the information to be collected; and (5) how might the Department minimize the burden of this collection on the respondents, including through the use of information technology. Please note that written comments received in response to this notice will be considered public records.
National Assessment Governing Board, U.S. Department of Education.
Announcement of open and closed meetings.
This notice sets forth the agenda for the May 17-19, 2018 Quarterly Board Meeting of the National Assessment Governing Board (hereafter referred to as Governing Board). This notice provides information to members of the public who may be interested in attending the meeting or providing written comments related to the work of the Governing Board. Notice of this meeting is required under § 10(a)(2) of the Federal Advisory Committee Act (FACA). This meeting notice is late due to a technical issue with the publication of the notice.
The Quarterly Board Meeting will be held on the following dates:
• May 17, 2018 from 3:00 p.m. to 6:00 p.m.
• May 18, 2018 from 8:30 a.m. to 5:00 p.m.
• May 19, 2018 from 7:30 a.m. to 10:45 a.m.
Embassy Suites Montgomery Hotel and Conference Center, 300 Tallapoosa Street, Montgomery, Alabama 36104.
Munira Mwalimu, Executive Officer/
The Governing Board is established to formulate policy for the National Assessment of Educational Progress (NAEP). The Governing Board's responsibilities include the following: Selecting subject areas to be assessed, developing assessment frameworks and specifications, developing appropriate student achievement levels for each grade and subject tested, developing standards and procedures for interstate and national comparisons, improving the form and use of NAEP, developing guidelines for reporting and disseminating results, and releasing initial NAEP results to the public.
The Governing Board's standing committees will meet to conduct regularly scheduled work based on agenda items planned for this Quarterly Board Meeting and follow-up items as reported in the Governing Board's committee meeting minutes available at
On Thursday, May 17, 2018, the Ad Hoc Committee on Measures of Postsecondary Preparedness will meet in open session from 3:00 p.m. to 5:00 p.m. Thereafter, the Executive Committee will convene in open session from 5:15 p.m. to 6:00 p.m.
On Friday, May 18, 2018, the Governing Board will meet in open session from 8:30 a.m. to 10:15 a.m. From 8:30 a.m. to 8:45 a.m., the Governing Board will review and approve the May 17-19, 2018 Governing Board meeting agenda and meeting minutes from the March 2018 Quarterly Board Meeting. Thereafter, from 8:45 a.m. to 9:15 a.m. the Governing Board will receive welcome remarks from Alabama leaders to include John Merrill, Secretary of State. From 9:15 a.m. to 10:15 a.m., a panel of state leaders and educators will provide a briefing on Pre-K education issues and share information about Alabama's programs. At 10:15 a.m., the Governing Board will recess for a 15 minute break and convene for standing committee meetings which will take place from 10:30 a.m. to 1:00 p.m.
ADC will meet in open session from 10:30 a.m. to 1:00 p.m. The committee will receive a briefing and have a panel discussion related to the NAEP Mathematics Framework. R&D will meet in open session from 10:30 a.m. to 12:00 p.m. to discuss recent NAEP release activities, core contextual variables, and the Long-Term Trend Assessment. From 10:30 a.m. to 11:45 a.m., COSDAM will discuss a draft revised policy for achievement level setting.
Following a short break, COSDAM will convene in a joint open session with R&D to discuss issues related to communication and interpretation of the NAEP achievement levels from 12:00 p.m. to 1:00 p.m.
On Friday, May 18, 2018, the Board will meet in open session from 1:15 p.m. to 2:25 p.m. to receive a briefing on how state mathematics curricula relate to NAEP mathematics. Thereafter, the Board will discuss implementing NAEP assessment schedule priorities from 2:30 p.m. to 3:00 p.m. Following this session, the Board will convene in small breakout discussion groups at 3:15 p.m. to discuss implementing NAEP assessment schedule priorities. The breakout sessions will conclude at 4:15 p.m. Following a short break, the Board will reconvene from 4:30 p.m. to 5:00 p.m. to summarize and reflect on the breakout discussion groups. The May 18, 2018 session of the Governing Board meeting will adjourn at 5:00 p.m.
On Saturday, May 19, 2018, the Nominations Committee will meet in closed session from 7:30 a.m. to 8:15 a.m. The Committee will discuss nominees for Governing Board vacancies for terms beginning October 1, 2018. The Nominations Committee's discussions pertain solely to internal personnel rules and practices of an agency and information of a personal nature where disclosure would constitute a clearly unwarranted invasion of personal privacy. As such, the discussions are protected by exemptions 2 and 6 of § 552b(c) of Title 5 of the United States Code.
On May 19, 2018, the Governing Board will convene in open session from 8:30 a.m. to 9:15 a.m. to receive an update from the Ad Hoc Committee on Post-Secondary Preparedness. The Governing Board will then receive reports from its standing committees from 9:15 a.m. to 9:45 a.m. From 9:45 a.m. to 10:45 a.m. the Governing Board will meet in closed session to receive a briefing on results Connecting NAEP to State and Local as it relates to results for the State Mapping Report and the Stanford Education Data Archive project. This briefing must be in closed session because data for this study has not been released to the public. Public disclosure of secure data would significantly impede implementation of the NAEP assessment program if conducted in open session. Such matters are protected by exemption 9(B) of § 552b of Title 5 U.S.C.
The Governing Board's Ad Hoc Screening Committee—established by the Chair after consultation with the Governing Board—will meet in closed session from 11:00 a.m. to 1:00 p.m. to review applications for the Executive Director vacancy. These discussions pertain solely to internal personnel rules and practices of an agency and information of a personal nature where disclosure would constitute a clearly unwarranted invasion of personal privacy. As such, the discussions are protected by exemptions 2 and 6 of § 552b(c) of Title 5 of the United States Code.
Pub. L. 107-279, Title III—National Assessment of Educational Progress § 301.
Office of Fossil Energy, DOE.
Notice of change in control.
The Office of Fossil Energy (FE) of the Department of Energy (DOE) gives notice of receipt of a Notice of Proposed Change in Control (Notice) filed March 23, 2018, by Cameron LNG, LLC (Cameron LNG) in FE Docket Nos. 11-162-LNG, 15-67-LNG, 15-90-LNG, and 16-34-LNG. The Notice describes a proposed change in control of ENGIE, S.A., an indirect parent entity. The Notice was filed under section 3 of the Natural Gas Act (NGA).
Protests, motions to intervene, or notices of intervention, as applicable, and written comments are to be filed using procedures detailed in the Public Comment Procedures section no later than 4:30 p.m., Eastern time, May 24, 2018.
Larine Moore or Amy Sweeney, U.S. Department of Energy (FE-34), Office of Regulation and International Engagement, Office of Fossil Energy, Forrestal Building, Room 3E-042, 1000 Independence Avenue SW, Washington, DC 20585, (202) 586-9478; (202) 586-2627.
Cassandra Bernstein or Ronald (R.J.) Colwell, U.S. Department of Energy (GC-76), Office of the Assistant General Counsel for Electricity and Fossil Energy, Forrestal Building, 1000 Independence Avenue SW, Washington, DC 20585, (202) 586-9793; (202) 586-8499.
Cameron LNG filed a Notice of Proposed Change in Control in the above-referenced dockets.
Cameron LNG describes a proposed transaction involving ENGIE Cameron LNG Corporation (ENGIE Member).
Additional details can be found in Cameron LNG's Notice, posted on the DOE/FE website at:
DOE/FE will review Cameron LNG's Notice in accordance with its Procedures for Changes in Control Affecting Applications and Authorizations to Import or Export Natural Gas (CIC Revised Procedures).
Interested persons will be provided 15 days from the date of publication of this notice in the
Filings may be submitted using one of the following methods: (1) Preferred method: emailing the filing to
Cameron LNG's Notice and any filed protests, motions to intervene, notices of intervention, and comments are available for inspection and copying in the Office of Regulation and International Engagement docket room, Room 3E-042, 1000 Independence Avenue SW, Washington, DC 20585. The docket room is open between the hours of 8:00 a.m. and 4:30 p.m., Monday through Friday, except Federal holidays.
The Notice and any filed protests, motions to intervene, notices of intervention, and comments will also be available electronically by going to the following DOE/FE Web address:
National Nuclear Security Administration, Department of Energy (DOE).
Notice of 229 Boundary revisions for the Pantex Plant Administrative Support Complex.
Pursuant to Section 229 of the Atomic Energy Act of 1954 (as amended), notice is hereby given that the United States Department of Energy is adding to its DOE- and contractor-occupied property at the Pantex Plant in Carson County, Texas, covered by DOE's regulations, Trespassing on Department of Energy Property, in the Code of Federal Regulations. In addition to the previously identified areas of the Pantex Plant, these regulations hereby prohibit the unauthorized entry onto and the unauthorized carrying, transporting, or otherwise introducing or causing to be introduced any dangerous weapon, explosive, or other dangerous instrument or material, into or upon the following described property of the Pantex Plant of the United States Department of Energy, National Nuclear Security Administration Production Office.
This action is effective on May 9, 2018.
Larry Warner, U.S. Department of Energy, National Nuclear Security Administration, P.O. Box 30030, Amarillo, TX 79120.
The DOE, successor agency to the Atomic Energy Commission, is authorized by section 229 of the Atomic Energy Act of 1954, as amended (42 U.S.C. 2278a), and by section 301 of the Department of Energy Organization Act (42 U.S.C. 7151), to issue regulations relating to the entry upon and carrying, transporting, or otherwise introducing or causing to be introduced, any dangerous weapon, explosive, or other dangerous instrument or material likely to produce substantial injury or damage to persons or property, into or upon any facility, installation, or real property subject to the jurisdiction, administration, or custody of the DOE. To exercise this statutory authority, on August 16, 1963, the DOE first promulgated the regulations now found at 10 CFR part 860, and on September 14, 1993 (58 FR 47985), DOE revised and reissued these regulations.
The Pantex Plant is a DOE NNSA facility located in Carson County, Texas, northeast of Amarillo, Texas. By notice published on October 19, 1965 (30 FR 13287), DOE prohibited unauthorized entry into or upon the Pantex Plant by providing a property description in the
The addition is described in further detail in the paragraphs that follow.
This description is in addition to the descriptions contained in the
Notices stating the pertinent prohibitions of §§ 860.3 and 860.4 and the penalties of § 860.5 will be posted at any entrances of the above-referenced areas and at intervals along their perimeters where 10 CFR part 860 is to be implemented, as provided in § 860.6.
Take notice that on April 30, 2018, pursuant to Rule 207(a)(2) of the Federal Energy Regulatory Commission's (Commission) Rules of Practice and Procedure, 18 CFR 385.207(a)(2) (2017), Buckeye Pipe Line Company, L.P. (Buckeye) and Laurel Pipe Line Company, L.P. (Laurel) (collectively, Buckeye/Laurel) filed a joint petition for a declaratory order seeking approval of the overall tariff rate structure and terms and conditions of service for a new service to be provided by using expanded Buckeye capacity, and by developing new bi-directional capability on the Laurel system, all as more fully explained in the petition.
Any person desiring to intervene or to protest this filing must file in accordance with Rules 211 and 214 of the Commission's Rules of Practice and Procedure (18 CFR 385.211, 385.214). Protests will be considered by the Commission in determining the appropriate action to be taken, but will not serve to make protestants parties to the proceeding. Any person wishing to become a party must file a notice of intervention or motion to intervene, as appropriate. Such notices, motions, or protests must be filed on or before the comment date. Anyone filing a motion to intervene or protest must serve a copy of that document on the Petitioner.
The Commission encourages electronic submission of protests and interventions in lieu of paper using the “eFiling” link at
This filing is accessible on-line at
Take notice that the Commission received the following electric corporate filings:
Take notice that the Commission received the following electric rate filings:
Description:
Take notice that the Commission received the following electric securities filings:
The filings are accessible in the Commission's eLibrary system by clicking on the links or querying the docket number.
Any person desiring to intervene or protest in any of the above proceedings must file in accordance with Rules 211 and 214 of the Commission's Regulations (18 CFR 385.211 and 385.214) on or before 5:00 p.m. Eastern time on the specified comment date. Protests may be considered, but intervention is necessary to become a party to the proceeding.
eFiling is encouraged. More detailed information relating to filing requirements, interventions, protests, service, and qualifying facilities filings can be found at:
1. In June 2017,
2. In this order, the Commission accepts the SIL values identified in Appendix A (Commission-accepted SIL values). These Commission-accepted SIL values will be used by the Commission to analyze updated market power analyses submitted by transmission owners for the Southeast region as well as any updated market power analyses filed by non-transmission owning sellers in the Southeast region for this study period. SIL studies are used as a basis for calculating import capability to serve load in the relevant geographic market when performing market power analyses. SIL values quantify a study area's simultaneous import capability from its aggregated first-tier area. The values accepted herein are based on SIL studies submitted by the Southeast Transmission Owners with their updated market power analyses. The Southeast Transmission Owners' updated market power analyses themselves, including any responsive pleadings, are being addressed in separate orders in the relevant dockets.
3. We note that other transmission owners in the Southeast region also submitted updated market power analyses. The updated market power analyses for those transmission owners have been or will be addressed in separate orders in the relevant dockets.
4. Additionally in this order, we provide clarification on the calculation of SIL values.
5. In Order No. 697, the Commission adopted a regional filing schedule for filing updated market power analyses.
6. In addition to providing SIL studies for their respective balancing authority areas, the Southeast Transmission Owners provided SIL studies for their respective first-tier balancing authority areas. Specifically, SIL studies were submitted for the following balancing authority areas that, collectively, are first-tier to the Southeast Transmission Owners: City of Tallahassee, Jacksonville Electric Authority, Midcontinent Independent System Operator, Inc. (MISO),
7. We begin by commending the Southeast Transmission Owners for coordinating the preparation of their SIL studies. Such coordination leads to more accurate and consistent SIL study results. The SIL values we accept herein are based on calculations by the Southeast Transmission Owners.
8. These calculations resulted in a few cases where there were conflicting SIL values for certain Florida balancing authority areas.
9. The Southeast Transmission Owners generally performed their SIL studies correctly. However, the review of these filings, as well as the review of filings for other regions, leads the Commission to conclude that it is appropriate to remind sellers of its expectations, and provide clarification, with respect to the calculation of SIL values. As the Commission has previously stated, each transmission owner should utilize the methodologies outlined in its Commission-approved Open Access Transmission Tariff (OATT) to calculate its simultaneous import capability that would have been available to suppliers in surrounding first-tier markets during each seasonal peak.
10. The Commission will use the Commission-accepted SIL values identified in Appendix A when reviewing the pending updated market power analyses submitted by transmission owners in the Southeast region as well as any updated market power analyses filed by non-transmission owning sellers in the Southeast region for this study period. Future filers submitting screens for the balancing authority areas and study period identified in Appendix A are encouraged to use these Commission-accepted SIL values. In the alternative, a filer may propose different SIL values provided that the filer's accompanying SIL studies comply with Commission directives and that the filer fully supports the values used and explains why the Commission should consider a different SIL value for a particular study area other than the Commission-accepted SIL values provided in Appendix A. In the event that the results
(A) The specific Commission-accepted SIL values identified in Appendix A to this order are hereby accepted for purposes of analyzing updated market power analyses for the Southeast region, as discussed in the body of this order.
(B) The Secretary is hereby directed to publish a copy of this order in the
By the Commission. Chairman McIntyre is not participating.
Take notice that the Commission has received the following Natural Gas Pipeline Rate and Refund Report filings:
The filings are accessible in the Commission's eLibrary system by clicking on the links or querying the docket number.
Any person desiring to intervene or protest in any of the above proceedings must file in accordance with Rules 211 and 214 of the Commission's Regulations (18 CFR 385.211 and 385.214) on or before 5:00 p.m. Eastern
eFiling is encouraged. More detailed information relating to filing requirements, interventions, protests, service, and qualifying facilities filings can be found at:
Federal Energy Regulatory Commission.
Comment request.
In compliance with the requirements of the Paperwork Reduction Act of 1995, the Federal Energy Regulatory Commission (Commission or FERC) is submitting its information collection FERC-917 (Electric Transmission Facilities) and FERC-918 (Standards for Business Practices and Communication Protocols for Public Utilities to the Office of Management and Budget (OMB)] for review of the information collection requirements. Any interested person may file comments directly with OMB and should address a copy of those comments to the Commission as explained below. The Commission previously published a Notice in the
Comments on the collection of information are due by June 8, 2018.
Comments filed with OMB, identified by the OMB Control No. 1902-0233 (for both the FERC-917 and FERC-918), should be sent via email to the Office of Information and Regulatory Affairs:
A copy of the comments should also be sent to the Commission, in Docket No. IC18-5-000, by either of the following methods:
•
•
Ellen Brown may be reached by email at
• Adopted pro forma OATT provisions necessary to keep imbalance charges closely related to incremental costs;
• Increased nondiscriminatory access to the grid by requiring public utilities, working through the North American Electric Reliability Corporation (NERC), to develop consistent methodologies for available transfer capability (ATC) calculation and to publish those methodologies to increase transparency;
• Required an open, transparent, and coordinated transmission planning process thereby increasing the ability of customers to access new generating resources and promote efficient utilization of transmission;
• Gave the right to customers to request from transmission providers, studies addressing congestion and/or integration of new resource loads in areas of the transmission system where they have encountered transmission problems due to congestion or where they believe upgrades and other investments may be necessary to reduce congestion and to integrate new resources;
• Required both the transmission provider's merchant function and network customers to include a statement with each application for network service or to designate a new network resource that attests, for each network resource identified, that the transmission customer owns or has committed to purchase the designated network resource and the designated network resource comports with the requirements for designated network resources. The network customer includes this attestation in the customer's comment section of the request when it confirms the request on the Open Access Same-Time Information System (OASIS);
• Required with regard to capacity reassignment that: (a) All sales or assignments of capacity be conducted through or otherwise posted on the transmission provider's OASIS on or before the date the reassigned service commences; (b) assignees of transmission capacity execute a service agreement prior to the date on which the reassigned service commences; and (c) transmission providers aggregate and summarize in an electric quarterly report the data contained in these service agreements;
• Adopted an operational penalties annual filing that provides information regarding the penalty revenue the transmission provider has received and distributed; and
• Required creditworthiness information to be included in a transmission provider's OATT. Attachment L must specify the qualitative and quantitative criteria that the transmission provider uses to
The Commission required a NERC/NAESB
Required OASIS postings included:
• Explanations for changes in ATC values;
• Capacity benefit margin (CBM) reevaluations and quarterly postings;
• OASIS metrics and accepted/denied requests;
• Planning redispatch offers and reliability redispatch data;
• Curtailment data;
• Planning and system impact studies;
• Metrics for system impact studies; and
• All rules.
Incorporating the Order No. 890 standards into the Commission's regulations benefits wholesale electric customers by streamlining utility business practices, transactional processes, and OASIS procedures, and by adopting a formal ongoing process for reviewing and upgrading the Commission's OASIS standards and other electric industry business practices. These practices and procedures benefit from the implementation of generic industry standards.
The Commission's Order No. 890 regulations can be found in 18 CFR 35.28 (pro forma tariff requirements), and 37.6 and 37.7 (OASIS requirements).
• One-time pro forma tariff and standards changes by utilities in existence at that time, which would not be needed unless the tariff and/or standards are changed again; and
• completed development and comment solicitation of the required NERC/NAESB reliability standards and business practices. The other activities are annual ongoing requirements. The estimated annual figures follow:
Take notice that the Commission received the following electric rate filings:
The filings are accessible in the Commission's eLibrary system by clicking on the links or querying the docket number.
Any person desiring to intervene or protest in any of the above proceedings must file in accordance with Rules 211 and 214 of the Commission's Regulations (18 CFR 385.211 and 385.214) on or before 5:00 p.m. Eastern time on the specified comment date. Protests may be considered, but intervention is necessary to become a party to the proceeding.
eFiling is encouraged. More detailed information relating to filing requirements, interventions, protests, service, and qualifying facilities filings can be found at:
Take notice that, pursuant to National Archives and Records Administration procedures for appropriate handling of documents (81 FR 63323 (Sept. 14, 2016)), the Federal Energy Regulatory Commission (Commission) will follow the Information Governance Policy and Guidelines for the Protection of Sensitive Information requirements as described in 18 CFR 388.112 and 388.113. As a result, every submission or filing with the Commission or Commission staff that contains sensitive material (as described below) should be labeled controlled unclassified information (CUI). The documents described below should be labeled as follows:
Documents containing Critical Energy/Electric Infrastructure Information (CEII),
Documents containing information that section 388.112 of the Commission's regulations, 18 CFR 388.112, recognizes as privileged, and documents containing information within the scope of protective orders and agreements in Commission proceedings, should include in a top center header of each page of the document the following text: CUI//PRIV.
Documents containing multiple information types, should reference each
For information that is CEII, filers are reminded that they must clearly segregate those portions of the documents that contain CEII, and indicate how long the CEII label should apply (not to exceed five years unless redesignated by the CEII Coordinator).
For information that is privileged or within the scope of a protective order or agreement, filers are reminded that they also need to clearly identify within the document those specific portions of the document (
This notice supersedes and clarifies an earlier notice issued April 14, 2017.
The staff of the Federal Energy Regulatory Commission (FERC or Commission) will prepare an environmental assessment (EA) that will discuss the environmental impacts of the construction and operation of facilities by Cheyenne Connector, LLC and Rockies Express Pipeline LLC (“applicants”) in Weld County, Colorado. The Commission will use this EA in its decision-making process to determine whether the applicants' projects are in the public convenience and necessity. According to the applicants, the proposed projects are being developed to work in tandem to deliver natural gas produced in Weld County to the Cheyenne Hub; therefore, the Commission is evaluating these two projects within a single EA.
This notice announces the opening of the scoping process the Commission will use to gather input from the public and interested agencies on the projects. You can make a difference by providing us with your specific comments or concerns about the projects. Your comments should focus on the potential environmental effects, reasonable alternatives, and measures to avoid or lessen environmental impacts. Your input will help the Commission staff determine what issues they need to evaluate in the EA. To ensure that your comments are timely and properly recorded, please send your comments so that the Commission receives them in Washington, DC on or before June 4, 2018.
If you sent comments on either of these projects to the Commission before the opening of this docket on March 5, 2018, you will need to file those comments in the appropriate docket number (
This notice is being sent to the Commission's current environmental mailing list for the projects. State and local government representatives should notify their constituents of these proposed projects and encourage them to comment on their areas of concern.
If you are a landowner receiving this notice, a pipeline company representative may contact you about the acquisition of an easement to construct, operate, and maintain the proposed facilities. The company would seek to negotiate a mutually acceptable agreement. However, if the Commission approves these projects, that approval conveys with it the right of eminent domain. Therefore, if easement negotiations fail to produce an agreement, the pipeline company could initiate condemnation proceedings where compensation would be determined in accordance with state law.
The applicants provided landowners with a fact sheet prepared by the FERC entitled “An Interstate Natural Gas Facility On My Land? What Do I Need To Know?” This fact sheet addresses a number of typically asked questions, including the use of eminent domain and how to participate in the Commission's proceedings. It is also available for viewing on the FERC website (
For your convenience, there are three methods you can use to submit your comments to the Commission. The Commission encourages electronic filing of comments and has expert staff available to assist you at (202) 502-8258 or
(1) You can file your comments electronically using the
(2) You can file your comments electronically by using the
(3) You can file a paper copy of your comments by mailing them to the following address. Be sure to reference the appropriate docket number of concern (either CP18-102-000 or CP18-103-000) with your submission: Kimberly D. Bose, Secretary, Federal Energy Regulatory Commission, 888 First Street NE, Room 1A, Washington, DC 20426.
Please note this is not your only public input opportunity; refer to the review process flow chart in appendix 1.
The applicants propose to construct and operate new natural gas pipeline, metering, and compression facilities in Weld County, Colorado. The Cheyenne Connector Pipeline Project (Docket No. CP18-102-000) would transport northward about 600,000 dekatherms per day of natural gas from natural gas processing plants to a delivery interconnect with Rockies Express Pipeline LLC (Rockies Express) at the Cheyenne Hub. The Cheyenne Hub Enhancement Project (Docket No. CP18-
The Cheyenne Connector Pipeline Project would consist of the following facilities:
• Approximately 70 miles of 36-inch-diameter pipeline, including three associated mainline valves and other ancillary facilities; and
• Five meter and regulating stations.
The Cheyenne Hub Enhancement Project would consist of the following facilities:
• One new approximately 32,100 horsepower “Cheyenne Hub Booster Compressor Station”; and
• Enhancements to modify the existing Cheyenne Hub interconnect facilities, including installation of pipe, valves, fittings, filters, and ancillary equipment.
The general locations of the projects' facilities are shown in appendix 2.
Construction of the proposed aboveground and pipeline facilities would disturb about 1,720.3 acres of land. Following construction, the applicants would maintain about 470.5 acres for permanent operation of the projects' facilities; the remaining acreage would be restored and revert to former uses. About 46 percent of the proposed pipeline route parallels existing pipeline rights-of-way.
The National Environmental Policy Act (NEPA) requires the Commission to take into account the environmental impacts that could result from an action whenever it considers the issuance of a Certificate of Public Convenience and Necessity. NEPA also requires us
In the EA we will discuss impacts that could occur as a result of the construction and operation of the proposed projects under these general headings:
• Geology and soils;
• land use;
• water resources, fisheries, and wetlands;
• cultural resources;
• vegetation and wildlife;
• air quality and noise;
• endangered and threatened species;
• socioeconomics;
• public safety; and
• cumulative impacts.
We will also evaluate reasonable alternatives to the proposed projects or portions of the projects, and make recommendations on how to lessen or avoid impacts on the various resource areas.
The EA will present our independent analysis of the issues. The EA will be available in the public record through eLibrary. We will publish and distribute the EA to the public for an allotted comment period. We will consider all comments on the EA before making our recommendations to the Commission. To ensure we have the opportunity to consider and address your comments, please carefully follow the instructions in the Public Participation section, beginning on page 2.
With this notice, we are asking agencies with jurisdiction by law and/or special expertise with respect to the environmental issues of these projects to formally cooperate with us in the preparation of the EA.
In accordance with the Advisory Council on Historic Preservation's implementing regulations for section 106 of the National Historic Preservation Act, we are using this notice to initiate consultation with the Colorado State Historic Preservation Office (SHPO), and to solicit their views and those of other government agencies, interested Indian tribes, and the public on the projects' potential effects on historic properties.
The environmental mailing list includes federal, state, and local government representatives and agencies; elected officials; environmental and public interest groups; Native American Tribes; other interested parties; and local libraries and newspapers. This list also includes all affected landowners (as defined in the Commission's regulations) who are potential right-of-way grantors, whose property may be used temporarily for project purposes, or who own homes within certain distances of aboveground facilities, and anyone who submits comments on a project. We will update the environmental mailing list as the analysis proceeds to ensure that we send the information related to this environmental review to all individuals, organizations, and government entities interested in and/or potentially affected by the proposed projects.
Copies of the EA will be sent to the environmental mailing list for public review and comment. If you would prefer to receive a paper copy of the document instead of the CD version or would like to remove your name from the mailing list, please return the attached Information Request (appendix 3).
In addition to involvement in the EA scoping process, you may want to become an “intervenor” which is an official party to the Commission's proceeding. Intervenors play a more formal role in the process and are able to file briefs, appear at hearings, and be heard by the courts if they choose to appeal the Commission's final ruling. An intervenor formally participates in the proceeding by filing a request to intervene. Instructions for becoming an intervenor are in the “Document-less Intervention Guide” under the “e-filing” link on the Commission's website.
Additional information about the projects is available from the Commission's Office of External Affairs, at (866) 208-FERC, or on the FERC website at
In addition, the Commission offers a free service called eSubscription which allows you to keep track of all formal issuances and submittals in specific dockets. This can reduce the amount of time you spend researching proceedings by automatically providing you with notification of these filings, document summaries, and direct links to the documents. Go to
Finally, public sessions or site visits will be posted on the Commission's calendar located at
On May 3, 2018, the Commission issued an order in Docket No. EL18-136-000, pursuant to section 206 of the Federal Power Act (FPA), 16 U.S.C. 824e (2012), instituting an investigation into whether NRG Wholesale Generation LP's rates for Reactive Service may be unjust and unreasonable.
The refund effective date in Docket No. EL18-136-000, established pursuant to section 206(b) of the FPA, will be the date of publication of this notice in the
Any interested person desiring to be heard in Docket No. EL18-136-000 must file a notice of intervention or motion to intervene, as appropriate, with the Federal Energy Regulatory Commission, 888 First Street, NE, Washington, DC 20426, in accordance with Rule 214 of the Commission's Rules of Practice and Procedure, 18 CFR 385.214, within 21 days of the date of issuance of the order.
On March 6, 2018 the Federal Energy Regulatory Commission (Commission) issued a notice that Commission staff will hold an Electric Quarterly Report (EQR) Users Group meeting on June 5, 2018. The meeting will take place from 1:00 p.m. to 5:00 p.m. (EST), in the Commission Meeting Room at 888 First Street NE, Washington, DC 20426. All interested persons are invited to attend. For those unable to attend in person, access to the meeting will be available via webcast.
Commission staff is hereby supplementing the March 6, 2018 notice with the agenda for discussion. During the meeting, Commission staff and EQR users will discuss potential improvements to the EQR program and the EQR filing process. Recent meetings have focused on issues pertaining primarily to EQR filers. However, in the upcoming meeting, staff will also include sessions for those accessing and using EQR data. While discussion topics to be considered for the formal agenda were due by April 16, 2018, feedback may be emailed to
Commission staff will discuss and seek feedback on common EQR audit findings, techniques for accessing EQR data, and examples of how EQR data is used and interpreted. Please note that matters pending before the Commission and subject to ex parte limitations cannot be discussed at this meeting. An agenda of the meeting is attached.
Due to the nature of the discussion, those interested in participating are encouraged to attend in person. All interested persons (whether attending in person or via webcast) are asked to register online at
Commission conferences are accessible under section 508 of the Rehabilitation Act of 1973. For accessibility accommodations, please send an email to
For more information about the EQR Users Group meeting, please contact Jeff Sanders of the Commission's Office of Enforcement at (202) 502-6455, or send an email to
Take notice that the staff of the Federal Energy Regulatory Commission will hold a technical conference to address issues raised in the captioned proceedings regarding PJM Interconnection, LLC's (PJM) frequency regulation (Regulation) market, including to examine PJM's two-signal Regulation market design with respect to the requirements of Order No. 755.
A specific date and time for the technical conference will be specified in a supplemental notice. The technical conference will be held at the Federal Energy Regulatory Commission, 888 First Street NE, Washington, DC 20426. The technical conference will be transcribed. All interested parties are invited to attend.
To facilitate the technical conference, Commission staff requires additional information from complainant Energy Storage Association (ESA) and PJM in the captioned proceedings.
The Federal Energy Regulatory Commission (Commission) hereby gives notice that members of the Commission's staff may attend the following meetings related to the transmission planning activities of the New York Independent System Operator, Inc. (NYISO):
The above-referenced meeting will be via web conference and teleconference.
The above-referenced meeting is open to stakeholders.
Further information may be found at:
The above-referenced meeting will be via web conference and teleconference.
The above-referenced meeting is open to stakeholders.
Further information may be found at:
The above-referenced meeting will be via web conference and teleconference.
The above-referenced meeting is open to stakeholders.
Further information may be found at:
The above-referenced meeting will be via web conference and teleconference.
The above-referenced meeting is open to stakeholders.
Further information may be found at:
The above-referenced meeting will be via web conference and teleconference.
The above-referenced meeting is open to stakeholders.
Further information may be found at:
The discussions at the meetings described above may address matters at issue in the following proceedings:
For more information, contact James Eason, Office of Energy Market Regulation, Federal Energy Regulatory Commission at (202) 502-8622 or
On May 3, 2018, the Commission issued an order in Docket No. EL18-137-000, pursuant to section 206 of the Federal Power Act (FPA), 16 U.S.C. 824e (2012), instituting an investigation into whether NRG Energy Center Dover LLC's reactive supply and voltage control service rates may be unjust and unreasonable.
The refund effective date in Docket No. EL18-137-000, established pursuant to section 206(b) of the FPA, will be the date of publication of this notice in the
Any interested person desiring to be heard in Docket No. EL18-137-000
The Federal Deposit Insurance Corporation (FDIC or Receiver), as Receiver for each of the following insured depository institutions, was charged with the duty of winding up the affairs of the former institutions and liquidating all related assets. The Receiver has fulfilled its obligations and made all dividend distributions required by law.
The Receiver has further irrevocably authorized and appointed FDIC-Corporate as its attorney-in-fact to execute and file any and all documents that may be required to be executed by the Receiver which FDIC-Corporate, in its sole discretion, deems necessary, including but not limited to releases, discharges, satisfactions, endorsements, assignments, and deeds. Effective on the termination dates listed above, the Receiverships have been terminated, the Receiver has been discharged, and the Receiverships have ceased to exist as legal entities.
The notificants listed below have applied under the Change in Bank Control Act (12 U.S.C. 1817(j)) and § 225.41 of the Board's Regulation Y (12 CFR 225.41) to acquire shares of a bank or bank holding company. The factors that are considered in acting on the notices are set forth in paragraph 7 of the Act (12 U.S.C. 1817(j)(7)).
The notices are available for immediate inspection at the Federal Reserve Bank indicated. The notices also will be available for inspection at the offices of the Board of Governors. Interested persons may express their views in writing to the Reserve Bank indicated for that notice or to the offices of the Board of Governors. Comments must be received not later than May 23, 2018.
A.
1.
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Agency for Healthcare Research and Quality (AHRQ), Department of Health and Human Services (HHS).
Notice of Availability—New Common Formats.
As authorized by the Secretary of HHS, AHRQ coordinates the development of common definitions and reporting formats (Common Formats) for reporting on health care quality and patient safety. The purpose of this notice is to announce the availability of
Ongoing public input.
The
Dr. Hamid Jalal, Center for Quality
The Patient Safety and Quality Improvement Act of 2005, 42 U.S.C. 299b-21 to b-26, (Patient Safety Act) and the related Patient Safety and Quality Improvement Final Rule, 42 CFR part 3 (Patient Safety Rule), published in the
The Patient Safety Act provides for AHRQ to develop standardized reporting formats using common language and definitions (Common Formats) for reporting on health care quality and patient safety that will ensure that data collected by PSOs and other entities have comparable clinical meaning. The Common Formats facilitate aggregation of comparable data at local, PSO, regional and national levels. In addition, the Common Formats are intended to enhance the reporting of information that is standardized both clinically and electronically.
AHRQ has developed Common Formats for three settings of care—acute care hospitals, skilled nursing facilities, and community pharmacies—for use by health care providers and PSOs. AHRQ-listed PSOs are required to collect patient safety work product in a standardized manner to the extent practical and appropriate; a requirement the PSO can meet by collecting such information using Common Formats. Additionally, providers and other organizations not working with an AHRQ-listed PSO can use the Common Formats in their work to improve quality and safety; however, they cannot benefit from the federal confidentiality and privilege protections of the Patient Safety Act.
Since February 2005, AHRQ has convened the Federal Patient Safety Work Group (PSWG) to assist AHRQ in developing and maintaining the Common Formats. The PSWG includes major health agencies within HHS as well as the Departments of Defense and Veterans Affairs. The PSWG helps assure the consistency of definitions/formats with those of relevant government agencies. In addition, AHRQ has solicited comments from the private and public sectors regarding proposed versions of the Common Formats through a contract, since 2008, with the National Quality Forum (NQF), which is a non-profit organization focused on health care quality. After receiving comments, the NQF solicits review of the formats by its Common Formats Expert Panel. Subsequently, NQF provides this input to AHRQ who then uses it to refine the Common Formats before issuing as a production version.
Previously, AHRQ's primary focus with the Common Formats has been to support traditional event reporting. For the Common Formats, it should be noted that AHRQ uses the term “surveillance” to refer to the improved detection of events and calculation of adverse event rates in populations reviewed that will allow for collection of comparable performance data over time and across settings. These formats are designed to provide, through retrospective review of medical records, information that is complementary to that derived from event reporting systems. For more information on AHRQ's efforts measuring patient safety in this area, please go to:
AHRQ is specifically interested in receiving feedback in order to guide the improvement of the Common Formats. Information on how to comment on the
Additional information about the Common Formats can be obtained through AHRQ's PSO website:
Centers for Medicare & Medicaid Services, HHS.
Notice.
The Centers for Medicare & Medicaid Services (CMS) is announcing an opportunity for the public to comment on CMS' intention to collect information from the public. Under the Paperwork Reduction Act of 1995 (the PRA), federal agencies are required to publish notice in the
Comments must be received by
When commenting, please reference the document identifier or OMB control number. To be assured consideration, comments and recommendations must be submitted in any one of the following ways:
1.
2.
To obtain copies of a supporting statement and any related forms for the proposed collection(s) summarized in this notice, you may make your request using one of following:
1. Access CMS' website address at
2. Email your request, including your address, phone number, OMB number, and CMS document identifier, to
3. Call the Reports Clearance Office at (410) 786-1326.
William Parham at (410) 786-4669.
This notice sets out a summary of the use and burden associated with the following information collections. More detailed information can be found in each collection's supporting statement and associated materials (see
Under the PRA (44 U.S.C. 3501-3520), federal agencies must obtain approval from the Office of Management and Budget (OMB) for each collection of information they conduct or sponsor. The term “collection of information” is defined in 44 U.S.C. 3502(3) and 5 CFR 1320.3(c) and includes agency requests or requirements that members of the public submit reports, keep records, or provide information to a third party. Section 3506(c)(2)(A) of the PRA requires federal agencies to publish a 60-day notice in the
1.
Food and Drug Administration, HHS.
Notice of availability.
The Food and Drug Administration (FDA or Agency) is announcing the availability of a draft guidance for industry entitled “Waivers, Exceptions, and Exemptions from the Requirements of Section 582 of the Federal Food, Drug, and Cosmetic Act.” When finalized, this draft guidance will describe the process that trading partners and stakeholders should use to request a waiver, exception, or exemption from certain requirements of the Federal Food, Drug, and Cosmetic Act (FD&C Act), and describe how FDA intends to review and decide such requests and determine FDA-initiated exceptions and exemptions. Additionally, when finalized, this draft guidance will describe how FDA intends to biennially review and renew waivers, exceptions, and exemptions.
Submit either electronic or written comments on the draft guidance by July 9, 2018 to ensure that the Agency considers your comment on this draft guidance before it begins work on the final version of the guidance.
You may submit comments on any guidance at any time as follows:
Submit electronic comments in the following way:
•
• If you want to submit a comment with confidential information that you do not wish to be made available to the public, submit the comment as a written/paper submission and in the manner detailed (see “Written/Paper Submissions” and “Instructions”).
Submit written/paper submissions as follows:
•
• For written/paper comments submitted to the Dockets Management Staff, FDA will post your comment, as well as any attachments, except for information submitted, marked and identified, as confidential, if submitted as detailed in “Instructions.”
• Confidential Submissions—To submit a comment with confidential information that you do not wish to be made publicly available, submit your comments only as a written/paper
You may submit comments on any guidance at any time (see 21 CFR 10.115(g)(5)).
Submit written requests for single copies of the draft guidance to the Division of Drug Information, Center for Drug Evaluation and Research, Food and Drug Administration, 10001 New Hampshire Ave., Hillandale Building, 4th Floor, Silver Spring, MD 20993-0002, or the Office of Communication, Outreach and Development, Center for Biologics Evaluation and Research, Food and Drug Administration, 10903 New Hampshire Ave., Bldg. 71, Rm. 3128, Silver Spring, MD 20993-0002. Send one self-addressed adhesive label to assist that office in processing your requests. See the
Abha Kundi, Office of Compliance, Center for Drug Evaluation and Research, Food and Drug Administration, 10903 New Hampshire Ave., Silver Spring, MD 20993-0002, 301-796-3130,
FDA is announcing the availability of a draft guidance for industry entitled “Waivers, Exceptions, and Exemptions from the Requirements of Section 582 of the Federal Food, Drug, and Cosmetic Act.” The Drug Supply Chain Security Act (DSCSA) was signed into law on November 27, 2013 (Title II of Pub. L. 113-54). The DSCSA outlines critical steps to build an electronic, interoperable system by 2023 that can identify and trace products as they are distributed in the United States. Section 202 of the DSCSA added section 582 to the FD&C Act (21 U.S.C. 360eee-1), which sets forth trading partner requirements, including those related to product tracing, product identifiers, authorized trading partners, and verification. Section 582(a)(3)(A) of the FD&C Act directs FDA to establish processes by which: (1) An authorized trading partner (
Accordingly, this draft guidance describes these processes required by the law. Additionally, as required by section 582(a)(3)(B) of the FD&C Act, this draft guidance also includes a process for the biennial review and renewal of waivers, exceptions, and exemptions.
This draft guidance is being issued consistent with FDA's good guidance practices regulation (21 CFR 10.115). The draft guidance, when finalized, will represent the current thinking of FDA on the process for waivers, exceptions, and exemptions from the requirements of section 582 of the FD&C Act. It does not establish any rights for any person and is not binding on FDA or the public. You can use an alternative approach if it satisfies the requirements of the applicable statutes and regulations. This guidance is not subject to Executive Order 12866.
Under the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501-3520), Federal Agencies must obtain approval from the Office of Management and Budget (OMB) for each collection of information they conduct or sponsor. “Collection of information” is defined in 44 U.S.C. 3502(3) and 5 CFR 1320.3(c) and includes Agency requests or requirements that members of the public submit reports, keep records, or provide information to a third party. Section 3506(c)(2)(A) of the PRA (44 U.S.C. 3506(c)(2)(A)) requires Federal Agencies to provide a 60-day notice in the
With respect to the following collection of information, FDA invites comments on these topics: (1) Whether the proposed collection of information is necessary for the proper performance of FDA's functions, including whether the information will have practical utility; (2) the accuracy of FDA's estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used; (3) ways to enhance the quality, utility, and clarity of the information to be collected; and (4) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques, when appropriate, and other forms of information technology.
Under the draft guidance, a trading partner or stakeholder may request a waiver, exception, or exemption from the requirements of section 582 of the FD&C Act. FDA estimates that annually a total of approximately 20 waiver, exception, or exemption requests will be submitted to the Agency by approximately 20 trading partners or stakeholders. This estimate is based on communications the Agency has had with trading partners and stakeholders since the enactment of the DSCSA in 2013. FDA also estimates that it will take respondents an average of 40 hours to prepare and submit each request, including the time to submit any additional followup information that may be requested by FDA. FDA estimates that the total annual burden hours for submitting these requests are
Under the draft guidance, a recipient of a waiver, exception, or exemption should notify FDA whenever there is a material change in the circumstances that were the basis for the relief. In addition, FDA intends to biennially review waivers, exceptions, and exemptions that are longer than 2 years in duration as described in the draft guidance, and may ask the recipients to submit information to determine whether there has been a material change in the circumstances.
FDA estimates that annually it will receive approximately 1 notification or other information from approximately 1 respondent that there has or has not been a material change in the circumstances that warranted the waiver, exception, or exemption, and that each notification will take approximately 16 hours to prepare and submit to FDA. We estimate that the total annual burden hours for submitting this information to FDA are approximately 16 hours (see table 1, row 2).
Under the draft guidance, a trading partner may request that FDA renew a waiver, exception, or exemption that is of limited duration. This request should include a detailed statement justifying the continuance of the relief and the desired length of the extension. FDA estimates that annually it will receive approximately 1 renewal request from approximately 1 respondent, and that each request will take approximately 16 hours to prepare and submit to FDA. We estimate that the total annual burden hours for submitting these requests to FDA are approximately 16 hours (see table 1, row 3).
Persons with access to the internet may obtain the draft guidance at either
Health Resources and Service Administration (HRSA), Department of Health and Human Services (HHS).
Notice of Advisory Committee meeting.
In accordance with the Federal Advisory Committee Act, this notice announces that the National Advisory Council of the National Health Service Corps (NACNHSC) will hold a public meeting.
Tuesday, May 15, 2018, 2:00 p.m. to 5:30 p.m. ET.
The meeting is a teleconference and webinar. The conference call-in number is 1-800-619-2521; passcode: 9271697. The webinar link is
Diane Fabiyi-King, Designated Federal Official (DFO), Division of National Health Service Corps (NHSC), Bureau of Health Workforce (BHW), HRSA. Address: 5600 Fishers Lane, Room 14N110, Rockville, Maryland 20857; phone: (301) 443-3609; or email:
Public participants may also submit written statements in advance of the scheduled meeting. Written statements are due to Monica-Tia Bullock at
Department of Health and Human Services, Office of the Secretary, Office of the Assistant Secretary for Health.
Notice.
As stipulated by the Federal Advisory Committee Act, the U.S. Department of Health and Human Services (HHS) is hereby giving notice that a webinar meeting of the Chronic Fatigue Syndrome Advisory Committee (CFSAC) will take place and open to the public to listen in via a toll free number.
The CFSAC webinar will be held on Wednesday, June 20, 2018, from 9:00 a.m. until 5:00 p.m. and on Thursday, June 21, 2018 from 9:00 a.m. to 5:00 p.m. (EST).
This meeting will be broadcasted to the public as a webinar. A webinar is a virtual meeting. Registration is not required for the webinar.
Gustavo Ceinos, MPH, Designated Federal Officer, Chronic Fatigue Syndrome Advisory Committee, Department of Health and Human Services, 200 Independence Avenue SW, Room 728F.6, Washington, DC 20201. Please direct all inquiries to
The CFSAC is authorized in 42 U.S.C.217a, Section 222 of the Public Health Service Act, as amended. The purpose of the CFSAC is to provide advice and recommendations to the Secretary of Health and Human Services (HHS), through the Assistant Secretary for Health (ASH), on issues related to myalgic encephalomyelitis/chronic fatigue syndrome (ME/CFS). The issues can include factors affecting access and care for persons with ME/CFS; the science and definition of ME/CFS; and broader public health, clinical, research, and educational issues related to ME/CFS.
The agenda for this meeting, call-in information and location will be posted on the CFSAC website
A one hour of public comments via telephone will be scheduled for the first and second day of the webinar. Individuals will have five minutes to present their comments. Priority will be given to individuals who have not provided public comments within the previous year. We are unable to place international calls for public comments. To request a time slot for public comments, please send an email to
Individuals who would like to provide written testimony to Committee members should submit a copy of their testimony prior to the meeting. It is preferred, but not required, that the submitted testimony be prepared in digital format and typed using a 12-pitch font. Copies of the written testimony must not exceed 5 single-space pages, and it is preferred, but not required that the document be prepared in the MS Word format. Please note that PDF files, handwritten notes, charts, and photographs cannot be accepted. Materials submitted should not include sensitive personal information, such as social security number, birthdates, driver's license number, passport number, financial account number, or a credit or debit card number. If you wish to remain anonymous, you must specify this in the document.
The Committee welcomes input on any topic related to ME/CFS.
Pursuant to section 10(d) of the Federal Advisory Committee Act, as amended, notice is hereby given of the following meetings.
The meetings will be closed to the public in accordance with the provisions set forth in sections 552b(c)(4) and 552b(c)(6), Title 5 U.S.C., as amended. The grant applications and the discussions could disclose confidential trade secrets or commercial property such as patentable material, and personal information concerning individuals associated with the grant applications, the disclosure of which would constitute a clearly unwarranted invasion of personal privacy.
Pursuant to section 10(d) of the Federal Advisory Committee Act, as amended, notice is hereby given of the following meeting.
The meeting will be closed to the public in accordance with the provisions set forth in sections 552b(c)(4) and 552b(c)(6), Title 5 U.S.C., as amended. The contract proposals and the discussions could disclose confidential trade secrets or commercial property such as patentable material, and personal information concerning individuals associated with the contract proposals, the disclosure of which would constitute a clearly unwarranted invasion of personal privacy.
Pursuant to section 10(d) of the Federal Advisory Committee Act, as amended, notice is hereby given of the following meetings.
The meetings will be closed to the public in accordance with the provisions set forth in sections 552b(c)(4) and 552b(c)(6), Title 5 U.S.C., as amended. The grant applications and the discussions could disclose confidential trade secrets or commercial property such as patentable material, and personal information concerning individuals associated with the grant applications, the disclosure of which would constitute a clearly unwarranted invasion of personal privacy.
Pursuant to section 10(d) of the Federal Advisory Committee Act, as amended, notice is hereby given of the following meeting.
The meeting will be closed to the public in accordance with the provisions set forth in sections 552b(c)(4) and 552b(c)(6), Title 5 U.S.C., as amended.The grant applications and the discussions could disclose confidential trade secrets or commercial property such as patentable material, and personal information concerning individuals associated with the grant applications, the disclosure of which would constitute a clearly unwarranted invasion of personal privacy.
Pursuant to section 10(d) of the Federal Advisory Committee Act, as amended, notice is hereby given of the following meetings.
The meetings will be closed to the public in accordance with the provisions set forth in sections 552b(c)(4) and 552b(c)(6), Title 5 U.S.C., as amended. The grant applications and the discussions could disclose confidential trade secrets or commercial property such as patentable material, and personal information concerning
Pursuant to section 10(d) of the Federal Advisory Committee Act, as amended, notice is hereby given of the following meetings.
The meetings will be closed to the public in accordance with the provisions set forth in sections 552b(c)(4) and 552b(c)(6), Title 5 U.S.C., as amended. The grant applications and the discussions could disclose confidential trade secrets or commercial property such as patentable material, and personal information concerning individuals associated with the grant applications, the disclosure of which would constitute a clearly unwarranted invasion of personal privacy.
Pursuant to section 10(d) of the Federal Advisory Committee Act, as amended, notice is hereby given of a meeting of the Advisory Committee to the Director, National Institutes of Health.
The meeting will be open to the public, with attendance limited to space available. Individuals who plan to attend and need special assistance, such as sign language interpretation or other reasonable accommodations, should notify the Contact Person listed below in advance of the meeting.
Any interested person may file written comments with the committee by forwarding the statement to the Contact Person listed on this notice. The statement should include the name, address, telephone number and when applicable, the business or professional affiliation of the interested person.
In the interest of security, NIH has instituted stringent procedures for entrance onto the NIH campus. All visitor vehicles, including taxicabs, hotel and airport shuttles will be inspected before being allowed on campus. Visitors will be asked to show one form of identification (for example, a government-issued photo ID, driver's license, or passport) and to state the purpose of their visit.
Information is also available on the Institute's/Center's home page:
Pursuant to section 10(d) of the Federal Advisory Committee Act, as amended, notice is hereby given of the following meeting.
The meeting will be closed to the public in accordance with the provisions set forth in sections 552b(c)(4) and 552b(c)(6), Title 5 U.S.C., as amended. The grant applications and the discussions could disclose confidential trade secrets or commercial property such as patentable material, and personal information concerning individuals associated with the grant applications, the disclosure of which would constitute a clearly unwarranted invasion of personal privacy.
Pursuant to section 10(d) of the Federal Advisory Committee Act, as amended, notice is hereby given of the following meetings.
The meetings will be closed to the public in accordance with the provisions set forth in sections 552b(c)(4) and 552b(c)(6), Title 5 U.S.C., as amended. The grant applications and the discussions could disclose confidential trade secrets or commercial property such as patentable material, and personal information concerning individuals associated with the grant applications, the disclosure of which would constitute a clearly unwarranted invasion of personal privacy.
United States International Trade Commission.
Notice.
May 2, 2018.
Christopher W. Robinson (202-205-2542), Office of Investigations, U.S. International Trade Commission, 500 E Street SW, Washington, DC 20436. Hearing-impaired persons can obtain information on this matter by contacting the Commission's TDD terminal on 202-205-1810. Persons with mobility impairments who will need special assistance in gaining access to the Commission should contact the Office of the Secretary at 202-205-2000. General information concerning the Commission may also be obtained by accessing its internet server (
On February 2, 2018, the Commission established a schedule for the conduct of the final phase investigations of low melt PSF from Korea and Taiwan. On February 26, 2018, the schedule was published in the
The Commission's new schedule for these investigations is as follows: Requests to appear at the hearing must be filed with the Secretary to the Commission not later than June 14, 2018; the prehearing conference will be held at the U.S. International Trade Commission building on June 14, 2018, if deemed necessary; the prehearing staff report will be placed in the nonpublic record on May 31, 2018; the deadline for filing prehearing briefs is June 7, 2018; the hearing will be held at the U.S. International Trade Commission building at 9:30 a.m. on June 19, 2018; the deadline for filing posthearing briefs is June 26, 2018; the Commission will make its final release of information on July 13, 2018; and final party comments are due on July 17, 2018.
For further information concerning these investigations see the Commission's notice cited above and the Commission's Rules of Practice and Procedure, part 201, subparts A through E (19 CFR part 201), and part 207, subparts A, D, E, and F (19 CFR part 207).
These investigations are being conducted under authority of title VII of the Tariff Act of 1930; this notice is published pursuant to section 207.21 of the Commission's rules.
By order of the Commission.
U.S. International Trade Commission.
Notice.
Notice is hereby given that the U.S. International Trade Commission has determined sua sponte to amend the notice of investigation to delete claims 2-9 of U.S. Patent No. 8,633,936 (“the '936 patent”), which were erroneously included due to a typographical error.
Panyin A. Hughes, Office of the General Counsel, U.S. International Trade Commission, 500 E Street SW, Washington, DC 20436, telephone (202) 205-3042. Copies of non-confidential documents filed in connection with this investigation are or will be available for inspection during official business hours (8:45 a.m. to 5:15 p.m.) in the Office of the Secretary, U.S. International Trade Commission, 500 E Street SW, Washington, DC 20436, telephone (202) 205-2000. General information concerning the Commission may also be obtained by accessing its internet server at
The Commission instituted this investigation on August 14, 2017, based on a complaint filed by Qualcomm Incorporated of San Diego, California (“Qualcomm”). 82 FR 37899 (Aug. 14, 2017). The complaint alleges violations of section 337 of the Tariff Act of 1930 (19 U.S.C. 1337) in the importation into the United States, the sale for importation, and the sale within the United States after importation of certain mobile electronic devices and radio frequency and processing components thereof that infringe one or more claims of U.S. Patent No. 8,487,658; U.S. Patent No. 8,698,558; U.S. Patent No. 8,487,658; U.S. Patent No. 8,838,949; U.S. Patent No. 9,535,490; U.S. Patent No. 9,608,675; and the '936 patent. The notice of investigation named Apple Inc. of Cupertino, California as the respondent. The Office of Unfair Import Investigations is participating in the investigation.
The complaint, as amended, states that Qualcomm alleges infringement of claims 1, 10-27, 29, 38, 49, 55-60, 67, and 68 of the '936 patent. The notice of investigation, however, lists the asserted claims of the '936 patent as claims 1-27, 29, 38, 49, 55-60, 67, and 68. Under Commission Rule 210.14(b) (19 CFR 210.14(b)), good cause exists to amend the notice of investigation to correct this typographical error.
The authority for the Commission's determination is contained in section 337 of the Tariff Act of 1930, as amended (19 U.S.C. 1337), and in Part 210 of the Commission's Rules of Practice and Procedure (19 CFR part 210).
By order of the Commission.
On May 2, 2018, the Department of Justice lodged a proposed Consent Decree with the United States District Court for the Middle District of Louisiana in the lawsuit entitled
The Complaint in this Clean Water Act case was filed against WCC Energy Group, LLC and Sammy Garrard concurrently with the lodging of the proposed Consent Decree. The Complaint alleges that WCC and Mr. Garrard are civilly liable for violations of Section 311 of the Clean Water Act (“CWA”), 33 U.S.C. 1321. The Complaint seeks civil penalties and injunctive relief for two discharges of oil into navigable waters of the United States from an oil production facility in the Frog Lake Area of the Atchafalaya River Basin.
The Complaint alleges that the spills occurred in August 2017. The first spill involved oil discharged from a portion of the facility's transfer line. The second spill was caused by oil leaking off the deck of the facility's production barge into the surrounding water, resulting in a sheen. WCC is an owner and operator of the facility. Mr. Garrard, the facility manager at the time of the spills, was an operator and person-in-charge.
Under the proposed Consent Decree each defendant will pay a civil penalty and perform corrective measures. WCC will pay a civil penalty of $55,000. Mr. Garrard will pay a civil penalty of $2,000 based on assessment of his limited financial ability to pay. The Consent Decree also requires WCC to perform corrective measures at its Frog Lake facility, including notifying the Coast Guard in advance of oil transfer operations, discontinuing the storage of oily waste at the facility, maintaining flow meter gauges and installing pressure gauges to ensure against oil losses along the transfer line, performing periodic inspections of the facility, and submitting reports on progress and compliance. The Consent Decree further requires Mr. Garrard to notify the Coast Guard of his work in the oil and gas industry over the next year.
The Publication of this notice opens a period for public comment on the proposed Consent Decree. Comments should be addressed to the Acting Assistant Attorney General, Environment and Natural Resources Division, and should refer to
During the public comment period, the proposed Consent Decree may be examined and downloaded at this Justice Department website:
Please enclose a check or money order for $7.50 (25 cents per page
Occupational Safety and Health Administration (OSHA), Labor.
Request for public comments.
OSHA solicits public comments concerning its proposal to extend the Office of Management and Budget's (OMB) approval of the information collection requirements specified in the Inorganic Arsenic Standard.
Comments must be submitted (postmarked, sent, or received) by July 9, 2018.
Theda Kenney, Directorate of Standards and Guidance, OSHA, U.S. Department of Labor, telephone (202) 693-2222.
The Department of Labor, as part of its continuing effort to reduce paperwork and respondent (
The information collection requirements in the Inorganic Arsenic Standard provide protection for workers from the adverse health effects associated with exposure to inorganic arsenic. The Inorganic Arsenic Standard requires employers to: Monitor workers' exposure to inorganic arsenic, and notify workers of exposure-monitoring results; notify anyone who cleans protective clothing or equipment of inorganic arsenic exposure; develop, update, and maintain a housekeeping and maintenance plan; monitor worker health by providing medical surveillance; post warning signs, and apply labels to shipping and storage containers of inorganic arsenic; develop and maintain worker exposure monitoring and medical records; establish and implement written compliance programs; and provide workers with information about their exposures and the health effects of exposure to inorganic arsenic.
OSHA has a particular interest in comments on the following issues:
• Whether the proposed information collection requirements are necessary for the proper performance of the Agency's functions, including whether the information is useful;
• The accuracy of OSHA's estimate of the burden (time and costs) of the information collection requirements, including the validity of the methodology and assumptions used;
• The quality, utility, and clarity of the information collected; and
• Ways to minimize the burden on employers who must comply; for example, by using automated or other technological information collection and transmission techniques.
The Agency is requesting an adjustment decrease of 1,920 burden hours, from 12,466 to 10,546 hours. This decrease is due to a decrease in the number of workers being exposed above the permissible exposure limit (PEL), and being exposed above the action level (AL), but below the PEL. There is also a decrease in the number of medical examinations administered annually. Therefore, this reduces the total cost burden for exposure monitoring sampling and medical exams from $1,350,395 to $1,121,959, even though the total cost has gone up for medical exams from $221 to $243.33.
You may submit comments in response to this document as follows: (1) Electronically at
Because of security procedures, the use of regular mail may cause a significant delay in the receipt of comments. For information about security procedures concerning the delivery of materials by hand, express delivery, messenger, or courier service, please contact the OSHA Docket Office at (202) 693-2350, TTY (877) 889-5627.
Comments and submissions are posted without change at
Loren Sweatt, Deputy Assistant Secretary of Labor for Occupational Safety and Health, directed the preparation of this notice. The authority for this notice is the Paperwork Reduction Act of 1995 (44 U.S.C. 3506
Legal Services Corporation.
Notice.
The Legal Services Corporation (LSC) issues this Notice describing the application and award process for up to $14,250,000 of grants to support delivery of legal services related to the consequences of all cyclone and hurricane stages of Hurricanes Harvey, Irma, and Maria and of the calendar year 2017 California wildfires.
Applications must be submitted by 11:59 p.m. E.S.T. on Monday, June 4, 2018.
Application must be submitted electronically at
Application instructions are in the Notice of Funds and Request for Applications available at
The Legal Services Corporation (LSC) is accepting applications from current LSC grantees for grants to support delivery of legal services related to the consequences of all cyclone and hurricane stages of Hurricanes Harvey, Irma, and Maria and of the calendar year 2017 California wildfires (2017 Hurricanes and California Wildfires). These grants will fund necessary expenses for grantees to provide (1) mobile resources, (2) technology, and (3) disaster coordinators for pro bono volunteers, all of which must be necessary to provide storm-related services to LSC-eligible clients in the areas significantly affected by the 2017 Hurricanes and California Wildfires. Application materials and descriptions of eligible activities, grant requirements and the review and selection process are posted in the Notice of Funds and Request for Applications available at
LSC will have approximately $14,250,000 available for 2017 Hurricanes and California Wildfires grants. Grant decisions for these funds will be made in the summer of 2018. There is no maximum amount for 2017 Hurricanes and California Wildfires grants that are within the total funding available. LSC recommends submitting applications with budget of at least $500,000.
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National Aeronautics and Space Administration.
Notice; correction.
NASA published a document in the
The correction is valid May 9, 2018.
In the
Mark Homer, Patent Counsel, NASA Management Office of Chief Counsel, Jet Propulsion Laboratory, 4800 Oak Grove Drive, M/S 180-800C Pasadena, CA 91109. Phone (818) 354-7770. Facsimile (818) 393-2607.
Nuclear Regulatory Commission.
Exemption; issuance.
The U.S. Nuclear Regulatory Commission (NRC) has issued an exemption for the Monticello Nuclear Generating Plant, Docket No. 50-263, in response to an April 6, 2017, request from Northern States Power Company. Specifically, the exemption is from the regulation that requires where redundant trains of systems necessary to achieve and maintain hot shutdown conditions located within the same fire area outside of primary containment, one of the redundant trains remains free of fire damage by one of three methods of physical separation.
The exemption was issued on May 1, 2018.
Please refer to Docket ID NRC-2018-0090 when contacting the NRC about the availability of information regarding this document. You may obtain publicly-available information related to this document using any of the following methods:
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Robert F. Kuntz, Office or Nuclear Reactor Regulation, U.S. Nuclear Regulatory Commission, Washington, DC 20555-0001; telephone: 301-415-3733, email:
The text of the exemption is attached.
For the Nuclear Regulatory Commission.
Northern States Power Company, doing business as Xcel Energy (the licensee), is the holder of Renewed Facility Operating License Number 50-263, which authorizes operation of the Monticello Nuclear Generating Plant (Monticello). The license provides, among other things, that the facility is subject to all rules, regulations, and orders of the U.S. Nuclear Regulatory Commission (NRC or the Commission) now or hereafter in effect.
The facility consists of a boiling water reactor located in Wright County, Minnesota.
In its letter dated April 6, 2017 (Agencywide Documents Access and Management System (ADAMS) Accession No. ML17096A599), as supplemented by its letter dated November 20, 2017 (ADAMS Accession No. ML17324B361), the licensee requested an exemption from Title 10 of the
The regulatory framework that applies to Monticello is contained in 10 CFR 50.48(b)(1) which requires that plants licensed before January 1, 1979, to meet Sections III.G, J, and O, of Appendix R to 10 CFR part 50. Monticello began commercial operations in 1971. Section III.G.2 of 10 CFR part 50, Appendix R, requires, that, “where cables or equipment, including associated non-safety circuits that could prevent operation or cause maloperation due to hot shorts, open circuits, or shorts to ground, of redundant trains of systems necessary to achieve and maintain hot shutdown conditions are located within the same fire area outside of primary containment, one of the following means of ensuring that one of the redundant trains is free of fire damage shall be provided: a. Separation of cables and equipment and associated non-safety circuits of redundant trains by a fire barrier having a 3-hour rating. Structural steel forming a part of or supporting such fire barriers shall be protected to provide fire resistance equivalent to that of the barrier; b. Separation of cables and equipment and associated non-safety circuits of redundant trains by a horizontal distance of more than 20 feet with no intervening combustible or fire hazards. In addition, fire detectors and an automatic fire suppression system shall be installed in the fire area; or c. Enclosure of cable and equipment and associated non-safety circuits of one redundant train in a fire barrier having a 1-hour fire rating. In addition, fire detectors and an automatic fire suppression system shall be installed in the fire area.”
In its April 29, 2014, triennial fire protection inspection report 05000263/2014008, (ADAMS Accession No. ML14119A216), the NRC staff identified two pairs of Drywell Spray (DWS) motor-operated valve (MOV) control cables that are not
The requirements at 10 CFR part 50, Appendix R, Section III.G.2, require that hot shorts and open circuits be considered, and the licensee's analysis showed that the shorting switch modification could fail to meet its design purpose if certain hot shorts and open circuits were to occur due to fire damage. Therefore, on April 6, 2017, the licensee submitted an RI request for an exemption from the requirements of 10 CFR part 50, Appendix R, Section III.G.2, to address postulated spurious actuations of the DWS MOVs that could occur in the event that an open circuit caused the shorting switch to fail to perform its function.
Pursuant to 10 CFR 50.12, the Commission may, upon application by any interested person or upon its own initiative, grant exemptions from the regulations when: (1) the exemptions are authorized by law, will not present an undue risk to public health or safety, and are consistent with the common defense and security; and (2) when special circumstances are present. The licensee requested an exemption from 10 CFR part 50, Appendix R, Section III.G.2, claiming that the special circumstances of 10 CFR 50.12(a)(2)(ii), which states that, “Application of the regulation in the particular circumstances would not serve the underlying purposed of the rule or is not necessary to achieve the underlying purpose of the rule,” apply.
The underlying purpose of 10 CFR part 50, Appendix R, Section III.G.2, is to provide reasonable assurance of fire protection of safe shutdown capability by providing a means to ensure that one of the redundant trains of systems necessary to achieve and maintain hot shutdown conditions is free of fire damage. The licensee's position is that the safety benefit, when measured using accepted probabilistic risk assessment (PRA) techniques, is “virtually” the same as if the plant had used one of the three separation options described in 10 CFR part 50, Appendix R, Section III.G.2.a, b, or c.
The NRC staff's evaluation of the licensee's exemption request is provided below.
The fire scenario, as described in the licensee's exemption request, is that there will be spurious operation of two normally closed DWS MOVs due to a fire. The cables are routed from the control room and may be subject to a fire in three other rooms. Two of the rooms are in Fire Area IX, the rooms (called fire zones) are Fire Zone 13C—Turbine Building East—Engineered Safeguards Feature Motor Control Center Area, and Fire Zone 19C—Turbine Building East—Pipe and Cable Tray Penetration Area. The third room is in Fire Area XII, Fire Zone 19B, Turbine Building East and Engineered Safeguards Features Motor Control Center Cable Tunnel. It is within these three rooms that the separation required by 10 CFR part 50, Appendix R, Section III.G.2, is not provided.
The scenario postulates that a fire in one of these areas could damage the control cables to the two DWS MOVs and cause the normally closed valves to spuriously open. If these valves were to open while the same division's residual heat removal (RHR) pump were operating, the scenario postulates that the RHR pumps would be damaged and safe shutdown capability would be impaired.
The NRC staff evaluated the licensee's analysis of how the protection provided by the shorting switch compares to the 10 CFR part 50, Appendix R, Section III.G.2 requirement that one train be free of fire damage by comparing the installed shorting switch configuration to the configuration required by the regulation. This section includes a discussion of how the installed shorting switch works to prevent a spurious opening of the DWS MOVs.
To reduce the likelihood of a spurious actuation, the licensee installed a shorting switch on one of the valves in series. There are two trains of DWS. A shorting switch is installed on MOV MO-2020 (Division I), and installed on MOV MO-2021 (Division II). The other valves in series, MOVs MO-2022 (Division I) and MO-2023 (Division II), are not equipped with a shorting switch, and therefore may be subject to an energized cable fault that could cause a spurious opening of those valves. Figure 1 of the licensee's exemption request includes a one-line diagram of the system.
When the control room switch is in the closed position, the shorting switch creates an electrical circuit that provides a low impedance path bypassing the valve's “open” coil. If an energized cable fault or hot short were to occur that would energize the “open” coil, this low impedance path would divert enough current away from the “open” coil through the shorting switch electrical circuit to prevent the “open” coil from actuating. When the control room switch is set to the open position, this low impedance path is removed from the circuit and the valve can be opened normally. The shorting switch only functions to prevent spurious actuation of the valve in the event of an energized cable fault. A simplified shorting switch circuit is shown in Figure 2 of the licensee's exemption request.
The fire scenario of concern would involve three fire-induced failures. First, an energized cable fault or hot short would need to occur on control circuitry for the DWS MOV that does not have a shorting switch installed, for example MO-2022. Second, the fire would need to cause a cable to become severed, also called an open circuit, on one of the conductors for the shorting switch protected valves, such as MO-2020. Third, the fire would have to cause that same severed cable to MO-2020 to be exposed to an energized cable fault or hot short. Essentially the severed cable would remove the shorting switch from the circuit, thereby, defeating the design capability of the shorting switch. Similarly, the pair of valves MO-2021 and MO-2023 would be vulnerable to the same potential failure mode. Note that both valves in a pair, MO-2020 and MO-2022 or MO-2021 and MO-2023, would need to be impacted to remove the shorting switch from the circuit. A hot short from one cable in the first pair and one cable in the second pair would not create a condition where the RHR pumps could be damaged.
The licensee's exemption request includes a risk assessment of the proposed plant change. The use of risk information in a 10 CFR part 50, Appendix R, exemption request is in accordance with Regulatory Position 1.8 of Regulatory Guide (RG) 1.189, “Fire Protection for Nuclear Power Plants,” Revision 2, dated October 2009 (ADAMS Accession No. ML092580550), which says that RI/PB methodologies may be used to evaluate the acceptability of FPP changes; however, for this approach, the licensee should use methodologies and acceptance criteria that the NRC has reviewed and approved. RG 1.174, “An Approach for Using Probabilistic Risk Assessment in Risk-Informed Decisions on Plant-Specific Changes to the Licensing Basis,” Revision 2, (ADAMS Accession No. ML100910006), includes guidance for RI changes to a plant's current licensing bases.
Accordingly, the NRC staff reviewed the licensee's exemption request using the review methodology and criteria contained in RG 1.174, Revision 2, which includes the following elements:
• Defining the proposed change,
• Performing an engineering analysis, including an evaluation that the proposed change is consistent with the defense-in-depth (DID) philosophy and the principle that sufficient safety margins are maintained,
• Assessing the technical adequacy of the PRA analysis, the methods used to determine the risk impact of the proposed change, and the results of the risk impact assessment,
• Defining the implementation and monitoring program to ensure that no unexpected adverse safety degradation occurs due to the proposed change, and
• Confirming that an integrated approach was used to evaluate the proposed change.
Pursuant to 10 CFR 50.12, the licensee requested an exemption from 10 CFR part 50, Appendix R, Section III.G.2 requirements with respect to the protection of the control circuitry for the DWS MOVs. In lieu of meeting the protection requirements of Section III.G.2, the licensee has installed a shorting switch modification on the control circuitry for one MOV in each division of the DWS system to reduce the risk impact of a fire-induced multiple spurious operation (MSO) that fails both MOVs. A detailed
Regulatory Position 2.1 of RG 1.174, Revision 2, indicates that, for RI changes to the plant licensing basis, the licensee should evaluate the proposed change to determine whether it is consistent with the DID philosophy and the principle that sufficient safety margins are maintained.
Regulatory Position 2.1.1 of RG 1.174, Revision 2, provides guidance on maintaining the philosophy of nuclear safety DID and identifies several elements to consider in this evaluation. DID involves prevention, protection, and mitigation. With respect to nuclear power plant FPPs, the regulations in 10 CFR part 50, Appendix R, Section II.A state that the FPP shall extend the concept of DID to fire protection in fire areas important to safety with the following objectives:
• to prevent fires from starting;
• to detect rapidly, control, and extinguish promptly those fires that do occur; and
• to provide protection for structures, systems and components important to safety so that a fire that is not promptly extinguished by the fire suppression activities will not prevent the safe shutdown of the plant.
An engineering analysis that evaluates the impact of a proposed change to an Appendix R FPP on the balance among these FPP DID elements is deemed by the NRC staff to satisfy the RG 1.174 guidance. Enclosure 1, Section 3.2, of the exemption request provides the licensee's evaluation of the FPP DID elements. Fire protection DID elements consist of administrative controls such as plant procedures to limit combustible materials or control hot work activities, plant design features, fire protection inspections, installed fire detection and suppression systems, and passive fire protection features such as fire barriers.
The licensee's position is that the use of a shorting switch meets the underlying purpose of the rule by providing equivalent protection to one of the separation methods of 10 CFR part 50, Appendix R, Section III.G.2. The licensee chose to install the shorting switch in lieu of possibly separating the cables for the valves in series (MO-2021 from MO-2023, and MO-2020 from MO-2022) into separate areas. The following sections discuss the fire protection DID elements of preventing fires, suppressing fires that do occur, and protecting safe shutdown.
The licensee indicated that each of the three rooms has administratively controlled restrictions on combustibles. The licensee described that of the three zones, only Fire Area IX, Fire Zone 13C, has significant fixed ignition sources, which are motor control centers. The NRC staff finds that this exemption does not degrade the preventing fires DID element, because the proposed change does not introduce additional combustibles or ignition sources at such a level that necessitates additional controls be put in place to prevent fires from starting.
The licensee indicated that all three of the rooms addressed in this exemption are equipped with full area ionization smoke detection systems. Only Fire Area IX, Fire Zone 13C, has significant fixed ignition sources and it is equipped with an automatic water based suppression system which the licensee indicates is based on the significance of the fire hazards contained within that room. The smoke detection system annunciates to the control room which results in response of the fire brigade.
Each of the three rooms included in this exemption has fire hose stations and fire extinguishers in the rooms or in adjacent rooms. Fire Area IX, Fire Zone 13C, and Fire Area XII, Fire Zone 19B, are 900 square feet, are considered large rooms, and have extinguishers and hose stations within the rooms. Fire Area IX, Fire Zone 19C, does not have a fire hose station or extinguisher in the room. Because Fire Area IX, Fire Zone 19C, has a small floor area of 204 square feet, the NRC staff concludes that it is reasonable that extinguishers and fire hoses could be brought from adjoining areas. The NRC staff also concludes that this exemption does not degrade the detecting and extinguishing fires DID element, because the installation of the switches (1) does not impact the ability of the installed detection and suppression systems to detect and extinguish a fire, and (2) does not impact the fire brigades ability to manually extinguish a fire using the installed extinguishers and fire hose stations.
The NRC staff determined that the safe shutdown element of fire protection DID is impacted by this exemption request. The licensee proposes to install an engineered feature called a shorting switch, in lieu of the protection required by 10 CFR part 50, Appendix R, Section III.G.2. Compliance with the regulation by use of a barrier, or separation with fire detection and suppression, protects against possible failure modes, but the shorting switch modification results in a possible failure mode involving hot shorts and open circuits. 10 CFR part 50, Appendix R, Section III.G.2, specifically states that a plant licensed before January 1, 1979, must address these failure modes (i.e., “maloperation due to hot shorts [and] open circuits”).
Although the licensee has chosen to use a RI analysis to compare compliance with the regulation and the proposed alternative using a shorting switch, the following deterministic features are in place, in addition to the fire prevention, fire detection, and fire suppression that are discussed above.
A fire would have to occur in one of the three subject areas and damage the cables to two of the MOVs. One MOV cable would have to be subjected to an energized fault or hot short, and the second MOV cable would have to be subjected to both a hot short and a severed cable also called an open circuit. For the combination of cable faults to damage the RHR pumps, the pumps would have to be running at the time of the cable faults. Although possible in an actual plant event, the licensee did not assume in its evaluation that plant operators would turn off the pumps before they became damaged. The NRC staff considers this assumption to be conservative because the licensee indicated that operators would initiate a controlled shutdown to preclude equipment failures.
Additionally, the NRC staff determined that hot shorts would have to be of sufficient duration to open the MOVs enough to result in a flow that would cause RHR pump failure due to runout and that typically, hot shorts are of a very short duration.
These aspects of the scenario, the likelihood of cable faults, the assumption that the RHR pumps are operating, and the possible operator actions and timing related to mitigating the potentially damaging configuration were not explicitly credited in the analysis. The NRC staff has determined that the DID discussion regarding prevention, protection, and mitigation satisfies the RG 1.174 guidance for a DID analysis because it discussed multiple means to accomplish safety functions in accordance with the guidance provided in Regulatory Position 2.1.1 of RG 1.174.
In Enclosure 1, Section 3.4.3, of the exemption request, the licensee provided its assessment of how sufficient safety margins are maintained. The licensee explained that the design and installation of the shorting switches was completed using applicable codes and standards and that the Monticello safety analyses were not impacted by the installation of the switches or the exemption request. In its letter dated November 20, 2017, in response to the NRC's October 18, 2017, request for additional information (RAI) (ADAMS Accession No. ML17293A091), the licensee indicated that sufficient safety margins are demonstrated by the design, operation, and performance monitoring of the shorting switches. The licensee indicated that the RHR system currently meets all applicable codes and standards (with the exception of the stated 10 CFR part 50, Appendix R, Section III.G.2 noncompliance), and also stated that granting the exemption will not affect Monticello's ability to demonstrate consistency with all applicable codes and standards.
In its November 20, 2017, letter, the licensee also summarized some of the PRA bases for ensuring sufficient safety margins. The summarized bases included maintaining a FPP that meets regulatory requirements, using a fire PRA (FPRA) that was developed in accordance with NUREG/CR-6850, “Fire PRA Methodology for Nuclear Power Facilities,” having had formal industry peer reviews of internal events PRAs (IEPRAs) and FPRAs, and using verified and validated fire models.
The NRC staff concludes that the licensee's safety margins assessment is acceptable because it demonstrated that codes and standards or their alternatives approved by the NRC are met, and that the safety analysis acceptance criteria described in the licensing basis are met.
The licensee performed a risk impact assessment for installation of the shorting switches rather than physically separating the control circuitry for the DWS MOVs in accordance with the 10 CFR part 50, Appendix R, separation requirements. For the assessment, the risk was evaluated by estimating the change in risk between an Appendix R-compliant configuration and the as-installed and as-operated configuration of the shorting switches. The risk assessment was provided in Enclosure 1, Section 3.3, of the licensee's exemption request.
The licensee used Revision 4.0 of the Monticello FPRA model to perform the risk impact assessment. For the development of the FPRA, the licensee modified its IEPRA model to capture the effects of fire. Therefore, the NRC staff evaluated both the IEPRA and FPRA quality information provided by the licensee in the exemption request to determine whether the plant-specific PRA used in the risk impact assessment includes sufficient scope, level of detail, and technical adequacy for this assessment.
Consistent with the information provided in NRC Regulatory Issue Summary 2007-06, “Regulatory Guide 1.200 Implementation,” March 22, 2007 (ADAMS Accession No. ML070650428), the NRC staff uses RG 1.200, “An Approach for Determining the Technical Adequacy of Probabilistic Risk Assessment Results for Risk-Informed Activities,” Revision 2 (ADAMS Accession No. ML090410014).
The licensee stated that a full-scope peer review was performed in April 2013, for the IEPRA model (Revision 3.2). The peer review was performed using Nuclear Energy Institute (NEI) 05-04, Revision 2, “Process for Performing Internal Events PRA Peer Reviews Using the ASME/ANS [American Society of Mechanical Engineers/American Nuclear Society] PRA Standard” (ADAMS Accession No. ML083430462), as clarified by RG 1.200, Revision 2. The PRA standard provides supporting requirements for the PRA against capability categories (CC) CC-I, CC-II, or CC-Ill. The peer review resulted in identification of PRA standard supporting requirements that did not meet CC-II, or that were met and had related findings (Reference: Evaluation of Risk Significance of Permanent Integrated Leak Rate Testing Extension—ML16047A273). In Enclosure 2 of the exemption request, the licensee provided the peer review finding-level facts and observations (F&Os) against the PRA standard supporting requirements and the licensee's resolution to each of the F&Os. The licensee stated that all of the finding-level F&Os have been resolved and that none were determined to affect the exemption request.
The licensee stated that a full-scope peer review of the FPRA model (Revision 1a) was performed in March 2015, using NEI 07-12, Revision 1, “Fire Probabilistic Risk Assessment (FPRA) Peer Review Process Guidelines,” June 2010 (ADAMS Accession No. ML102230070), and RG 1.200, Revision 2. The peer review resulted in identification of PRA standard supporting requirements that did not meet CC-II, or CC-III for one supporting requirement (Reference: Monticello ILRT license amendment—ML16047A273). In Enclosure 3 of the exemption request, the licensee provided the peer review finding-level F&Os against the PRA standard supporting requirements and its resolution to each of the F&Os. The licensee stated that all of the finding-level F&Os have been resolved and that none were determined to affect the exemption request.
The licensee stated that a focused-scope peer review of Revision 4.0 of the FPRA model was performed in December 2016, of a subset of high-level requirements impacted by the use of enhanced fire modeling methods that were implemented subsequent to the March 2015, peer review. The licensee provided the two peer review finding-level F&Os from this focused-scope peer review in Enclosure 4 of the exemption request. The licensee stated that the two finding-level F&Os have been resolved and that neither was determined to affect the exemption request. The licensee also stated that the PRA used in the risk impact assessment represents the current as-installed and as-operated configuration of Monticello.
The NRC staff reviewed the exemption request to determine the technical adequacy of the Monticello IEPRA and FPRA models used for this exemption request. The licensee stated that it evaluated its PRA against Revision 2 of RG 1.200 and the ASME/ANS PRA standard. The licensee stated that it had resolved all peer review and focused-scope peer review finding-level F&Os and concluded that they had no impact on the exemption request. Based on the information provided by the licensee, the NRC staff found that the licensee's PRA represents the current as-installed and as-operated plant, and the margin between the reported risk values and the guidance recommended values is acceptable.
The NRC staff concludes that the IEPRA is adequate and can be used to support the FPRA because the licensee demonstrated that the resolution of the F&Os did not affect the technical adequacy of the licensee's PRA analysis submitted to support the licensee's risk evaluation of the proposed exemption request.
The NRC staff concludes that the IEPRA is adequate and can be used to support the FPRA because the licensee demonstrated that the resolution of the F&Os support the technical adequacy of the licensee's PRA analysis submitted for the licensee's risk evaluation of the proposed exemption request.
The NRC staff also concludes that the FPRA is of sufficient technical adequacy and that its quantitative results can be used to demonstrate that the change in risk due to the lack of physical separation between the DWS division meets the acceptance guidelines in RG 1.174 because the licensee demonstrated that the resolution of the relevant F&Os supports the determination that the quantitative results are adequate and have no significant impact on the FPRA. For several F&Os, the NRC staff determined that the resolutions could impact the delta risk results reported in the exemption request, but that their resolution is unlikely to change the delta risk results reported by the licensee in the exemption request enough to increase the delta core damage frequency (CDF) and the delta large early release frequency (LERF) by an amount necessary to exceed the RG 1.174 risk guidelines for very small changes.
Based on the above, NRC staff concludes that the FPRA model is of sufficient technical adequacy to support the risk impact assessment of the proposed change.
The licensee stated that the evaluation of the risk for the proposed change was done using Revision 4.0 of the Monticello FPRA model to estimate the change in risk between an Appendix R-compliant configuration and the as-installed and as-operated configuration of the shorting switches.
In Enclosure 1, Section 3.3.3, of the exemption request, the licensee described how it developed the risk of the as-installed and as-operated configuration of the plant with shorting switches installed. For this plant configuration, the licensee modified the FPRA model to include new basic events to fail the DWS MOVs due to fire-induced MSOs (referred to as the “variant model”). The model modification included identifying the cables that could cause a DWS MOV MSO, identifying the plant locations (fire zones) where these cables are located in the plant, and linking these cables to specific fire scenarios modeled in the FPRA. The exemption request also described the revised fault tree logic that incorporated the new basic events.
Each of the two DWS trains includes two-normally-closed in-series MOVs that could fail open due to a fire-induced MSO and result in core damage. Each in-series pair of DWS MOVs were added together in the fault tree and assigned a hot short probability. The MOVs without a shorting switch have a hot short probability of 0.39, which is taken from Volume 2 of NUREG/CR-7150, “Joint Assessment of Cable Damage and Quantification of Effects from Fire (JACQUE-FIRE)” (ADAMS Accession No. ML14141A129). The MOVs with a shorting switch are assumed to have a failure probability of 1.0E-03, which is the assumed failure probability of the shorting switch. In enclosure 1, section 3.3.5 of the exemption request, the licensee justified its use of the 1.0E-03 failure probability by explaining that it was found acceptable by the NRC staff in the safety evaluations related to National Fire Protection Association 805 license amendment requests by other licensees (see ADAMS Accession Nos. ML15212A796 and ML16223A481). The licensee stated that the control circuitry configuration for the shorting switch application at these plants is substantially similar to that for the Monticello DWS MOVs.
The NRC staff finds that the use of a hot short probability of 0.39 is acceptable because it is the most bounding of the MOV hot short probabilities for grounded and ungrounded alternate current control circuits as described in Table 8-1 of NUREG/CR-7150, Volume 2. The NRC staff also finds that the licensee's use of the 1.0E-3 failure probability for the shorting switches is acceptable because the conditions that would
The exemption request further explained that the flow diversion created by the failure of just one train of DWS MOVs (i.e., spurious opening of both in-series MOVs) was assumed to result in damage of the RHR pumps because activation of the Drywell Sprays would result in lowering the drywell pressure. This in turn could result in the potential loss of containment accident pressure, which leads to a loss of net positive suction head and which, in turn, would fail the RHR pumps. All RHR pumps are potentially damaged because the RHR removal cross-tie valves are normally kept open. The failure of the RHR pumps and loss of net positive suction head result in failure of all associated functions modeled in the PRA (except DWS), specifically:
• Shutdown cooling,
• Low pressure coolant injection (LPCI),
• Torus cooling (which fails high pressure coolant injection and reactor coolant isolation cooling when suction is from the torus),
• Core spray,
• Alternate injection with condensate service water, the fire protection system, or RHR service water, and
• Primary containment.
Because of the failure of RHR pumps, the torus sprays would also fail, which is not modeled in the PRA.
In Enclosure 1, Section 3.3.2, of the exemption request, the licensee described how it developed the risk of the Appendix R-compliant configuration. For this plant configuration, the licensee revised the FPRA model to assume the DWS MOVs do not fail due to a fire-induced MSO (referred to as the “compliant model”). The licensee explained that its assumption is conservative because it assumes a failure probability of zero for the DWS MOVs due to a fire-induced MSO. The NRC staff concludes that this assumption is conservative because, although unlikely, there is a greater-than-zero probability of a large enough fire that could defeat the Appendix R protection requirements and produce a MSO that would fail the MOVs.
In Enclosure 1, Section 3.3.4, of the exemption request, the license explained that it calculated the change in risk for the proposed change by subtracting the calculated risk (CDF) and LERF) for the compliant model from the calculated risk for the variant model.
Furthermore, in Enclosure 1, Section 3.3.5, of the exemption request, the licensee identified several conservatisms in the PRA model that would overestimate the calculated change in risk. These conservatisms include: the assumption that all postulated control room fires fail the shorting switches, assumption that the RHR pumps are running at the time of the MSO event, and the assumption that the loss of containment accident pressure and net positive suction head is instantaneous with the MSO event. The NRC staff finds that these conservatisms make the model overestimate the calculated change in risk because not all control room fires fail the shorting switches, because the RHR pumps may not be running at the time of the MSO event, and because loss of containment accident pressure and net positive suction head may not be instantaneous with the MSO event.
Based on the licensee's description of the fault tree modeling of the MSO event in the compliant and variant models, the NRC staff concludes that the hot short probability and shorting switch failure probability are acceptable, and that the calculated change in risk is likely conservative. The NRC staff further concludes that the licensee's method for calculating the change in risk is acceptable.
In Enclosure 1, Section 3.3.4, of the exemption request, the licensee reported the results of its risk impact assessment. The licensee reported the calculated change in risk (variant model risk minus compliant model risk) for the proposed plant change to be 1.8E-08 per year for CDF and 1.4E-08 per year for LERF, which are below the RG 1.174, Revision 2, risk guidelines for a “very small” change.
Based on its review of the risk impact assessment results, and the margin between the reported risk values and the risk guidelines, the NRC staff concludes that the increase in CDF and LERF from the proposed change is very small per the definition in RG 1.174, Revision 2. Also, while the licensee did not provide the total plant risk from all hazards, the NRC staff finds this acceptable and consistent with RG 1.174, Revision 2, because there is no indication that the total CDF and LERF is considerably higher than 1.0E-04 and 1.0E-05 per reactor year, respectively.
In Enclosure 1, Section 3.4.5, of the exemption request, the licensee described the implementation and the monitoring program for the shorting switches and the DWS MOVs. The licensee explained that the shorting switches were installed in 2012 and that post-maintenance testing was conducted to ensure that the switches were installed in accordance with the approved design and that the MOVs continued to operate as expected. The DWS MOVs will continue to be regularly exercised in accordance with the Monticello MOV program, which has been accepted by the NRC staff, as providing an acceptable level of quality and safety, and are monitored under the Monticello Maintenance Rule Program.
In its November 20, 2017, letter, the licensee indicated that Monticello will generate a preventive maintenance task for the shorting switches to ensure acceptable resistance, and that this task will be completed within 180 days of the date of the exemption is issued. The licensee will introduce performance monitoring of the shorting switches into the Monticello, Appendix R, program, with the objective to ensure the shorting switches provide a low impedance path to ground in the event of a fire-induced hot short. The program will include acceptance criteria, which if exceeded, will cause the licensee to enter the issue into its corrective action program.
The NRC staff concludes that the proposed monitoring program for the shorting switches meets the guidelines of RG 1.174, Revision 2, and that RI applications include performance monitoring and feedback provisions.
As described in the previous sections, the licensee's exemption request and responses to NRC staff RAIs provided an integrated approach to evaluating the proposed change. Specifically, the licensee's assessment of the proposed change included:
• Performing a traditional engineering analysis, including an evaluation that the proposed change is consistent with the DID philosophy and the principle that sufficient safety margins are maintained,
• Assessing the technical adequacy of the PRA analysis, evaluating the risk impact of the proposed change, and comparing the results of the risk impact assessment to the
• RG 1.174, Revision 2, risk guidelines, and
• Defining the implementation of the proposed change and of a monitoring program to ensure that no unexpected adverse safety degradation occurs due to the proposed change.
Based on the NRC staff's review of each of these elements of the licensee's exemption request, the NRC staff concludes that the licensee's evaluations are acceptable and in accordance with RG 1.174, Revision 2, and that the risk increase of the proposed change meets the RG 1.174, Revision 2, risk guidelines for a “very small” change. Based on this, the NRC staff concludes that the licensee's integrated evaluation of the proposed change is acceptable.
Based on its review of the information provided by the licensee, the NRC staff concludes that the licensee's request to credit a shorting switch does not create any new accident precursors because the plant's operation remains the same in that fire protection for structures, systems, and components important to safe shutdown continues to be provided, and fire damage continues to be limited so that one of the redundant trains is free of fire.
The NRC staff also concludes that the licensee's evaluations are acceptable and in accordance with RG 1.174, Revision 2, and that the risk increase of the proposed change meets the RG 1.174, Revision 2, risk guidelines for a “very small” change. Based on this, the NRC staff concludes that the licensee's integrated evaluation of the proposed change is acceptable.
The exemption would allow the licensee to rely on the installed shorting switch and other fire protection DID features instead of providing separation in accordance with 10 CFR Part 50, Appendix R, Section III.G.2. As stated above, 10 CFR 50.12 allows the NRC to grant exemptions from the requirements of 10 CFR Part 50. The NRC staff has determined, as described in Section 3.7 below, that special circumstances exist to grant the proposed exemption and that granting of the licensee's proposed exemption will not result in a violation of the Atomic Energy Act of 1954, as amended, or
The underlying purposes of 10 CFR Part 50, Appendix R, is to provide reasonable assurance of fire protection safe shutdown capability. As discussed in Sections 3.1 and 3.2 above, the NRC staff found that the crediting of a shorting switch permitted by the proposed exemption does not create any new accident precursors or degrade detection systems because the plant's operation remains the same and the installed shorting switch provides an acceptable level of protection as compared to that provided by compliance with the regulation.
Because no new accident precursors are created by the proposed exemption, which would allow the licensee to use, or take credit using a risk-informed approach, for an installed shorting switch to ensure that one redundant train is free of fire damage, the probability of postulated accidents is not significantly increased, and reasonable assurance of fire protection of safe shutdown capability is maintained. Therefore, the NRC staff concludes that the consequences of postulated accidents are not significantly increased, and there is no undue risk to public health and safety.
The proposed exemption would allow the licensee to rely on the installed shorting switch instead of providing separation required by 10 CFR Part 50, Appendix R, Section III.G.2. The NRC staff concludes that this change to the plant design has no relation to security issues, therefore, the common defense and security is not impacted by this exemption.
Special circumstances, in accordance with 10 CFR 50.12, are present whenever an application of the regulation in the particular circumstances is not necessary to achieve the underlying purpose of the rule. The underlying purpose of 10 CFR part 50, Appendix R, Section III.G.2, is to provide reasonable assurance of fire protection of safe shutdown capability by providing a means to ensure that one of the redundant trains of systems necessary to achieve and maintain hot shutdown conditions is free of fire damage. The technical evaluation above demonstrates that the shorting switch and DID features provide reasonable assurance that the underlying purpose of the rule is met because the licensee demonstrated that the installed shorting switch provides an acceptable level of protection that is similar to that provided by compliance with the regulation. The licensee performed a deterministic engineering analysis and demonstrated that the proposed change is consistent with the DID philosophy and maintains sufficient safety margins. The licensee also assessed the technical adequacy of the PRA analysis and evaluated the risk impact of the proposed change and compared the results to the RG 1.174, Revision 2, risk guidelines, and also defined the implementation of the proposed change and of a monitoring program to ensure that no unexpected adverse safety degradation occurs due to the proposed change. Therefore, the NRC staff concludes that since the underlying purpose of 10 CFR 50, Appendix R, Section III.G.2 (i.e., ensuring one of the redundant trains of Drywell Spray is free of fire damage), is achieved, the special circumstances required by 10 CFR 50.12 for the granting of an exemption from 10 CFR part 50, Appendix R, Section III.G.2, exist.
The NRC staff determined that the issuance of the requested exemption meets the provisions of categorical exclusion 10 CFR 51.22(c)(9) because the exemption is from a requirement, with respect to the installation or use of a facility component located within the restricted area, as defined in 10 CFR part 20 and the issuance of the exemption involves: (i) No significant hazards consideration; (ii) no significant change in the types or significant increase in the amounts of any effluents that may be released offsite; and (iii) no significant increase in individual or cumulative occupational radiation exposure. Therefore, in accordance with 10 CFR 51.22(b), no environmental impact statement or environmental assessment need be prepared in connection with the NRC's issuance of this exemption. The basis for the NRC staff's determination is provided in the following evaluation of the requirements in 10 CFR 51.22(c)(9)(i)-(iii).
The NRC staff evaluated whether the exemption involves no significant hazards consideration by using the standards in 10 CFR 50.92(c), as presented below:
1. Does the requested exemption involve a significant increase in the probability or consequences of an accident previously evaluated?
No. The proposed exemption would allow the licensee to rely on the installed shorting switch instead of providing physical separation in accordance with 10 CFR Part 50, Appendix R, III.G.2 to protect structures, systems or components important to safe shutdown of the plant in the event of a fire. The licensee performed a risk impact assessment for installation of the shorting switches rather than physically separating the control circuitry in accordance with the 10 CFR Part 50, Appendix R, III.G.2 separation requirements. For the assessment, the risk was evaluated by estimating the change in fire risk between an Appendix R-compliant configuration and the as-installed and as-operated configuration of the shorting switches. Based on its review of the licensee's exemption request, the NRC staff concludes that the licensee's evaluations are acceptable and in accordance with Regulatory Guide (RG) 1.174, “An Approach for Using Probabilistic Risk Assessment in Risk-Informed Decisions on Plant-Specific Changes to the Licensing Basis,” Revision 2, and that the risk increase of the proposed change meets the RG 1.174, Revision 2, risk guidelines for a “very small” change.
The installation of the shorting switch does not alter plant operation or affect fire detection capability because fire protection for structures, systems, and components important to safe shutdown continues to be provided, and fire damage continues to be limited so that one of the redundant trains is free of fire damage and, therefore, would not alter the consequences of any accident previously evaluated.
Therefore, the exemption does not involve a significant increase in the probability or consequences of an accident previously evaluated.
2. Does the requested exemption create the possibility of a new or different kind of accident from any accident previously evaluated?
No. The underlying purposes of 10 CFR Part 50, Appendix R, III.G.2 is to provide reasonable assurance of fire protection safe shutdown capability. The exemptions' crediting of a shorting switch and defense in depth measures does not create any new accident precursors because the plant's operation and fire detection capability remains the same.
Therefore, the exemption does not create the possibility of a new or different kind of accident from any accident previously evaluated.
3. Does the requested exemption involve a significant reduction in a margin of safety?
No. The installation of the shorting switch and reliance on defense in depth measures does not alter plant operation and does not impact any safety margins because codes and standards or their alternatives approved by the NRC are met, and the safety analysis acceptance criteria described in the licensing basis are met.
Therefore, the exemption does not involve a significant reduction in a margin of safety.
Based on the evaluation above, the NRC staff has determined that the proposed exemption involves no significant hazards consideration. Therefore, the requirements of 10 CFR 51.22(c)(9)(i) are met.
The proposed exemption would allow the Monticello Nuclear Generating Plant to maintain a hot shutdown train of Drywell Spray free of fire damage by using a method that is different from one of the acceptable methods listed in 10 CFR Part 50, Appendix R, Section III.G.2. Specifically, In lieu of meeting these protection requirements, the licensee has installed a shorting switch modification on the control circuitry for one motor-operated valve (MOV) in each division of the Drywell Spray system to reduce the risk impact of a fire-induced multiple spurious operation that fails both MOVs. In addition, the licensee will rely on fire protection DID features such as administrative controls, plant design features, fire protection inspections, installed fire detection and suppression systems, and passive fire protection features. The exemption does not modify plant operation because fire protection for structures, systems, and components important to safe shutdown continues to be provided, and fire damage continues to be limited so that one of the redundant trains of Drywell Spray is free of fire damage. Thus the exemption does
Accordingly, the Commission has determined that, pursuant to 10 CFR 50.12, the exemption is authorized by law, will not present an undue risk to the public health and safety, and is consistent with the common defense and security. Also, special circumstances are present in that application of the regulation is not necessary to achieve the underlying purpose of the rule. Therefore, the Commission hereby grants Northern States Power Company, doing business as Xcel Energy, an exemption from the requirements of 10 CFR 50, Appendix R, Section III.G.2, for Monticello Nuclear Generating Plant, to allow the use of a shorting switch to ensure that one redundant train of Drywell Spray is free of fire damage to achieve and maintain hot shutdown conditions in the event of a fire.
The documents identified in the following table are available in ADAMS.
Dated at Rockville, Maryland, this 1st day of May 2018.
For the Nuclear Regulatory Commission.
Gregory F. Suber,
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the “Act”),
The Exchange proposes to renew an existing pilot program until November 5, 2018.
(a)-(d) (No change).
(e) Nonstandard Expirations Pilot Program
(1)-(2) (No change).
(3) Duration of Nonstandard Expirations Pilot Program. The Nonstandard Expirations Pilot Program shall be through [May 3]
(4) (No change).
. . .
.01-.14 (No change).
The text of the proposed rule change is also available on the Exchange's website (
In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for
On September 14, 2010, the Commission approved a Cboe Options proposal to establish a pilot program under which the Exchange is permitted to list P.M.-settled options on broad-based indexes to expire on (a) any Friday of the month, other than the third Friday-of-the-month, and (b) the last trading day of the month.
Pursuant to the order approving the establishment of the Program, two months prior to the conclusion of the pilot period, Cboe Options is required to submit an annual report to the Commission, which addresses the following areas: Analysis of Volume & Open Interest, Monthly Analysis of Weekly Expirations & EOM Trading Patterns and Provisional Analysis of Index Price Volatility. The Exchange has submitted, under separate cover, the annual report in connection with the present proposed rule change. Additionally, the Exchange will provide the Commission with any additional data or analyses the Commission requests because it deems such data or analyses necessary to determine whether the Program is consistent with the Exchange Act. The Exchange will make public all data and analyses previously submitted to the Commission under the Program, as well as any data and analyses it makes to the Commission under the Program in the future.
If, in the future, the Exchange proposes an additional extension of the Program, or should the Exchange propose to make the Program permanent (which the Exchange currently intends to do), the Exchange will submit an annual report (addressing the same areas referenced above and consistent with the order approving the establishment of the Program) to the Commission at least two months prior to the expiration date of the Program. Any positions established under the Program will not be impacted by the expiration of the Program.
The Exchange believes there is sufficient investor interest and demand in the Program to warrant its extension. The Exchange believes that the Program has provided investors with additional means of managing their risk exposures and carrying out their investment objectives. Furthermore, the Exchange has not experienced any adverse market effects with respect to the Program.
The Exchange believes that the proposed extension of the Program will not have an adverse impact on capacity.
The Exchange believes the proposed rule change is consistent with the Securities Exchange Act of 1934 (the “Act”) and the rules and regulations thereunder applicable to the Exchange and, in particular, the requirements of Section 6(b) of the Act.
In particular, the Exchange believes that the Program has been successful to date and states that it has not encountered any problems with the Program. The proposed rule change allows for an extension of the Program for the benefit of market participants. Additionally, the Exchange believes that there is demand for the expirations offered under the Program and believes that that Weekly Expirations and EOMs will continue to provide the investing public and other market participants increased opportunities to better manage their risk exposure.
Cboe Options does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. Specifically, the Exchange believes that, by extending the expiration of the Program, the proposed rule change will allow for further analysis of the Program and a determination of how the Program shall be structured in the future. In doing so, the proposed rule change will also serve to promote regulatory clarity and
The Exchange neither solicited nor received comments on the proposed rule change.
Because the proposed rule change does not (i) significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act
A proposed rule change filed under Rule 19b-4(f)(6)
At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved.
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
** This corrected notice replaces the notice published on May 2, 2018 in the
Notice is hereby given that pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501
Rule 17g-7 contains disclosure requirements for Nationally Recognized Statistical Rating Organizations (“NRSROs”) including certain information to be published when taking a rating action with respect to a credit rating. Currently, there are 10 credit rating agencies registered as NRSROs with the Commission. The Commission estimates that the total burden for respondents to comply with Rule 17g-7 is 695,797 hours.
The Commission may not conduct or sponsor a collection of information unless it displays a currently valid OMB control number. No person shall be subject to any penalty for failing to comply with a collection of information subject to the PRA that does not display a valid Office of Management and Budget (OMB) control number.
Background documentation for this information collection may be viewed at the following website:
On February 28, 2018, Nasdaq PHLX LLC (“Exchange” or “Phlx”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)
The Exchange has proposed to amend Phlx Rule 1079, governing FLEX option transactions, and Phlx Rule 1059, governing accommodation transactions (also known as cabinet trades), to permit open FLEX positions to be closed pursuant to the cabinet procedures in Phlx Rule 1059.
Phlx Rule 1079 permits the trading of FLEX options, which are options customized to fit specific investment strategies and goals.
Phlx Rule 1059 permits trading of cabinet orders, defined as closing limit orders at a price of $1 per option contract for the account of a customer, firm, specialist or registered options trader
The Exchange has proposed to add Phlx Rule 1079(g) and Commentary .03 to Phlx Rule 1059 to state that open FLEX option positions are eligible to be closed in accordance with the minimum increments set forth in Phlx Rule 1059 governing cabinet trading.
Under existing Phlx rules all FLEX options are governed by the procedures for FLEX options in Phlx Rule 1079. To accommodate FLEX options trading as a cabinet order under Phlx Rule 1059, the Exchange also proposed in new Section 1079(g) that sections (a) and (b) of Phlx Rule 1079 would not apply to FLEX option transactions in the cabinet.
Under the Phlx's proposal, Phlx Rules 1079(c)-(f) would, however, continue to apply to FLEX option cabinet
After careful review, the Commission finds that the proposed rule change is consistent with the requirements of the Act
The Commission believes that allowing the closing of FLEX options positions through cabinet trading is designed to promote just and equitable principles of trade and to remove impediments to and perfect the mechanism of a free and open market and a national market system by allowing market participants to close out their FLEX options positions that have little or no value prior to the options' expiration. Currently, market participants holding Phlx listed non-FLEX standardized options are allowed to close out positions with little or no value through an accommodation transaction known as a cabinet trade. FLEX option market participants currently do not have the same opportunity, despite the fact that there may be tax advantages to closing out a FLEX option position at a loss prior to the options expiration, and instead must hold the FLEX options until it expires, most likely worthless.
The Commission recognizes that the FLEX options market is unique in that it allows the customization of certain options terms between buyer and seller and that, as result, the FLEX options market does not typically have the liquidity and active trading market offered in the standardized options market. Despite these unique characteristics, however, allowing FLEX market participants to close out their FLEX options positions with little or no value in an accommodation transaction under cabinet trading procedures, and subject to certain FLEX rules continuing to apply, would appear to be helpful to FLEX market participants.
Further, under the proposal, the existing Phlx rules concerning enhanced financial requirements and who may trade FLEX under Phlx Rule 1079 would continue to apply to any FLEX options executed under the cabinet trading rules. Any orders, whether a closing order or, as permitted, an opening order, executed against a Phlx FLEX option cabinet order are still therefore considered FLEX options orders, as indicated in the proposed changes to both Phlx Rules 1079 and 1059.
In addition, the position and exercise limits for FLEX options will continue to apply to FLEX options closed in the cabinet. The Commission notes, however, that under the FLEX rules equity options do not have position limits and positions in FLEX options are generally not aggregated with standardized options for position limit purposes, with some exceptions.
For the reasons above, the Commission finds that the proposed rule change is consistent with the Act.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),
The Exchange proposes to adopt price protections for Complex Orders. The text of the proposed rule change is available from the principal office of the Exchange, at the Commission's Public Reference Room and also on the Exchange's internet website at
In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The self-regulatory organization has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements.
The Exchange is proposing to adopt price protections for Complex Orders executed on BOX. The Exchange notes that the proposed change is similar to the rules of another exchange.
The Exchange is proposing a debit/credit check that will prevent the execution of certain Complex Orders at erroneous prices.
The system determines whether an order is a debit or credit based on general options volatility and pricing principles, which the Exchange understands are used by market participants in their option pricing models. With respect to options with the same underlying:
• If two calls have the same expiration date, the price of the call with the lower exercise price is more than the price of the call with the higher exercise price;
• if two puts have the same expiration date, the price of the put with the higher exercise price is more than the price of the put with the lower exercise price; and
• if two calls (puts) have the same exercise price, the price of the call (put) with the near expiration is less than the price of the call (put) with the farther expiration.
In other words, a call (put) with a lower (higher) exercise price is more expensive than a call (put) with a higher (lower) exercise price, because the ability to buy stock at a lower price is more valuable than the ability to buy stock at a higher price, and the ability to sell stock at a higher price is more valuable than the ability to sell stock at a lower price. A call (put) with a farther expiration is more expensive than the price of a call (put) with a nearer expiration, because locking in a price further in the future involves more risk for the buyer and seller and thus is more valuable, making an option (call or put) with a farther expiration more expensive than an option with a nearer expiration.
Pursuant to the aforementioned principles, the Exchange will reject an eligible Complex Order that is a Limit Complex Order for a credit strategy with a net debit price, or a Limit Complex Order for a debit strategy with a net credit price. The system will identify the strategy as a debit or credit based on the potential profit or loss of the Complex Order. The system accomplishes this by first grouping the legs of the Complex Order by expiration date. The system then calculates the potential profit or loss of each group for a range of price levels of the underlying security. The specific price levels are equal to the strike price of each leg in the group.
If, at all price levels, the profit or loss for the group is break-even or profit, then the group is a debit.
For example, assume a Complex Order to buy 50 Jan $1 XYZ calls, sell 50 Jan $2 XYZ calls, sell 50 Jan $3 XYZ calls, and buy 50 Jan $4 XYZ calls is entered at a net credit price (
If not all groups of a Complex Order are a debit or credit, the system, for American-style options only, will determine if the Complex Order is a debit or a credit by comparing legs across expiration dates.
For example, assume a Complex Order to buy 50 Feb $1 XYZ calls, sell 50 Jan $2 XYZ calls, sell 50 Jan $3 XYZ calls, and buy 50 Feb $4 XYZ calls, is entered at a net credit price (
If the system cannot identify whether the Complex Order is a credit or debit pursuant to proposed IM-7240-1(a)(2) or (3), the system will not apply the check in proposed IM-7240-1(a).
After a Complex Order passes the debit/credit check, the system will then calculate a maximum price for certain Complex Orders.
The price buffer is calculated by taking a specified percentage of the absolute value of the strategy.
An absolute value will be calculated for those strategies to which the Maximum Price protection applies. The absolute value for a vertical spread is the absolute difference between the exercise prices of the two legs.
Assume a Complex Limit Order to buy 10 Dec $30 XYZ puts and sell 10 Dec $20 XYZ puts at $10.60. The absolute value for the vertical spread is $10 (the absolute value of 30-20). The specified percentage is set to 5%, the minimum value is set to $0.10, and the maximum value is set to $1.00. The price buffer for the vertical spread would be $0.50 ($10.00 * .05). Therefore the system will reject any Complex Limit Order because the price ($10.60) is greater than the Maximum Price of $10.50 for the strategy.
Assume a Complex Limit Order to buy 10 Dec $10 XYZ calls, sell 20 Dec $40 XYZ calls, and buy 10 Dec $70 XYZ calls at $30.50. The absolute value for the butterfly spread is $30 (the absolute value of 10-40 or 40-70). The specified percentage is set to 5%, the minimum value is set to $0.10, and the maximum value is set to $1.00. The price buffer for the butterfly spread would be $1.50 ($30.00 * .05); however, since that amount is above the maximum value, the system would use the maximum value ($1.00) as the price buffer instead. Therefore the system would accept the Complex Limit Order because the price ($30.50) is less than the Maximum Price of $31.00 for the strategy.
Assume a Complex Limit Order to buy 10 Dec $4 XYZ calls, sell 10 Dec $5 XYZ calls, buy 10 Dec $5 XYZ puts, and sell 10 Dec $4 puts at $1.09. The absolute value for the box spread is $1.00 (the absolute value of 5-4). The specified percentage is set to 5%, the minimum value is set to $0.10, and the maximum value is set to $1.00. The price buffer for the box spread would be $0.05 ($1.00 * .05); however, since that amount is below the minimum value, the system would use the minimum value ($0.10) as the price buffer instead. Therefore the system would accept the Complex Limit Order because the price ($1.09) is less than the Maximum Price of $1.10 for the strategy.
The Exchange will provide notice of the exact implementation date of the proposed protections, via Circular, at least two weeks prior to implementing the proposed change. The Exchange anticipates implementing the proposed protections during Q2 of 2018.
The Exchange believes that the proposal is consistent with the requirements of Section 6(b) of the Securities Exchange Act of 1934 (the “Act”),
In particular, the proposed rule change to implement a debit/credit check for Complex Orders for which the Exchange can determine whether a Complex Order is a debit or credit is consistent with the Act. With the use of debit/credit checks, the Exchange can further assist with the maintenance of a fair and orderly market by mitigating the potential risks associated with Complex Orders trading at prices that are inconsistent with their strategies (which may result in executions at prices that are extreme and potentially erroneous), which ultimately protects investors. This proposed implementation of the debit/credit check promotes just and equitable principles of trade, as it is based on the same general option and volatility pricing principles which the Exchange understands are used by market participants in their option pricing models.
Additionally, the Exchange also believes that calculating a maximum price for true butterfly spreads, vertical spreads, and box spreads will assist with the maintenance of fair and orderly markets by helping to mitigate the potential risks associated with Complex Orders trading at extreme and potentially erroneous prices that are inconsistent with particular Complex Order strategies. Further, the Exchange notes that the maximum price is designed to mitigate the potential risks of executions at prices that are not within an acceptable price range, as a means to help mitigate the potential risks associated with Complex Orders trading at prices that are inconsistent with their strategies, in addition to the debit/credit check. As such, the proposed rule change is designed to protect investors and the public interest.
The Exchange does not believe that the proposed Complex Order protections will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. In this regard and as indicated above, the Exchange notes that the rule change is being proposed as a competitive response to the rules of another exchange.
For the reasons stated, the Exchange does not believe that the proposed rule changes will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act, and the Exchange believes the proposed change will, in fact, enhance competition.
The Exchange has neither solicited nor received comments on the proposed rule change.
Because the proposed rule change does not (i) significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A) of the Act
A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the Act
At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved.
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the “Act”),
The Exchange proposes to extend the operation of its SPXPM pilot program. The text of the proposed rule change is provided below.
(No change).
.01-.13 (No change).
.14 In addition to A.M.-settled Standard & Poor's 500 Stock Index options approved for trading on the Exchange pursuant to Rule 24.9, the Exchange may also list options on the S&P 500 Index whose exercise settlement value is derived from closing prices on the last trading day prior to expiration (P.M.-settled third Friday-of-the-month SPX options series). The Exchange may also list options on the Mini-SPX Index (“XSP”) whose exercise settlement value is derived from closing prices on the last trading day prior to expiration (“P.M.-settled”). P.M.-settled third Friday-of-the-month SPX options series and P.M.-settled XSP options will be listed for trading for a pilot period ending [May 3]
The text of the proposed rule change is also available on the Exchange's website (
In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.
On February 8, 2013, the Exchange received approval of a rule change that established a Pilot Program that allows the Exchange to list options on the S&P 500 Index whose exercise settlement value is derived from closing prices on the last trading day prior to expiration (“SPXPM”).
During the course of the Pilot Program and in support of the extensions of the Pilot Program, the Exchange submits to the Securities and Exchange Commission (the “Commission”) reports regarding the Pilot Program that detail the Exchange's experience with the Pilot Program, pursuant to the SPXPM Approval Order and the P.M.-settled XSP Approval Order. Specifically, the Exchange submits annual Pilot Program reports to the Commission that contain an analysis of volume, open interest, and trading patterns. The analysis examines trading in Pilot Products as well as trading in the securities that comprise the underlying index. Additionally, for series that exceed certain minimum open interest parameters, the annual reports provide analysis of index price volatility and share trading activity. The Exchange also submits periodic interim reports that contain some, but not all, of the information contained in the annual reports. In providing the annual and periodic interim reports (the “pilot reports”) to the Commission, the Exchange has previously requested confidential treatment of the pilot reports under the Freedom of Information Act (“FOIA”).
The pilot reports both contain the following volume and open interest data:
(1) Monthly volume aggregated for all trades;
(2) monthly volume aggregated by expiration date;
(3) monthly volume for each individual series;
(4) month-end open interest aggregated for all series;
(5) month-end open interest for all series aggregated by expiration date; and
(6) month-end open interest for each individual series.
The annual reports also contain the information noted in Items (1) through (6) above for Expiration Friday, A.M.-settled, S&P 500 index options traded on Cboe Options, as well as the following analysis of trading patterns in the Pilot Products options series in the Pilot Program:
(1) A time series analysis of open interest; and
(2) an analysis of the distribution of trade sizes.
(1) A comparison of index price changes at the close of trading on a given Expiration Friday with comparable price changes from a control sample. The data includes a calculation of percentage price changes for various time intervals and compare that information to the respective control sample. Raw percentage price change data as well as percentage price change data normalized for prevailing market volatility, as measured by the Cboe Volatility Index (VIX), is provided; and
(2) a calculation of share volume for a sample set of the component securities representing an upper limit on share trading that could be attributable to expiring in-the-money series. The data includes a comparison of the calculated share volume for securities in the sample set to the average daily trading volumes of those securities over a sample period.
The Exchange proposes the extension of the Pilot Program in order to continue to give the Commission more time to consider the impact of the Pilot Program. To this point, Cboe Options believes that the Pilot Program has been
The Exchange believes the proposed rule change is consistent with the Securities Exchange Act of 1934 (the “Act”) [sic] and the rules and regulations thereunder applicable to the Exchange and, in particular, the requirements of Section 6(b) of the Act.
In particular, the Exchange believes that the proposed extension of the Pilot Program will continue to provide greater opportunities for investors. Further, the Exchange believes that it has not experienced any adverse effects or meaningful regulatory concerns from the operation of the Pilot Program. As such, the Exchange believes that the extension of the Pilot Program does not raise any unique or prohibitive regulatory concerns. Also, the Exchange believes that such trading has not, and will not, adversely impact fair and orderly markets on Expiration Fridays for the underlying stocks comprising the S&P 500 index. The extension of the Pilot Program will continue to provide investors with the opportunity to trade the desirable products of SPXPM and P.M.-settled XSP, while also providing the Commission further opportunity to observe such trading of the Pilot Products.
Cboe Options does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The Exchange does not believe the continuation of the Pilot Program will impose any unnecessary or inappropriate burden on intramarket competition because it will continue to apply equally to all Cboe Options market participants, and the Pilot Products will be available to all Cboe Options market participants. The Exchange believes there is sufficient investor interest and demand in the Pilot Program to warrant its extension. The Exchange believes that, for the period that the Pilot Program has been in operation, it has provided investors with desirable products with which to trade. Furthermore, the Exchange believes that it has not experienced any adverse market effects or regulatory concerns with respect to the Pilot Program. The Exchange further does not believe that the proposed extension of the Pilot Program will impose any burden on intermarket competition that is not necessary or appropriate in furtherance of the purposes of the Act because it only applies to trading on Cboe Options. To the extent that the continued trading of the Pilot Products may make Cboe Options a more attractive marketplace to market participants at other exchanges, such market participants may elect to become Cboe Options market participants.
The Exchange neither solicited nor received comments on the proposed rule change.
Because the proposed rule change does not (i) significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act
The Exchange has asked the Commission to waive the 30-day operative delay so that the proposal may become operative immediately upon filing. The Exchange states that waiver of the 30-day operative delay will allow it to extend the Pilot Program prior to its expiration on May 3, 2018, and maintain the status quo, thereby reducing market disruption. The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest, as it will allow the Pilot Program to continue uninterrupted, thereby avoiding investor confusion that could result from a temporary interruption in the Pilot Program. For this reason, the Commission designates the proposed rule change to be operative upon filing.
At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.
Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposal is consistent with the Act. Comments may be submitted by any of the following methods:
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
U.S. Small Business Administration.
Notice of open Federal Advisory Committee Meeting.
The U.S. Small Business Administration (SBA) is issuing this notice to announce the location, date, time, and agenda for the next meeting of the Advisory Committee on Veterans Business Affairs. The meeting is open to the public.
Thursday, June 7, 2018, from 9:00 a.m. to 4:00 p.m.
Eisenhower Conference Room B, located on the concourse level.
(Teleconference Dial-in) 1-888-858-2144, Access Code: 7805798; (Webinar)
Pursuant to section 10(a)(2) of the Federal Advisory Committee Act (5 U.S.C., Appendix 2), SBA announces the meeting of the Advisory Committee on Veterans Business Affairs (ACVBA). The ACVBA is established pursuant to 15 U.S.C. 657(b) note, and serves as an independent source of advice and policy. The purpose of this meeting is to focus on strategic planning, updates on past and current events, and the ACVBA's objectives for 2018.
For more information on veteran owned small business programs, please visit
U.S. Small Business Administration.
Notice of open Federal Interagency Task Force meeting.
The U.S. Small Business Administration (SBA) is issuing this notice to announce the location, date, time and agenda for the next meeting of the Interagency Task Force on Veterans Small Business Development. The meeting is open to the public.
Wednesday, June 6, 2018, from 1:00 p.m. to 4:00 p.m.
U.S. Small Business Administration, 409 3rd Street SW, Washington, DC 20416.
(Teleconference Dial-In) 1-888-858-2144, Access Code: 7805798; (Webinar)
Pursuant to section 10(a)(2) of the Federal Advisory Committee Act (5 U.S.C., Appendix 2), SBA announces the meeting of the Interagency Task Force on Veterans Small Business Development (Task Force). The Task Force is established pursuant to Executive Order 13540 to coordinate the efforts of Federal agencies to improve capital, business development opportunities, and pre-established federal contracting goals for small business concerns owned and controlled by veterans and service-disabled veterans.
Moreover, the Task Force shall coordinate administrative and regulatory activities and develop proposals relating to “six focus areas”: (1) Improving capital access and capacity of small business concerns owned and controlled by veterans and service-disabled veterans through loans, surety bonding, and franchising; (2) ensuring achievement of the pre-established Federal contracting goals for small business concerns owned and controlled by veterans and service disabled veterans through expanded mentor-protégé assistance and matching such small business concerns with contracting opportunities; (3) increasing the integrity of certifications of status as a small business concern owned and controlled by a veteran or service-disabled veteran; (4) reducing paperwork and administrative burdens on veterans in accessing business development and entrepreneurship opportunities; (5) increasing and improving training and counseling services provided to small business concerns owned and controlled by veterans; and (6) making other improvements relating to the support for veterans business development by the Federal Government.
For more information on veteran owned small business programs, please visit
The Social Security Administration (SSA) publishes a list of information collection packages requiring clearance by the Office of Management and Budget (OMB) in compliance with Public Law 104-13, the Paperwork Reduction Act of 1995, effective October 1, 1995. This notice includes extensions and revisions of OMB-approved information collections.
SSA is soliciting comments on the accuracy of the agency's burden estimate; the need for the information; its practical utility; ways to enhance its quality, utility, and clarity; and ways to minimize burden on respondents, including the use of automated collection techniques or other forms of information technology. Mail, email, or fax your comments and recommendations on the information collection(s) to the OMB Desk Officer and SSA Reports Clearance Officer at the following addresses or fax numbers.
Office of Management and Budget, Attn: Desk Officer for SSA, Fax: 202-395-6974, Email address:
Social Security Administration, OLCA, Attn: Reports Clearance Director, 3100 West High Rise, 6401 Security Blvd., Baltimore, MD 21235, Fax: 410-966-2830, Email address:
Or you may submit your comments online through
I. The information collections below are pending at SSA. SSA will submit them to OMB within 60 days from the date of this notice. To be sure we consider your comments, we must receive them no later than July 9, 2018. Individuals can obtain copies of the collection instruments by writing to the above email address.
1. Statement of Employer—20 CFR 404.801-404.803—0960-0030. When workers report they were paid wages but cannot provide proof of those earnings, and the wages do not appear in SSA's records of earnings, SSA uses Form SSA-7011-F4 to document the alleged wages. Specifically, the agency uses the form to resolve discrepancies in the individual's Social Security earnings record and to process claims for Social Security benefits. We only send Form SSA-7011-F4 to employers if we are unable able to locate the earnings information within our own records. The respondents are employers who can verify wage allegations made by wage earners.
2. Request for Waiver of Overpayment Recovery and Request for Change in Overpayment Recovery Rate—20 CFR 404.502, 20 CFR 404.506-404.512, 20 CFR 416.550-416.558, and 416.570-416.571—0960-0037. When Social Security beneficiaries and Supplemental Security Income (SSI) recipients receive an overpayment, they must return the extra money. These beneficiaries and recipients can use Form SSA-632-BK to request a waiver from repaying their overpayment. Beneficiaries and recipients can also use Form SSA-634 to request a change to the monthly recovery rate of their overpayment. The respondents must provide financial information to help the agency determine how much the overpaid person can afford to repay each month. Respondents are overpaid Social Security beneficiaries or SSI recipients who are requesting: (1) A waiver of recovery of an overpayment, or (2) a lesser rate of withholding,
3. Statement of Claimant or Other Person—20 CFR 404.702 & 416.570—0960-0045. SSA uses Form SSA-795 in special situations where there is no authorized form or questionnaire, yet we require a signed statement from the applicant, claimant, or other individuals who have knowledge of facts, in connection with claims for Social Security benefits or SSI. The information we request on the SSA-795 is of sufficient importance that we need both a signed statement and a penalty clause. SSA uses this information to process, in addition to claims for benefits, issues about continuing eligibility; ongoing benefit amounts; use of funds by a representative payee; fraud investigation; and a myriad of other program-related matters. The most common respondents are applicants for Social Security, SSI, or recipients of these programs. However, respondents also include friends and relatives of the involved parties, coworkers, neighbors, or anyone else in a position to provide information pertinent to the issue(s).
4. Application for a Social Security Number Card, the Social Security Number Application Process (SSNAP), and internet SSN Replacement Card (iSSNRC) Application—20 CFR 422.103-422.110—0960-0066. SSA collects information on the SS-5 (used in the United States) and
SS-5-FS (used outside the United States) to issue original or replacement Social Security cards. SSA also enters the application data into the SSNAP application when issuing a card via telephone or in person. In addition, hospitals collect the same information on SSA's behalf for newborn children through the Enumeration-at-Birth process. In this process, parents of newborns provide hospital birth registration clerks with information required to register these newborns. Hospitals send this information to State Bureaus of Vital Statistics (BVS), and they send the information to SSA's National Computer Center. SSA then uploads the data to the SSA mainframe along with all other enumeration data, and we assign the newborn a Social Security number (SSN) and issue a Social Security card. Respondents can also use these modalities to request a change in their SSN records. Finally, the iSSNRC internet application collects information similar to the paper SS-5 for no-change replacement SSN cards for adult U.S. citizens. The iSSNRC modality allows certain applicants for an SSN replacement cards to complete the internet application and submit the required evidence online rather than completing a paper Form SS-5. The respondents for this collection are applicants for original and replacement Social Security cards, or individuals who wish to change information in their SSN records, who use any of the modalities described above.
5. Statement of Care and Responsibility for Beneficiary—20 CFR 404.2020, 404.2025, 408.620, 408.625, 416.620, & 416.625—0960-0109. SSA uses the information from Form SSA-788 to verify payee applicants' statements of concern, and to identify other potential payees. SSA is concerned with selecting the most qualified representative payee who will use Social Security benefits in the beneficiary's best interest. SSA considers factors such as the payee applicant's capacity to perform payee duties; awareness of the beneficiary's situation and needs; demonstration of past, and current concern for the beneficiary's well-being; etc. in making that determination. If the payee applicant does not have custody of the beneficiary, SSA will obtain information from the custodian for evaluation against the information the applicant provides. Respondents are individuals who have custody of the beneficiary in cases where someone else filed to be the beneficiary's representative payee.
6. Certificate of Election for Reduced Spouse's Benefits—20 CFR 404.421—0960-0398. SSA cannot pay reduced Social Security benefits to an already entitled spouse unless the spouse elects to receive reduced benefits and is (1) at least age 62, but under full retirement age; and (2) no longer is caring for a child. In this situation, spouses who decide to elect reduced benefits must file Form SSA-25, Certificate of Election for Reduced Spouse's Benefits. SSA uses the information to pay qualified spouses who elect to receive reduced benefits. Respondents are entitled spouses seeking reduced Social Security benefits.
7. Coverage of Employees of State and Local Governments—20 CFR 404, Subpart M—0960-0425. The Code of Federal Regulations (CFR) at 20 CFR 404, subpart M, prescribes the rules for States submitting reports of deposits and recordkeeping to SSA. SSA requires States (and interstate instrumentalities) to provide wage and deposit contribution information for pre-1987 periods. Not all states have completely satisfied their pending wage report and contribution liability with SSA for pre-1987 tax years. SSA needs these regulations: (1) Until all pending items with all states are closed out, and (2) to provide for collection of this information in the future, if necessary. The respondents are State and local governments or interstate instrumentalities.
8. Continuation of Supplemental Security Income Payments for the Temporarily Institutionalized—Certification of Period and Need to Maintain Home—20 CFR 416.212(b)(1)—0960-0516. When Supplemental Security Income (SSI) recipients (1) enter a public institution, or (2) enter a private medical treatment facility with Medicaid paying more than 50 percent of expenses, SSA reduces recipients' SSI payments to a nominal sum. However, if this institutionalization is temporary (defined as a maximum of three months), SSA may waive the reduction. Before SSA can waive the SSI payment reduction, the agency must receive the following documentation: (1) A physician's certification stating the SSI recipient will only be institutionalized for a maximum of three months, and (2) certification from the recipient, the recipient's family, or friends, confirming the recipient needs SSI payments to maintain the living arrangements to which the individual will return post- institutionalization. To obtain this information, SSA employees contact the recipient (or a knowledgeable source) to collect the required physician's certification and the statement of need. SSA does not require any specific format for these items, so long as we obtain the necessary attestations. The respondents are SSI recipients, their family or friends, as well as physicians or hospital staff members who treat the SSI recipient.
9. Request for internet Services and 800# Automated Telephone Services Knowledge-Based Authentication (RISA-KBA)—20 CFR 401.45—0960-0596. The Request for internet Services and 800# Automated Telephone Services (RISA) Knowledge-Based Authentication (KBA) is one of the authentication methods SSA uses to
10. Representative Payment Policies Regulation—20 CFR 404.2011, 404.2025, 416.611, and 416.625—0960-0679. Per 20 CFR 404.2011 and 20 CFR 416.611, if SSA determines it may cause substantial harm for Title II or Title XVI recipients to receive their payments directly, recipients may dispute that decision. To do so, recipients provide SSA with information the agency uses to reevaluate its determination. In addition, our regulations state that after SSA selects a representative payee to receive benefits on a recipient's behalf, the payees provide SSA with information on their continuing relationship and responsibility for the recipients, and explain how they use the recipients' payments. Sections 20 CFR 404.2025 and 20 CFR 416.625 provide a process to follow up with the representative payee to verify payee performance. The respondents are Title II and Title XVI recipients, and their representative payees.
11. Function Report Adult—20 CFR 404.1512 & 416.912—0960-0681. Individuals receiving or applying for Social Security disability insurance (SSDI) or SSI must provide medical evidence and other proof SSA requires to prove their disability. SSA staff, and, on our behalf, State Disability Determination Services' (DDS) employees, collect the information via paper Form SSA-3373-BK, or through an in-person or telephone interview for cases where we need information about a claimant's activities and abilities to evaluate the claimant's disability. We use the information to document how claimants' disabilities affect their ability to function, and to determine eligibility, or continued eligibility, for SSI and SSDI claims. The respondents are Title II and Title XVI applicants (or current recipients undergoing redeterminations) for disability payments.
12. Request for Business Entity Taxpayer Information—0960-0731. SSA requires Law firms or other business entities to complete Form SSA-1694, Request for Business Entity Taxpayer Information, if they wish to serve as appointed representatives and receive direct payment of fees from SSA. SSA uses the information we receive to issue a Form 1099-MISC. SSA also uses the information to allow business entities to designate individuals to serve as entity administrators authorized to perform certain administrative duties on their behalf, such as providing bank account information; maintaining entity information; and updating individual affiliations. Respondents are law firms, or other business entities with attorneys or other qualified individuals as partners or employees, who represent claimants before SSA.
13. Request to Pay Civil Monetary by Installment Agreement—20 CFR 498—0960-0776. When SSA imposes a civil monetary penalty (CMP) on individuals for various fraudulent conduct related to SSA-administrated programs, those individuals may request to pay the CMP through benefit withholding, or an installment agreement. To negotiate a monthly payment amount, fair to both the individual and the agency, SSA needs financial information from the individual. SSA uses Form SSA-640, Financial Disclosure for CMP Debt, to obtain the information necessary to determine a monthly installment repayment rate for individuals owing a CMP. The respondents are recipients of Social Security benefits and non-entitled individuals who must repay a CMP to the agency and choose to do so using an installment plan.
14. Authorization for the Social Security Administration to Obtain Personal Information—20 CFR 404.704; 404.820—404.823; 404.1926; 416.203; and 418.3001—0960-0801. SSA uses Form SSA-8510 to contact a public or private custodian of records on behalf of an applicant or recipient of an SSA program to request evidence information, which may support a benefit application or payment continuation. We ask for evidence information such as the following:
If the custodian requires a signed authorization from the individual(s) whose information SSA requests, SSA may provide the custodian with a copy of the SSA-8510. Once the respondent completes the SSA-8510, either using the paper form, or using the Personal Information Authorization web page version, SSA uses the form as the authorization to obtain personal information regarding the respondent from third parties until the authorizing person (respondent) revokes the permission of its usage. The collection is voluntary; however, failure to verify the individuals' eligibility can prevent SSA from making an accurate and timely decision for their benefits. The respondents are individuals who may file for, or currently receive, Social Security benefits, SSI payments, or Medicare Part D subsidies.
II. SSA submitted the information collections below to OMB for clearance. Your comments regarding these information collections would be most useful if OMB and SSA receive them 30 days from the date of this publication. To be sure we consider your comments, we must receive them no later than June 8, 2018. Individuals can obtain copies of the OMB clearance packages by writing to
1. Request for Reconsideration—Disability Cessation—20 CFR 404.909, 416.1409—0960-0349. When SSA determines that claimants' disabilities medically improved; ceased; or are no longer sufficiently disabling, these claimants may ask SSA to reconsider that determination. SSA uses Form SSA-789-U4 to arrange for a hearing or to prepare a decision based on the evidence of record. Specifically, claimants or their representatives use Form SSA-789-U4 to: (1) Ask SSA to reconsider a determination; (2) indicate if they wish to appear at a disability hearing; (3) submit any additional information or evidence for use in the reconsidered determination; and (4) indicate if they will need an interpreter for the hearing. The respondents are disability claimants for Social Security benefits or SSI payments, or their representatives who wish to appeal an
2. Waiver of Right to Appear—Disability Hearing—20 CFR 404.913-404.914, 404.916(b)(5), 416.1413-416.1414, 416.1416(b)(5)—0960-0534. Claimants for Social Security disability payments or their representatives can use Form SSA-773-U4 to waive their right to appear at a disability hearing. The disability hearing officer uses the signed form as a basis for not holding a hearing, and for preparing a written decision on the claimant's request for disability payments based solely on the evidence of record. The respondents are disability claimants for Social Security benefits or SSI payments, or their representatives, who wish to waive their right to appear at a disability hearing.
3. Social Security Number Verification Services—20 CFR 401.45—0960-0660. Internal Revenue Service regulations require employers to provide wage and tax data to SSA using Form W-2, or its electronic equivalent. As part of this process, the employer must furnish the employee's name and Social Security number (SSN). In addition, the employee's name and SSN must match SSA's records for SSA to post earnings to the employee's earnings record, which SSA maintains. SSA offers the Social Security Number Verification Service (SSNVS), which allows employers to verify the reported names and SSNs of their employees match those in SSA's records. SSNVS is a cost-free method for employers to verify employee information via the internet. The respondents are employers who need to verify SSN data using SSA's records.
Department of State.
Notice.
A determination has been made that a foreign person has engaged in activities that warrant the imposition of measures pursuant to Section 3 of the Iran, North Korea, and Syria Nonproliferation Act. The Act provides for penalties on foreign entities and individuals for the transfer to or acquisition from Iran since January 1, 1999; the transfer to or acquisition from Syria since January 1, 2005; or the transfer to or acquisition from North Korea since January 1, 2006, of goods, services, or technology controlled under multilateral control lists (Missile Technology Control Regime, Australia Group, Chemical Weapons Convention, Nuclear Suppliers Group, Wassenaar Arrangement) or otherwise having the potential to make a material contribution to the development of weapons of mass destruction (WMD) or cruise or ballistic missile systems. The latter category includes items of the same kind as those on multilateral lists but falling below the control list parameters when it is determined that such items have the potential of making a material contribution to WMD or cruise or ballistic missile systems, items on U.S. national control lists for WMD/missile reasons that are not on multilateral lists, and other items with the potential of making such a material contribution when added through case-by-case decisions.
April 30, 2018.
On April 30, 2018, the U.S. Government applied the measures authorized in Section 3 of the Iran, North Korea, and Syria Nonproliferation Act (Pub. L. 109-353) against the following foreign person identified in the report submitted pursuant to Section 2(a) of the Act:
Rosoboronexport (ROE) (Russia) and any successor, sub-unit, or subsidiary thereof.
Accordingly, pursuant to Section 3 of the Act, the following measures are imposed on these persons:
1. No department or agency of the United States Government may procure or enter into any contract for the procurement of any goods, technology, or services from this foreign person, except to the extent that the Secretary of State otherwise may determine. This measure shall not apply to subcontracts at any tier with ROE and any successor, sub-unit, or subsidiary thereof made on behalf of the United States Government for goods, technology, and services for the maintenance, repair, overhaul, or sustainment of Mi-17 helicopters for the purpose of providing assistance to the security forces of Afghanistan, as well as for the purpose of combating terrorism and violent extremism globally. Moreover, the ban on U.S. government procurement from the Russian entity Rosoboronexport (ROE) and any successor, sub-unit, or subsidiary thereof shall not apply to United States Government procurement of goods, technology, and services for the purchase, maintenance, or sustainment of the Digital Electro Optical Sensor OSDCAM4060 to improve the U.S. ability to monitor and verify Russia's Open Skies Treaty compliance. Such subcontracts include the purchase of spare parts, supplies, and related services for these purposes;
2. No department or agency of the United States Government may provide any assistance to this foreign person, and this person shall not be eligible to participate in any assistance program of the United States Government, except to the extent that the Secretary of State otherwise may determine;
3. No United States Government sales to this foreign person of any item on the United States Munitions List are permitted, and all sales to this person of any defense articles, defense services, or design and construction services under the Arms Export Control Act are terminated; and
4. No new individual licenses shall be granted for the transfer to this foreign person of items the export of which is controlled under the Export Administration Act of 1979 or the Export Administration Regulations, and any existing such licenses are suspended.
These measures shall be implemented by the responsible departments and agencies of the United States Government and will remain in place for two years from the effective date, except to the extent that the Secretary of State may subsequently determine otherwise.
Federal Aviation Administration (FAA), U.S. Department of Transportation (DOT).
Eighty Eighth RTCA SC-147 Plenary Session Joint with EUROCAE WG-75.
The FAA is issuing this notice to advise the public of a meeting of Eighty Eighth RTCA SC-147 Plenary Session Joint with EUROCAE WG-75.
The meeting will be held May 18, 2018 9:00 a.m.-3:30 p.m.
The meeting will be held at: RTCA Headquarters, 1150 18th Street NW, Suite 910, Washington, DC 20036.
Al Secen at
Pursuant to section 10(a) (2) of the Federal Advisory Committee Act (Pub. L. 92-463, 5 U.S.C., App.), notice is hereby given for a meeting of the Eighty Eighth RTCA SC-147 Plenary Session Joint with EUROCAE WG-75. The agenda will include the following:
Attendance is open to the interested public but limited to space availability. With the approval of the chairman, members of the public may present oral statements at the meeting. Persons wishing to present statements or obtain information should contact the person listed in the
Federal Aviation Administration (FAA), U.S. Department of Transportation (DOT).
Thirty Sixth RTCA SC-214 Standards for Air Traffic Data Communications Services Plenary.
The FAA is issuing this notice to advise the public of a meeting of Thirty Sixth RTCA SC-214 Standards for Air Traffic Data Communications Services Plenary.
The meeting will be held June 25-28, 2018 9:00 a.m.-5:00 p.m.
The meeting will be held at: EUROCAE, 9-23 rue Paul Lafargue, “Le
Karan Hofmann at
Pursuant to section 10(a) (2) of the Federal Advisory Committee Act (Pub. L. 92-463, 5 U.S.C., App.), notice is hereby given for a meeting of the Thirty Sixth RTCA SC-214 Standards for Air Traffic Data Communications Services Plenary. The agenda will include the following:
Attendance is open to the interested public but limited to space availability. With the approval of the chairman, members of the public may present oral statements at the meeting. Persons wishing to present statements or obtain information should contact the person listed in the
Federal Aviation Administration (FAA), U.S. Department of Transportation (DOT).
RTCA PMC Program Management Committee Plenary.
The FAA is issuing this notice to advise the public of a meeting of RTCA PMC Program Management Committee Plenary.
The meeting will be held June 21, 2018 8:30 a.m.-4:30 p.m.
The meeting will be held at: RTCA Headquarters, 1150 18th Street NW, Suite 910, Washington, DC 20036.
Karan Hofmann at
Pursuant to section 10(a) (2) of the Federal Advisory Committee Act (Pub. L. 92-463, 5 U.S.C., App.), notice is hereby given for a meeting of the RTCA PMC Program Management Committee Plenary. The agenda will include the following:
Attendance is open to the interested public but limited to space availability. With the approval of the chairman, members of the public may present oral statements at the meeting. Persons wishing to present statements or obtain information should contact the person listed in the
Federal Aviation Administration (FAA), Department of Transportation.
Notice of submission deadline.
Under this notice, the FAA announces the submission deadline of May 17, 2018, for winter 2018/2019
Schedules must be submitted no later than May 17, 2018.
Schedules may be submitted by mail to the Slot Administration Office, AGC-200, Office of the Chief Counsel, 800 Independence Avenue SW, Washington, DC 20591; facsimile: 202-267-7277; or by email to:
Bryan Bourgoin, System Operations Services, Air Traffic Organization, Federal Aviation Administration, AJR-0, Room 300W, 800 Independence Avenue SW, Washington, DC 20591; telephone number: 202-267-0968; email:
The FAA has designated EWR, LAX, ORD\\, and SFO as IATA Level 2 airports and JFK as an IATA Level 3 airport under the Worldwide Slot Guidelines (WSG). The FAA currently limits scheduled operations at JFK by Order until October 27, 2018.
The FAA is primarily concerned about scheduled and other regularly conducted commercial operations during peak hours, but carriers may submit schedule plans for the entire day. At ORD, the peak hours for the winter 2018/2019 scheduling season are 0700 to 2100 Central Time (1300 to 0300 UTC), at LAX and SFO from 0600 to 2300 Pacific Time (1400 to 0700 UTC), and at EWR and JFK from 0600 to 2300 Eastern Time (1100 to 0400 UTC). These hours are unchanged from previous scheduling seasons. Carriers should submit schedule information in sufficient detail including, at minimum, the marketing or operating carrier, flight number, scheduled time of operation, frequency, aircraft equipment, and effective dates. IATA standard schedule information format and data elements for communications at Level 2 and Level 3 airports in the IATA Standard Schedules Information Manual (SSIM) Chapter 6 may be used. The WSG provides additional information on schedule submissions at Level 2 and Level 3 airports.
The U.S. winter scheduling season is from October 28, 2018, through March 30, 2019, in recognition of the IATA northern winter scheduling period. The FAA understands there may be differences in schedule times due to different U.S. daylight saving time dates and will accommodate these differences to the extent possible.
The FAA considers several factors and priorities as it reviews schedule requests at Level 2 airports. The WSG states that schedule facilitation is based on schedule adjustments mutually agreed between the airlines and the facilitator; to avoid exceeding the airport's coordination parameters, that the concepts of historic precedence and series of slots do not apply at Level 2 airports, and that the facilitator should adjust the smallest number of flights by the least amount of time necessary to avoid exceeding the airport's coordination parameters. The WSG also includes priorities such as services from the previous equivalent season over new demand for the same timings, services that are unchanged over services that plan to change time or other capacity relevant parameters, introduction of year-round services, effective period of operation, regularly planned operations over
Generally, the FAA uses average hourly runway capacity throughput for airports and performance metrics in its schedule reviews at Level 2 airports.
Slot management in the United States differs from other countries that follow the IATA WSG. In the United States, the FAA is responsible for facilitation and coordination of runway access for takeoffs and landings at Level 2 and Level 3 airports; however, the airport authority or its designee is responsible for facilitation and coordination of terminal/gate/airport facility access. The process with the individual airports for terminal access and other airport services is separate from, and in addition to, the FAA schedule review based on runway capacity. Approval from both the FAA and the airport authority for runway and airport availability, respectively, is necessary before implementing schedule plans. Contact information for Level 2 and Level 3 airports is available at
The FAA seeks to improve communications with carriers and schedule facilitators at Level 2 airports on potential runway schedule issues or terminal and gate issues that may affect the runway times. The FAA also seeks to reduce the time that carriers consider proposed offers on schedules, especially within peak periods or in periods of limited availability with competing requests. Retaining open offers for extended periods of time may delay the facilitation process for the airport. Reducing this delay is particularly important to allow the FAA to make informed decisions at airports where some hours are at or near the scheduling limits. If carriers do not accept the offers or continue to submit revised schedules that are above the limits, the FAA cannot effectively assess the final proposed schedules. The agency recognizes that there are circumstances that may require some schedules to remain pending. However, the FAA expects to substantially complete the process on initial submissions each scheduling season within 30 days of the end of the Slot Conference. After this time, the agency would confirm the acceptance of offers or issue a denial of schedule requests so that there is no ambiguity about the initial approved and unapproved schedules.
Finally, the FAA notes that the schedule information submitted by carriers to the FAA may be subject to
The Port Authority of New York and New Jersey (PANYNJ) plans construction on JFK Runway 13L/31R. The FAA will review the final phasing and assess the operational impacts once the construction plans are available. Mitigation strategies for prior runway construction projects could be used as needed. These include a “playbook” describing operational plans for various runway configurations and operating conditions, working with carriers to reduce schedules during certain periods or retime flights to less congested periods, limiting approval for new flights, or encouraging temporary reductions by waiving minimum slot usage requirements. The PANYNJ holds regular meetings with airlines and other stakeholders to discuss construction plans and consults with the FAA and local air traffic control facilities to minimize operational impacts. JFK operators also meet regularly to discuss operational issues at the airport. The FAA meets quarterly with stakeholders on operational issues in the greater New York City area. These various local meetings may be the best source of current construction-related information to assist in planning schedules and operations.
The FAA is continuing to monitor operations and delays at EWR, especially in the busiest afternoon and evening hours. The FAA announced the change in designation to Level 2 at EWR in April 2016.
Since transitioning to Level 2, requests for flights in the afternoon and evening hours have consistently exceeded the scheduling limits at EWR. The FAA advised carriers it would not be able to accommodate all requests for new operations and has reached agreement in most cases with carriers to retime flights as necessary in the initial seasons under Level 2. For the summer 2018 season, the FAA lowered the scheduling limit from 81 to 79 operations per hour based on an updated airport capacity analysis and review of summer 2017 performance. The winter season limits were already at 79 per hour based on winter season capacity analyses. For summer 2018, the FAA encouraged carriers to reduce operations in the peak periods and operate flights in less congested hours to improve operations and reduce delays, particularly in the afternoon and evening hours. However, the FAA advised it would accept flights above the new hourly limits if the flights were operated in summer 2017. The FAA also indicated new flights were possible in hours with fewer than 79 operations.
Despite the FAA's efforts to facilitate voluntary scheduling cooperation at EWR, certain carriers have been unwilling to reduce operations in peak hours to assist with the growing delays. Average demand for summer 2018 in the afternoon and evening hours remains at 81 operations per hour as it was in summer 2017. There are periods when the demand in half-hours or consecutive half-hours exceeds the optimum runway capacity. The imbalance of scheduled arrivals and departures in certain periods has also contributed to increased congestion and delays when the demand exceeds the called arrival or departure rates. For example, early afternoon arrivals exceed optimum runway capacity and air traffic control regularly implements traffic management initiatives including ground delay programs. Recent FAA modeling indicates retiming arrivals from the 1400 hour to the 1300 and 1200 hours could have significant delay reduction benefits and help preserve the Level 2 designation at EWR.
For the summer 2018 season, airlines generally agreed to retime requests for new flights to periods outside of the peak hours. However, this growth has resulted in more hours with operations at the scheduling limits. As the summer 2018 schedules are expected to be similar to summer 2017, the performance metrics are highly unlikely to improve without further summer schedule adjustments.
In light of the increasing delays in the peak afternoon hours due to the unwillingness of certain carriers to voluntarily retime historic flights into other less congested periods and the imbalance of arrivals and departures, the FAA is adopting new half-hourly scheduling limits of 43 operations, in addition to the current hourly limit of 79 per hour. As noted earlier, it is important to maintain a balance between arrivals and departures to limit delays. The maximum number of arrivals or departures, respectively, which can be accommodated is 43 in an hour and 24 in a half-hour. This would allow some higher levels of operations in certain periods (not to exceed the hourly limits) and some recovery from lower demand in adjacent periods.
Based on demand in winter 2017/2018 and summer 2018, the FAA anticipates the highest demand for flights will be in the 0700 and 0800 local hours (1200 to 1359 UTC) and
The FAA seeks to reach agreement with carriers to schedule flights within the scheduling limits and urges all carriers to cooperate. The FAA is introducing the half-hourly and arrivals and departures limits within each hour in an effort to preserve the Level 2 designation at EWR. If voluntary schedule adjustments are not achievable and delays continue to increase, the FAA will consider whether a Level 3 designation is necessary. If a Level 3 designation is warranted, the FAA will work closely with OST regarding policies for the reintroduction of slot controls at EWR, which may include considering options to address access at the airport. In addition, the DOT and the FAA will determine whether a schedule reduction meeting is necessary pursuant to 49 U.S.C. 41722.
Federal Highway Administration (FHWA), DOT.
Notice and request for comments.
The FHWA invites public comments about our intention to request the Office of Management and Budget's (OMB) approval for a new information collection, which is summarized below under Supplementary Information. We are required to publish this notice in the
Please submit comments by July 9, 2018.
You may submit comments identified by DOT Docket ID Number 2018-0032 by any of the following methods:
Follow the online instructions for submitting comments.
Susanna Hughes Reck, Office of Infrastructure, HISM-20, (202) 366-1548 Federal Highway Administration, 1200 New Jersey Avenue SE, Washington, DC 20590. Office hours are from 8:00 a.m. to 4:30 p.m. ET, Monday through Friday, except Federal holidays.
State DOTs now must submit biennial performance reports (23 U.S.C. 150 (e) and 23 CFR 490.107). The information being requested in the TPM Biennial Reports will be provided to the DOT in an electronic format through an online data form called the Performance Management Form (PMF). Alternative formats will be made available where necessary. As part of the rulemaking
3rd National Performance Management Measures Rule (PM3): Assessing Performance of National Highway System, Freight Movement on Interstate System, and Congestion Mitigation and Air Quality Improvement Program (RIN 2125-AF54)
The Paperwork Reduction Act of 1995; 44 U.S.C. Chapter 35, as amended; and 49 CFR 1.48.
Office of the Comptroller of the Currency (OCC), Treasury.
Notice and request for comment.
The OCC, as part of its continuing effort to reduce paperwork and respondent burden, invites the general public and other federal agencies to take this opportunity to comment on a continuing information collection as required by the Paperwork Reduction Act of 1995 (PRA). In accordance with the requirements of the PRA, the OCC may not conduct or sponsor, and the respondent is not required to respond to, an information collection unless it displays a currently valid Office of Management and Budget (OMB) control number. Currently, the OCC is soliciting comment concerning the renewal of an existing collection titled “Customer Complaint Form.” The OCC also is giving notice that it has sent the collection to OMB for review.
You should submit written comments by June 8, 2018.
Comments by any of the following methods:
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Additionally, please send a copy of your comments by mail to: OCC Desk Officer, 1557-0232, U.S. Office of Management and Budget, 725 17th Street NW, #10235, Washington, DC 20503 or by email to
You may review comments and other related materials that pertain to this information collection
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OCC Clearance Officer, (202) 649-5490, for persons who are deaf or hearing impaired, TTY, (202) 649-5597, Legislative and Regulatory Activities Division, Office of the Comptroller of the Currency, 400 7th Street SW, Suite 3E-218, Washington, DC 20219.
Under the PRA (44 U.S.C. 3501-3520), federal agencies must obtain approval from the OMB for each collection of information that they conduct or sponsor. “Collection of information” is defined in 44 U.S.C. 3502(3) and 5 CFR 1320.3(c) to include agency requests or requirements that members of the public submit reports, keep records, or provide information to a third party. The OCC is asking OMB to extend its approval of this collection.
CAG uses the information included in a completed form to create a record of the consumer's contact, capture information that can be used to resolve the consumer's issues, and provide a database of information that is incorporated into the OCC's supervisory process.
The OCC issued a notice for 60 days of comment regarding this collection on February 2, 2018, 83 FR 4959. No comments were received. Comments continue to be invited on:
(a) Whether the collection of information is necessary for the proper performance of the functions of the OCC, including whether the information shall have practical utility;
(b) The accuracy of the OCC's estimate of the burden of the collection of information;
(c) Ways to enhance the quality, utility, and clarity of the information to be collected;
(d) Ways to minimize the burden of the collection on respondents, including through the use of automated collection techniques or other forms of information technology; and
(e) Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.
The Department of Veterans Affairs (VA) gives notice under the Federal Advisory Committee Act that the Health Services Research and Development Service Scientific Merit Review Board will conduct an in-person and teleconference meeting of its Centers of Innovation (COINs) review on the dates below from 8:00 a.m. to approximately 4:30 p.m. (unless otherwise listed) at the Academy Health, 1666 K Street NW, Washington, DC 20006 (unless otherwise listed).
• HCN 1—Centers of Innovation (COINs) on June 14-15, 2018.
The purpose of the Board is to review health services research and development applications of the COINs research program that provides infrastructure support for the development of innovations in research, partnerships with program offices, collaboration with other researchers nationally, and mentorship of researchers as necessary to achieve the maximum possible impact on Veterans Health Administration (VHA) policies, health care practices, and health outcomes for veterans. A unique feature of the COINs is that they include one or more focused areas of research that collectively address questions of significance to VHA clinical and operational partners who will be engaged in the research activities of the COINs.
Applications are reviewed for scientific merit, infrastructural capacity, management capabilities and VA mission relevance. Recommendations regarding funding are submitted to the Chief Research and Development Officer. The subcommittee meeting of the Board will be open to the public at the start of the meeting on the first day, June 14 and June 15, 2018 for approximately one half-hour from 8:00 a.m. to 8:30 a.m. to cover administrative matters and to discuss the general status of the program. Members of the public who wish to attend the open portion of the subcommittee meeting may dial 1 (800) 767-1750, participant code 10443#.
The remaining portion of the subcommittee meeting will be closed for the discussion, examination, reference to, and oral review. During the closed portion of the meeting, discussion and recommendations will include qualifications of the personnel conducting the studies (the disclosure of which would constitute a clearly unwarranted invasion of personal privacy), as well as research information (the premature disclosure of which would likely compromise significantly the implementation of proposed agency action regarding proprietary research projects). As provided by subsection 10(d) of Public Law 92-463, as amended by Public Law 94-409, closing the meeting is in accordance with 5 U.S.C. 552b(c)(6) and (9)(B).
No oral or written comments will be accepted from the public for either portion of the meetings. Those who plan to participate during the open portion of the subcommittee meeting should contact Ms. Liza Catucci, Administrative Officer, Department of Veterans Affairs, Health Services Research and Development Service (10P9H), 810 Vermont Avenue NW, Washington, DC 20420, or by email at
Veterans Health Administration, Department of Veterans Affairs
Notice.
In compliance with the Paperwork Reduction Act (PRA) of 1995, this notice announces that the Veterans Health Administration, Department of Veterans Affairs, will submit the collection of information abstracted below to the Office of Management and Budget (OMB) for review and comment. The PRA submission describes the nature of the information collection and its expected cost and burden and it includes the actual data collection instrument.
Comments must be submitted on or before June 8, 2018.
Submit written comments on the collection of information through
Cynthia Harvey-Pryor, Office of Quality, Privacy and Risk (OQPR), Department of Veterans Affairs, 810 Vermont Avenue NW, Washington, DC 20420, (202) 461-5870 or email
An agency may not conduct or sponsor, and a person is not required to respond to a collection of information unless it displays a currently valid OMB control number.
The
By direction of the Secretary.
Federal Energy Regulatory Commission, DOE.
Final action.
In this final action, the Federal Energy Regulatory Commission (Commission) is amending the
This action is effective July 23, 2018.
1. In this final action, the Commission revises its
2. This final action adopts reforms that are designed to improve certainty for interconnection customers, promote more informed interconnection decisions, and enhance the interconnection process. We believe the reforms adopted in this final action will benefit both interconnection customers and transmission providers.
Shall mean the public utility (or its designated agent) that owns, controls, or operates transmission or distribution facilities used for the transmission of electricity in interstate commerce and provides transmission service under the Tariff. The term Transmission Provider should be read to include the Transmission Owner when the Transmission Owner is separate from the Transmission Provider.
3. First, in order to improve certainty for interconnection customers, this final action: (1) Removes the limitation that interconnection customers may only exercise the option to build a transmission provider's interconnection facilities and stand alone network upgrades in instances when the transmission provider cannot meet the dates proposed by the interconnection customer; and (2) requires that transmission providers establish interconnection dispute resolution procedures that allow a disputing party to unilaterally seek non-binding dispute resolution.
4. Second, to promote more informed interconnection decisions, this final action: (1) Requires transmission providers to outline and make public a method for determining contingent facilities; (2) requires transmission providers to list the specific study processes and assumptions for forming the network models used for interconnection studies; (3) revises the definition of “Generating Facility” to explicitly include electric storage resources; and (4) establishes reporting requirements for aggregate interconnection study performance.
5. The third area of reforms aims to enhance the interconnection process. To effectuate this goal, this final action: (1) Allows interconnection customers to request a level of interconnection service that is lower than their generating facility capacity; (2) requires transmission providers to allow for provisional interconnection agreements that provide for limited operation of a generating facility prior to completion of the full interconnection process; (3) requires transmission providers to create a process for interconnection customers to use surplus interconnection service at existing points of interconnection; and (4) requires transmission providers to set forth a procedure to allow transmission providers to assess and, if necessary, study an interconnection customer's technology changes without affecting the interconnection customer's queued position.
6. The
7. Although the implementation of Order No. 2003 reduced undue discrimination in the generator interconnection process, some interconnection customers argue that they have continued to observe systemic inefficiencies and discriminatory practices.
8. The reforms we adopt track many of the proposals set forth in the Notice of Proposed Rulemaking (NOPR) issued in this proceeding on December 15, 2016,
9. In Order No. 2003, the Commission recognized a “pressing need for a single set of procedures for jurisdictional Transmission Providers and a single, uniformly applicable interconnection agreement for Large Generators.”
10. In Order No. 2003, the Commission noted that it had previously found that interconnection is a “critical component of open access transmission service and thus is subject to the requirement that utilities offer comparable service under the OATT.”
11. Consequently, in Order No. 2003, the Commission required public utilities that own, control, or operate transmission facilities to file standard generator interconnection procedures and a standard agreement to provide interconnection service to generating facilities with a capacity greater than 20 megawatts (MW). To this end, the Commission adopted the
12. Although the issuance of Order No. 2003 was a significant step in minimizing undue discrimination in the generator interconnection process, some concerns with the process persisted, while some new concerns came to light. In response to concerns voiced to the Commission about interconnection queue management by regional transmission organizations and independent system operators (RTOs/ISOs) as well as other entities, the Commission held a technical conference on December 17, 2007, and issued a notice inviting further comments in response to such concerns.
13. The Commission issued an order on March 20, 2008 addressing interconnection queue issues based on the December 2007 technical conference and subsequent comments.
14. The Commission declined to impose generally applicable solutions, given the regional nature of some interconnection queue issues. However, the Commission provided guidance to assist RTOs/ISOs and their stakeholders in their efforts to improve the processing of interconnection queues.
15. On June 19, 2015, AWEA filed a petition in Docket No. RM15-21-000 requesting that the Commission revise the
16. On May 13, 2016, Commission staff convened a technical conference (2016 Technical Conference). The 2016 Technical Conference featured five panels on “The Current State of Generator Interconnection Queues,” “Transparency and Timing in the Interconnection Study Process,” “Certainty in Cost Estimates and Construction Time,” “Other Queue Coordination and Management Issues,” and “Interconnection of Electric Storage Resources.” The panels featured representatives from RTOs/ISOs, transmission owners from both RTO/ISO and non-RTO/ISO regions, renewable generation developers, electric storage resource developers, and other stakeholders.
17. On June 3, 2016, the Commission issued a Notice Inviting Post-Technical Conference Comments. The Commission received twenty-four post-technical conference comments.
18. On December 15, 2016, the Commission issued the NOPR, proposing fourteen reforms focused on improving aspects of the
19. First, the Commission proposed four reforms to improve certainty by affording interconnection customers more predictability in the interconnection process. To accomplish this goal, the Commission proposed to: (1) Revise the
20. Second, the Commission proposed five reforms to improve transparency by
21. Third, the Commission proposed five reforms to enhance interconnection processes by making use of underutilized existing interconnections, providing interconnection service earlier, or accommodating changes in the development process. In this area, the Commission proposed to: (1) Allow interconnection customers to limit their requested level of interconnection service below their generating facility capacity; (2) require transmission providers to allow for provisional agreements so that interconnection customers can operate on a limited basis prior to completion of the full interconnection process; (3) require transmission providers to create a process for interconnection customers to utilize surplus interconnection service at existing interconnection points; (4) require transmission providers to set forth a separate procedure to allow transmission providers to assess and, if necessary, study an interconnection customer's technology changes (
22. In response to the NOPR, sixty-three comments were filed.
23. In the NOPR, the Commission noted that the electric power industry has undergone numerous changes since Order No. 2003's issuance. These changes are due to a variety of factors, such as the economics of new power generation being driven by sustained low natural gas prices, technological advances, and federal and state policies. In the NOPR, the Commission found that such changes have implications for the interconnection process, for both interconnection customers and transmission providers.
24. As a result of such changes and despite Commission efforts to improve the interconnection process, aspects of the generator interconnection process still provide cause for concern.
25. In light of the changing industry and the aforementioned concerns, the Commission preliminarily found that the current interconnection process may hinder the timely development of new generation and, thereby, stifle competition in the wholesale markets, resulting in rates, terms, and conditions that are not just and reasonable or are unduly discriminatory or preferential. Additionally, the Commission preliminarily found that the interconnection study process may result in uncertainty and inaccurate information. Finally, the Commission preliminarily found that the potential for discriminatory interconnection processes exists as new technologies enter the power generation sphere.
26. A number of parties express support for the proposals in the NOPR.
27. IECA supports the majority of the Commission's proposed reforms.
28. Other parties express some support for the NOPR proposals but object to specific reforms. For example, the Non-Public Utility Trade Associations “believe that certain of the NOPR's proposed changes . . . hold the potential for improving transparency and process in a manner that may enhance cost certainty and predictability.”
29. Other parties oppose some or all aspects of the NOPR. EEI argues that improving certainty is a responsibility shared by interconnection customers and transmission providers.
30. A number of parties object to proposals that they contend could compromise system reliability or shift risk and costs to transmission providers for factors beyond the transmission providers' control.
31. APS states that it reviewed the NOPR against its current LGIP and LGIA and identified various revisions, in addition to those proposed in the NOPR, that would need to be made to comply with the proposals in the NOPR.
32. Duke, ISO-NE, and Southern support the NOPR to the extent that it allows procedures to vary according to differing regional needs.
33. NEPOOL states that a final action should allow for significant regional flexibility, especially for regions such as ISO-NE that have continued to improve their interconnection processes and incorporated region-specific features into interconnection rules, such as ISO-NE's Forward Capacity Market (FCM) and Elective Transmission Upgrade provisions. NEPOOL notes that, especially where interconnection provisions intersect with the FCM qualification process, the Commission should allow maximum flexibility to deviate from
34. Southern recommends that the Commission issue a revised notice of proposed rulemaking to allow for another round of notice and comment.
35. Duke states that, to fulfill their obligations to ensure reliability service, “transmission providers must be afforded the time needed to: (i) Carefully evaluate the potential reliability impact on [their] system[s] of
36. After consideration of the NOPR comments, we conclude that certain revisions to interconnection processes are necessary and that the record supports the need for reform. Therefore, with the exception of the withdrawal of some reforms proposed in the NOPR and the modification of others, which are discussed in further detail below, we adopt the majority of the proposed revisions to the
37. Based on our analysis of the record, we adopt the NOPR's preliminary findings.
38. We disagree with commenters that take issue with the proposals to impose new requirements and responsibilities on transmission providers. For example, although EEI is correct that interconnection customers and transmission providers share responsibility to improve certainty and that generator interconnection, by its nature, involves some uncertainty, we find that current interconnection processes and agreements can create unnecessary levels of uncertainty as discussed in more detail below.
39. Additionally, in response to Imperial's concerns that the NOPR could alter transmission owners' rights, we note that, although the final action creates new obligations and responsibilities for transmission providers and transmission owners, these changes are likely to improve the generator interconnection process for all involved parties. Also, we emphasize that the final action does not relieve interconnection customers of their existing responsibilities. Nor does it alter the ownership structure established in Order No. 2003 for interconnection facilities or network upgrades. Although some commenters argue that the NOPR's proposed reforms do not increase the responsibilities of, or directly address delays created by, interconnection customers, we believe that the reforms adopted in this final action should help improve the efficiency of processing interconnection requests for
40. We also disagree with arguments that the NOPR will compromise system reliability. We find that, for those reforms for which commenters have expressed reliability concerns, the Commission has either maintained existing safeguards or provided transmission providers with sufficient discretion to ensure that the reforms will not interfere with system reliability. For example, as discussed more fully below, the option to build, as modified by this final action, does not relax any of the safeguards that the Commission first established in Order No. 2003. Additionally with regard to the reforms that allow interconnection customers to request interconnection service below generating facility capacity and to utilize surplus interconnection service, transmission providers have the ability to require control technologies or to establish conditions necessary for interconnection customers to exercise these options without compromising reliability.
41. In response to comments by EEI and Salt River, among others, that the NOPR will shift costs traditionally borne by the interconnection customer, we note that this final action makes no changes with regard to interconnection customers' cost responsibilities for network upgrades and that the Commission is taking no further action on the issue of cost caps. Additionally, in response to Southern's concerns that the NOPR proposals lack balance, it is our belief that improved generator interconnection processes will benefit both transmission providers and interconnection customers.
42. Although APS argues that the NOPR necessitates additional
43. Finally, we note that a number of commenters seek regional flexibility in complying with the rule to accommodate regional needs. In Order No. 2003, the Commission stated that if, on compliance, a non-RTO/ISO transmission provider “offers a variation from the Final Rule LGIP and Final Rule LGIA and the variation is in response to established . . . reliability requirements, then it may seek to justify its variation using the regional
44. We decline to adopt Southern's recommendation that we issue a revised notice of proposed rulemaking, as well as EEI's proposal to convene general generator interconnection technical conferences, apart from the technical conference concerning affected systems discussed further below. We note that the process used in this proceeding has included a number of opportunities to narrow the issues for discussion and to provide comments. As stated, the Commission noticed AWEA's original 2015 petition for comment, held a technical conference in May 2016, and issued subsequent questions for which it requested comment, and sought comments on the NOPR. Therefore, we do not think additional steps are necessary in this proceeding at this time. In response to Duke's requests that transmission providers need to have adequate time to evaluate reliability impacts and to provide generators “with reasonable estimates within the time needed to effectuate interconnection and necessary supporting upgrades,” we point out that this final action neither changes the deadlines for interconnection studies nor eliminates the reasonable efforts standard or the deadlines for construction of facilities necessary to interconnect a particular large generating facility.
45. The Commission proposed reforms intended to improve certainty by providing interconnection customers more predictability in the interconnection process, including more predictability regarding the costs and the timing of interconnecting to the transmission system. In addition to the proposed reforms, the Commission sought comment on the extent to which capping interconnection customer cost responsibility for actual network upgrade costs to some margin above estimated network upgrade costs could mitigate the potential for serial restudies without inappropriately shifting cost responsibility.
46. The Commission proposed to revise the
47. Several commenters argue that, although restudies are often necessary, repeated restudies conducted at irregular intervals create cost and timing uncertainty for interconnection customers, impose delays on the process, and put development of new generation at risk, despite reductions in some RTOs/ISOs' interconnection requests and the use of cluster studies.
48. Some commenters note that the unpredictable start and stop of the generation interconnection study process has caused project cancellations because delays in obtaining an LGIA or small generator interconnection agreement (SGIA) can affect project financing.
49. AWEA states that requiring transmission providers to identify the frequency of restudies of a cluster study and post the dates of these scheduled restudies on OASIS will increase certainty and give transmission providers flexibility.
50. Xcel supports the Commission's proposal but requests that the Commission clarify that restudies will commence within a specified time period (
51. AVANGRID recommends that transmission providers provide cost estimates for the proposed scheduled periodic restudies for interconnection customers with interconnection requests included in a group or cluster, instead of providing interconnection customers estimates for the initial study only.
52. APPA/LPPC states that a schedule detailing periodic restudies may provide added predictability that could be valuable to project developers.
53. Duke states that it does not regularly conduct cluster studies, but it supports the proposal and the flexibility provided for transmission providers that do conduct cluster studies.
54. CAISO cautions that periodic restudies are effective in CAISO because it uses a cluster study approach with firm cost caps, and transmission owners finance network upgrade costs beyond these cost caps.
55. CAISO asserts that imposing scheduled periodic restudies in other RTOs/ISOs that do not share CAISO's market features may be problematic.
56. CAISO cautions that the Commission should consider the various proposed reforms in concert with each other, including changes to schedules in periodic studies, because cost caps and the definition of contingent facilities also have a significant impact on the efficacy of periodic restudies.
57. SoCal Edison and PG&E state that scheduled periodic annual restudies are the standard practice for CAISO and that they appreciate the predictability of CAISO's restudy process.
58. Generation Developers support the Commission's proposal, but they assert that semi-annual or quarterly restudies could be problematic and unpredictable, especially if the RTO/ISO has missed the study completion deadline listed in its tariff.
59. Invenergy states that restudies can be useful but should not add unnecessary time and expense, citing the substantial time differences for restudies within several RTOs/ISOs.
60. Several commenters oppose the Commission's proposed revisions to require transmission providers that conduct cluster studies to conduct restudies on a scheduled, periodic basis. As discussed further below, commenters state that the Commission's proposal may cause unnecessary delays, may not be appropriate in each region, and may unduly burden smaller transmission providers.
61. PJM contends that the NOPR may have the opposite effect from what is intended by causing unnecessary delays.
62. PJM explains that although it performs cluster studies at the feasibility and system impact study stages, it does not conduct restudies at the feasibility study stage because of the broad scope of the feasibility study and because the system impact study can account for withdrawals.
63. PJM asserts that the
64. PJM opposes the NOPR's 45/60 day restudy timeframe because restudies “come in all sizes and complexities.”
65. NYISO and Indicated NYTOs state that NYISO does not perform restudies in its Standard Large Facility Interconnection Procedures to modify the upgrades required for projects or their cost estimates based on changes to higher-queued projects or system conditions.
66. ISO-NE and NEPOOL state that the Commission should not adopt the NOPR proposal because it may not be appropriate in each region.
67. Specifically, ISO-NE states that its proposed two-phased cluster study structure is designed to provide interconnection customers with information regarding the likely outcome of the cluster study in the first phase. ISO-NE states that interconnection customers could then determine whether they would like to proceed to the second-phase, move to the end of the interconnection queue, or withdraw from the interconnection queue.
68. MISO, MISO TOs, ITC, and MidAmerican state that MISO's 2016 queue reform proposal addressed unstructured and repeated restudies. MISO asserts that, consistent with the independent entity variation standard, its revised procedures are now in effect and should be implemented.
69. Imperial states that the Commission's proposal to require scheduled, periodic restudies for cluster studies would unduly burden smaller transmission providers.
70. We decline to adopt the proposal in the NOPR to require transmission providers that conduct cluster studies to conduct scheduled periodic restudies. We find that the record does not support a finding that cascading restudies are an issue that the final action should address by adopting the proposal on scheduled periodic restudies. We recognize that scheduled periodic restudies may provide timing certainty for interconnection queues that experience cascading restudies, but the record does not suggest that this is a significant problem in all or many regions' interconnection queues where cluster studies are used. We agree with the commenters' concern that requiring scheduled periodic restudies would unnecessarily constrain the restudy process for transmission providers that are not experiencing cascading restudies. As explained in the RTO/ISO comments on this issue, existing variations in interconnection processes suggest that a one-size-fits-all approach is not appropriate at this time. For example, CAISO's firm cost caps allow customers to know in advance that network upgrade costs will not exceed the cost cap, even if a restudy occurs. In other RTOs/ISOs, however, adopting CAISO's annual restudy approach would require interconnection customers to wait for a scheduled periodic restudy to learn of cost changes.
71. We note that restudies are sometimes necessary due to a number of factors, including project withdrawals, modifications of higher-queued projects subject to section 4.4 of the LGIP, and/or a change to a project's point of interconnection.
72. Accordingly, we decline to adopt revisions to the
73. In the NOPR, the Commission proposed modifications to the
74. Generally, in the interconnection process, the transmission provider is responsible for the construction of all network upgrades and the transmission provider's interconnection facilities. Under article 5.1.3 of the current
Transmission Provider's Interconnection Facilities shall mean all facilities and equipment owned, controlled or operated by the Transmission Provider from the Point of Change of Ownership to the Point of Interconnection as identified in Appendix A to the Standard Large Generator Interconnection Agreement, including any modifications, additions or upgrades to such facilities and equipment. Transmission Provider's Interconnection Facilities are sole use facilities and shall not include Distribution Upgrades, Stand Alone Network Upgrades or Network Upgrades.
Shall mean Network Upgrades that an Interconnection Customer may construct without affecting day-to-day operations of the Transmission System during their construction. Both the Transmission Provider and the Interconnection Customer must agree as to what constitutes Stand Alone Network Upgrades and identify them in Appendix A to the Standard Large Generator Interconnection Agreement.
75. Under the current
76. Under the “standard option,” the transmission provider “shall construct the Transmission Provider's Interconnection Facilities and Network Upgrades using Reasonable Efforts to complete the construction by the dates designated by the Interconnection Customer.”
77. Under the current
78. In the NOPR, the Commission proposed modifications to articles 5.1, 5.1.3, and 5.1.4 of the
Options. Unless otherwise mutually agreed to between the Parties, Interconnection Customer shall select the In-Service Date, Initial Synchronization Date, and Commercial Operation Date; and either
79. The Commission also proposed to modify the language in article 5.1.3 of the
Option to Build. [If the dates designated by Interconnection Customer are not acceptable to Transmission Provider, Transmission Provider shall so notify Interconnection Customer within thirty (30) Calendar Days and unless the Parties agree otherwise,] Interconnection Customer shall have the option to assume responsibility for the design, procurement and construction of Transmission Provider's Interconnection Facilities and Stand Alone Network
80. The Commission stated that, given the changes proposed above, revisions to the negotiated option were necessary because the negotiated option references the current limitations on the option to build.
81. Therefore, the Commission also proposed to modify the language in article 5.1.4 of the
Negotiated Option. [If Interconnection Customer elects not to exercise its option under Article 5.1.3, Option to Build, Interconnection Customer shall so notify Transmission Provider within thirty (30) Calendar Days, and]
82. Consistent with article 5.2 of the current
83. Many commenters support this proposal.
84. A number of commenters also oppose the proposal.
85. In this final action, we adopt the NOPR proposal to modify articles 5.1, 5.1.3, and 5.1.4 of the
86. In response to EEI's and MISO TOs' contention that there has been no demonstration that the options under the existing
87. Although AEP, Xcel, and National Grid question interconnection customers' abilities to properly construct stand alone network upgrades, we note that the NOPR proposal makes no changes to the transmission provider's right to approve the engineering design, the equipment tests, and the construction of its interconnection facilities and stand alone network upgrades. In response to AEP, we note that the final action does not change the type of facilities for which the option to build is available, and neither the final action nor the NOPR discuss the applicability of the option to build to an “existing station” versus a “green field construction project.”
88. APPA/LPPC, MidAmerican, EEI, ITC, National Grid, and Southern contend that this proposal could compromise grid reliability.
89. Three commenters state that article 5.2 of the
90. Other commenters disagree and argue that the expanded option to build would not affect system reliability.
91. Concerns that the option to build, as revised by the final action, will compromise system reliability are misplaced because they ignore the safeguards for reliability already in place for the existing option to build. We note that a number of commenters expressed similar concerns in the Order No. 2003 proceeding.
92. In response to EEI's and CAISO's concerns about whether any facilities constructed pursuant to the option to build comply with applicable NERC reliability standards, we note that article 5.2 already addresses this concern. For example, article 5.2(2) states that the interconnection customer “shall comply with all requirements of law to which Transmission Provider would be subject.”
93. EEI, Xcel, and National Grid ask the Commission to ensure that interconnection customers indemnify the transmission owner or provider from any damages that result from facilities built pursuant to the option to build, including damages to adjacent facilities.
94. In response to EEI's, Xcel's, and National Grid's comments, we note that article 5.2(7) of the
95. In response to arguments that interconnection customers should assume all additional costs that result from exercise of the option to build, we note that the final action makes no changes with regard to cost assignment for transmission provider's interconnection facilities and stand alone network upgrades. Additionally, apart from the modifications to articles 5.1, 5.1.3, and 5.1.4 of the
96. AES claims that the proposal increases the transmission provider's risk regarding security compliance and project management.
97. Multiple commenters also identify barriers that will continue to exist under the current proposal. AWEA worries that requirements to adhere to jurisdictional transmission owner guidelines may remain a barrier to exercising the option to build under existing tariffs.
98. Some commenters recommend that additional, specific options and regulatory language be added to the proposal. AVANGRID and AWEA recommend that the Commission ensure the expanded option to build would apply to identified transmission provider interconnection facilities and stand alone network upgrades identified through cluster studies.
99. AVANGRID also recommends that the Commission provide two additional options for interconnection customers. Under the first, the transmission provider would construct, and the interconnection customer would pay the costs of, the transmission provider's interconnection facilities and stand alone network upgrades upfront, including an opportunity cost capped at 10 percent. Second, for all other network upgrades, the transmission provider, with the agreement of the interconnection customer, would construct and fund network upgrades, with charges to the interconnection customer made over time or the interconnection customer paying the costs up front, which would not include any margin.
100. Duke and EEI recommend that the Commission revise article 9.7.1 of the LGIA to require that parties coordinate actions regarding stand alone network upgrades that may impact other parties' facilities during outages needed for maintenance, testing, or installation.
101. National Grid recommends that the Commission revise article 5.2 of the
102. TVA and EEI suggest that interconnection customers should meet standards similar to those required under Order No. 1000 for transmission construction qualification.
103. In response to AES's concern that the proposal increases transmission providers' risk regarding security compliance and project management, we again note that the final action does not relax the established safeguards in article 5.2 of the
104. In response to AWEA's and APPA/LPPC's assertions about jurisdictional barriers, states laws, and eminent domain, we note that the specific purpose of this proposal is only to eliminate the
105. In response to CAISO's comment that later-queued projects may be adversely affected if a higher-queued customer withdraws from the queue or delays construction, we see no reason to believe that an interconnection customer that exercises the option to build is more likely to adversely affect a later-queued project than would a delay caused by a transmission provider. In fact, it is our expectation that customers that exercise the option to build are likely only to do so if they believe they can construct the facilities faster than the transmission provider. Additionally, we agree with AVANGRID and AWEA that the expanded option to build would apply to identified transmission provider interconnection facilities and stand alone network upgrades regardless of whether those facilities were identified through clustering, serial, or another study method. This is consistent with the current option to build, which does not restrict the study method.
106. In response to EDP, we note that the
107. We choose not to adopt AVANGRID's two additional proposals and find that the revisions adopted by the final action strike the appropriate balance. Additionally, we disagree with Bonneville's recommendation that we allow the interconnection customer to exercise the option to build only if it can demonstrate its ability to construct the subject facilities cost-effectively. It is unnecessary to impose such a requirement for interconnection customers because they will ultimately
108. We disagree with Duke and EEI regarding the need to revise article 9.7.1 of the
109. Furthermore, we disagree with Duke's proposal to revise article 11.5 of the
110. We also see no need to revise article 26.1 of the
111. In response to TVA and EEI, we find that article 5.2 already provides sufficient safeguards regarding transmission construction qualifications because it requires, for example, that interconnection customers use good utility practice and follow the standards and specifications outlined by the transmission provider. Additionally, while Generation Developers, EDP, and SEIA advocate that transmission providers post the standards and specifications for interconnection facilities and stand alone network upgrades on their websites, we will not require them to do so. Although posting such standards and specifications on a website could be useful, we do not think it appropriate to impose this requirement on transmission providers in this final action given the questionable usefulness of this information.
112. In response to Generation Developers' request that transmission providers be required to provide an explanation when they disagree that a facility is a stand alone network upgrade, we find that it would be difficult for a transmission provider to determine whether or not a facility would be considered a stand alone network upgrade until it is presented with the results of a system impact study. While we recognize that questions regarding what constitutes a stand alone network upgrade could lead to disputes, interconnection customers are free to seek dispute resolution on such questions and/or pursue a complaint under section 206 of the FPA.
113. We disagree with Eversource's request to require that interconnection customers receive transmission owner approval before ordering electrical materials and equipment. Article 5.2 already provides sufficient responsibilities to interconnection customers to mitigate the concerns Eversource raised through, for example, the requirements that the interconnection customer use good utility practice and abide by the transmission provider's standards and specifications, and the requirement that the transmission provider approve the design, equipment acceptance tests, and construction. We also disagree with Eversource's and MISO's recommendations to require that interconnection customers provide sufficient land rights to allow transmission provider access to transmission facilities and to terminate interconnection customers' authority to construct during emergency situations. We do not see the need to impose a further requirement on the interconnection customer, especially because the revisions adopted in this final action do not relax the existing requirements.
114. In the NOPR, the Commission proposed to require agreement between a transmission owner or provider and interconnection customer before the transmission owner or provider may elect to initially fund network upgrades.
115. Prior to the revisions proposed in the NOPR, article 11.3 in the
116. In 2013, MISO proposed allowing a transmission owner to elect to directly assign costs associated with self-funded network upgrades to the interconnection customer.
117. The Commission revisited that approach in the
118. In the NOPR in this proceeding, the Commission proposed to revise article 11.3 of the
Transmission Provider or Transmission Owner shall design, procure, construct, install, and own the Network Upgrades and Distribution Upgrades described in Appendix A, Interconnection Facilities, Network Upgrades and Distribution Upgrades. The Interconnection Customer shall be responsible for all costs related to Distribution Upgrades. Unless Transmission Provider or Transmission Owner elects to fund the capital for the Network Upgrades,
119. The Commission also sought comment on whether to limit the proposal to RTOs/ISOs or to apply it to all transmission providers.
120. A number of commenters support the proposal.
121. Regarding whether the Commission should extend the requirement for mutual agreement beyond RTOs/ISOs, AWEA, Joint Renewable Parties, TDU Systems, and AFPA all argue that the proposal should apply generically.
122. We withdraw the NOPR's proposal to extend the approach to self-funding that the Commission approved in MISO to all regions. On January 26, 2018, the D.C. Circuit issued a decision vacating the Commission's orders in the
123. In the NOPR, the Commission proposed that RTOs/ISOs establish interconnection dispute resolution procedures that allow a disputing party to unilaterally seek dispute resolution in RTO/ISO regions.
124. Order No. 2003 created an arbitration process through the adoption of section 13.5 of the
125. In the NOPR, the Commission proposed to revise the Code of Federal Regulations to require RTOs/ISOs to establish interconnection dispute resolution procedures that would allow a disputing party to unilaterally seek dispute resolution. In particular, the Commission proposed to revise § 35.28 of the Commission's regulations to add
126. The Commission limited the proposed requirements in this draft text to RTOs/ISOs because the Commission had only received comments regarding the need for dispute resolution reform in RTOs/ISOs. However, given the lack of a record on this issue, the Commission also sought comment on the need for reform outside the RTOs/ISOs.
127. The NOPR proposal represented a potential alternative to, and not a replacement of, section 13.5 of the
128. Multiple commenters support the proposal.
129. AES asserts that RTOs/ISOs, not the Commission, should reexamine their existing dispute resolution procedures.
130. MISO requests a clarification that RTOs/ISOs do not need to create separate dispute resolution procedures for generator interconnection disputes and may continue to rely on their general dispute resolution procedures as long as they permit parties to unilaterally initiate the resolution process.
131. Generation Developers request that the final action state that the dispute resolution mechanism that an RTO/ISO adopts should trump the existing provisions in section 13.5 of the LGIP. Generation Developers state that, unless this is made clear, the parties will argue about which dispute resolution provision applies.
132. In this final action, we revise the
133. Therefore, this final action revises the
Non-binding dispute resolution procedures. If a Party has submitted a Notice of Dispute pursuant to section 13.5.1, and the
134. The provision retains the central principles of the NOPR proposal but extends its application to all transmission providers, including non-RTOs/ISOs. We have revised the provision to also provide necessary clarification in response to the comments received in this proceeding, as discussed further below.
135. We note that numerous parties have expressed a need for dispute resolution reform and support for the principles embodied in the NOPR proposal. While this final action establishes the core requirement that transmission providers adopt a new non-binding dispute resolution process, each transmission provider must develop and establish the additional specifics of a just and reasonable process that allows disputing parties to unilaterally seek non-binding dispute resolution.
136. In response to Salt River's argument regarding the applicability of the proposed revisions to an autonomous neighboring affected system operator, as explained more fully below, on April 3-4, 2018, the Commission convened a technical conference in Docket No. AD18-8-000 for industry representatives and others to discuss issues related to affected systems. Given that the discussion here pertains to disputes within a transmission provider's region (such as a dispute between an interconnection customer and a transmission provider) and not to disputes with a party external to the region of the interconnection request, we find that Salt River's concerns are better addressed in a proceeding dedicated to issues involving affected systems, such as the aforementioned technical conference.
137. In response to Indicated NYTOs', ISO-NE's, NYISO's, PJM's, MISO's, MidAmerican's, and CAISO's contentions about the existing dispute resolution procedures in their specific regions, we remind these parties that we will not evaluate a particular transmission provider's tariff provisions until it submits its compliance filing. We note, however, that a transmission provider that has only adopted the generator interconnection dispute resolution procedures imposed by Order No. 2003, namely the section 13.5 arbitration process, would not comply with the non-binding dispute resolution requirements of this final action, as set forth in the new section 13.5.5 above.
138. In response to MISO's request for clarifications, we find that a transmission provider does not need to create dispute resolution procedures that only apply to generator interconnection disputes, so long as the transmission provider provides a dispute resolution process that a party, including the interconnection customer, may seek unilaterally. In response to the MISO TOs' request for clarification, we find that their concern that a party will use the dispute resolution process to gain additional time to meet LGIP or LGIA obligations to be speculative, and, to the extent that this is a valid concern, it would apply equally to disputing interconnection customers and transmission providers or owners. In addition, both the dispute resolution process created here and the section 13.5 arbitration process impose costs on the disputing parties, which should mitigate concerns about potential misuse of the process.
139. We find that the new dispute resolution provisions in section 13.5.5 of the
140. Generation Developers, IECA, Competitive Suppliers, and TDU Systems argue that the Commission should also reform dispute resolution procedures outside of RTOs/ISOs.
141. TVA believes that the current dispute resolution process for non-RTOs/ISOs is sufficient, under both the
142. In this final action, we adopt the aforementioned
143. Multiple commenters question the neutrality of RTO/ISO staff or oppose allowing RTO/ISO staff as dispute resolution neutral decision-makers.
144. AWEA also states that market monitors have the necessary independence to oversee dispute resolution, but they already have significant responsibilities and may lack relevant interconnection process experience.
145. Generation Developers and NextEra argue that subcontractors could serve as neutral parties.
146. Conversely, MISO contends that there is no need for independent staff or subcontractors and that the proposed requirements could increase RTO/ISO bureaucratization and impose additional costs.
147. MISO states that the requirement that RTO/ISO dispute resolution staff not have current or past substantial business or financial relationships with any disputing party is too broad and burdensome and that the pool of suitable candidates to perform these tasks is limited. If the Commission adopts this requirement, MISO asks the Commission to limit the prohibition to a reasonable time period (
148. NYISO is concerned about instituting a framework that would outsource responsibility to subcontractors.
149. With few exceptions, the commenters voice strong opposition to having RTO/ISO staff serve as decision-makers in dispute resolution proceedings. Some commenters argue that RTO/ISO staff may be unable to demonstrate independence in such a process. Conversely, Indicated NYTOs argue that requiring RTO/ISO staff to act as decision-makers would compromise their independence. In response to these concerns, and to address the issue where the transmission owner is the transmission provider outside of RTOs/ISOs, the LGIP provision adopted in this final action requires transmission providers to appoint an independent third party to preside over dispute resolution proceedings.
150. In response to Generation Developers' contention that interconnection customers should bear the fees for the decision-maker, we find that it makes little sense to have one disputing party bear all costs when there are multiple parties involved in the dispute. For this reason, the newly adopted provision in section 13.5.5 of the
151. The final action requires that the assigned decision-maker have no “current or past substantial business or financial relationships with either party.” We note that this standard is identical to the neutrality standard proposed in the NOPR and to the one established for arbitrators in section 13.5 of the
152. With regard to NYISO's concern about “outsourcing” responsibility to subcontractors, we note that the newly created process, like the arbitration process described in section 13.5 of the
153. AWEA indicates that, due to neutrality issues that are likely to remain, dispute resolution should be non-binding.
154. In this final action, we adopt a non-binding dispute resolution process. The
155. AWEA strongly supports the Commission's proposal to require the RTO/ISO-devised dispute resolution procedures to account for the interconnection process's time sensitivity.
156. TDU Systems state that, for non-RTO/ISO regions, it would be appropriate to reduce to two weeks the thirty-day period for parties to resolve disputes once a formal notice of the dispute has been provided. TDU Systems argue that nothing prevents the parties from continuing to attempt to
157. TDU Systems state that the rules in section 13.5 of the
158. TDU Systems ask the Commission to adopt fast-track complaint procedures for complaints that parties cannot resolve or do not mutually agree to arbitrate. It recommends a fixed period of time (for example, sixty days) from complaint filing to Commission order issuance. TDU Systems recognizes that even fast-track procedures, which it estimates could result in order issuance twenty days from the filing of an answer, might still be too long for interconnection disputes and that there is no guarantee of fast-track procedures. TDU Systems ask the Commission to specify that interconnection complaints are entitled to fast-track complaint procedures if the Commission does not adopt a separate streamlined interconnection process.
159. The
160. We disagree with TDU Systems' position that we should adopt different timing requirements inside and outside RTOs/ISOs, and we instead apply this rule generically. Additionally, while TDU Systems point to the timing requirements in the
161. Multiple commenters support the elimination of the mutual agreement requirement.
162. EEI questions who should bear the costs for such unilateral activity or how such costs would be recovered.
163. ISO-NE and EEI contend that, if the requirement for mutual agreement for alternative resolution methods is removed, unnecessary delays and uncertainties may result.
164. The provision adopted in this final action requires that transmission providers allow disputing parties to unilaterally seek dispute resolution procedures. In response to MISO and PG&E, we again note that, to the extent MISO and CAISO believe that they comply with the adopted
165. We also clarify for EEI that, although each party will bear its own costs to participate in the dispute resolution process, the cost of the decision-maker will be split equally among the disputing parties. Furthermore, we clarify for EEI that the process adopted by this final action, unlike the arbitration process described in section 13.5 of the
166. In response to ISO-NE, we note that its concerns about delays and uncertainty would still be present if disputing participants choose to participate in the existing arbitration process described in section 13.5 of the
167. Additionally, in response to ISO-NE's argument that it avoids delay by “allowing for” a section 206 complaint, we answer that the
168. Competitive Suppliers argue that the Commission should generically adopt the dispute resolution provisions of the
169. In the NOPR, the Commission sought comment on “the appropriateness of adopting procedures similar to those outlined in the
170. In response to the Commission's request for comments, only Competitive Suppliers and ISO-NE commented favorably in response to this suggestion. For this reason, we decline to take action to adopt dispute resolution procedures similar to those in the
171. In response to SEIA, we note that, consistent with Order No. 2003, DRS is always available to assist parties in resolving generator interconnection disputes. We note, however, that the new requirements imposed by this final action apply only to the non-binding dispute resolution process established through new section 13.5.5 in the
172. As part of the interconnection feasibility study and system impact study, the
173. The Commission sought comment on whether it should revise the
174. A minority of commenters,
175. Generation Developers argue that if there is an overage from the cost estimate, it is just and reasonable to socialize that overage. Generation Developers acknowledge that this is a variation from strict “but for” interconnection policy but assert that the variation is justified because all users of the transmission network receive benefits from the interconnection customer's network upgrades.
176. APS, AVANGRID, Bonneville, EDP, Generation Developers, Invenergy, MISO TOs, NextEra, NorthWestern, and Tri-State contend that cost caps could lead to inflated cost estimates for network upgrades.
177. CAISO states that, while cost caps come with some risk, they allow generators to have clear demarcations for their financial responsibilities going forward, which CAISO believes mitigates risk and financial uncertainty when generators submit proposals to provide capacity and later seek financing for construction.
178. Most responsive commenters
179. Modesto argues that because smaller entities do not frequently estimate interconnection facility and network upgrade costs, their cost estimates are likely susceptible to greater variability, which could lead to a greater inaccuracy. Modesto asserts that smaller entities essentially would be penalized through cost caps on network upgrades.
180. Several commenters contend that cost caps are unwarranted because many of the variables that affect cost estimates are outside the transmission provider's control and are based on the best data available at the time.
181. ITC, MISO, Non-Profit Utility Trade Associations, and Xcel state that well-defined milestones and milestone payments are preferable to a cost cap.
182. NYISO and Indicated NYTOs state that NYISO already has a process in place in its tariff to allocate actual costs that exceed cost estimates.
183. Salt River and TVA believe that it would be inappropriate for the Commission to attempt to impose a cap on the costs that can be collected by a not-for-profit governmental utility, via the reciprocity condition or otherwise.
184. CAISO states that its system of cost caps may be more difficult to implement outside of regions where ratepayers ultimately pay for generator interconnection-driven network upgrades.
185. AFPA, ELCON, ITC, SEIA, and Invenergy assert that policies other than cost caps will provide greater downward pressure on network upgrade costs including improving cost transparency, transmission planning that anticipates future generation needs, and aligning interconnection procedures with resource procurement processes.
186. Eversource suggests that the Commission instead explore the transmission provider's cost estimation process.
187. Xcel recommends that, instead of imposing cost caps, the Commission should reevaluate its policy discussed in Order No. 2003 and implement regional variations that allow transmission costs to be assigned to the interconnection customer after the execution of an LGIA.
188. TAPS opposes a generic rule establishing a cost cap and also opposes a generic rule that bars all cost caps.
189. In this final action, we decline to take any action related to capping costs for network upgrades. We find that there is insufficient evidence in the record to support cost caps as a preferred solution to reducing variances from cost estimates and providing greater cost certainty to interconnection customers. Therefore, we decline to propose revisions to the
190. We recognize the value of providing more accurate cost estimates to interconnection customers of the network upgrades needed to interconnect their generating facilities. Smaller deviations between the cost estimate and the final costs of the network upgrades would reduce risk and uncertainty faced by the interconnection customer. We note that other actions in this final action, including the reforms on transparency regarding study models and assumptions and identification and definition of contingent facilities, could contribute to improved accuracy of cost estimates for network upgrades. Additionally, we understand that greater cost certainty, where reasonably achievable without creating overly onerous requirements, could reduce queue withdrawals and their cascading effects on other projects within the queue. We encourage transmission providers and stakeholders to continue to work together to improve the cost estimation process.
191. In the NOPR, the Commission proposed reforms designed to improve interconnection process transparency and provide improved information to benefit all participants in the interconnection process. In addition to the proposed reforms, the Commission sought comment on proposals or additional steps that the Commission could take to improve the resolution of issues that arise when affected systems are impacted by a proposed interconnection.
192. The Commission currently requires transmission providers to identify for interconnection customers contingencies affecting interconnection studies
193. In addition, the Commission proposed to add the following new definition to section 1 of the
194. The Commission also sought further comment on how transmission providers currently identify contingent facilities, as well as additional recommendations to improve the existing approach. Finally, the Commission sought comment on whether the method for determining contingent facilities should be harmonized as much as possible. To this end, the Commission sought comment on the usefulness of requiring transmission providers to include a distribution factor analysis in their methodologies for identifying contingent facilities, and if so, whether a specific distribution factor should be implemented in the
195. Most responsive commenters support
196. AWEA and NextEra contend that the proposal will place a minimal burden on transmission providers.
197. AWEA comments that the interconnection customer should not be financially responsible for any facilities that are not listed among the contingent facilities and that even contingent facilities omitted in error should not be the financial responsibility of the interconnection customer.
198. A minority of responsive commenters oppose the proposal.
199. We adopt the NOPR proposal to add a new section 3.8 to the
Transmission Provider shall post in this section a method for identifying the Contingent Facilities to be provided to Interconnection Customer at the conclusion of the System Impact Study and included in Interconnection Customer's GIA. The method shall be sufficiently transparent to determine why a specific Contingent Facility was identified and how it relates to the interconnection request. Transmission Provider shall also provide, upon request of the Interconnection Customer, the estimated interconnection facility and/or network upgrade costs and estimated in-service completion time of each identified Contingent Facility when this information is
200. We note that commenters widely support the adoption of this requirement. We agree with commenters that this requirement will increase transparency in the interconnection process, better inform interconnection customers, and, consequently, result in fewer interconnection disputes and withdrawals. The Commission notes that, while some transmission providers may provide information on contingent
201. We disagree with AWEA's argument that the final action should exempt the interconnection customer from financial responsibility for any facilities that are not identified as contingent facilities, because changes in the interconnection queue may require changes to or subtractions from the list of contingent facilities. Thus, we find that the final action strikes the right balance to accomplish our goal of increasing transparency.
202. Several commenters support the proposal that transmission providers provide the list of contingent facilities applicable to an interconnection request at the close of the system impact study phase.
203. MISO requests that the Commission clarify that, in the context of MISO's phased system impact study process, the requirement would apply only after the final system impact study.
204. We adopt the NOPR proposal to require transmission providers to provide the list of contingent facilities applicable to an interconnection request at the close of the system impact study phase. The system impact study considers generating facilities and identified network upgrades associated with higher-queued interconnection requests, and an accompanying list of contingent facilities can contextualize these results. We find that this timing allows interconnection customers to access contingent facility information early enough to better understand their potential risk exposure and to expedite decisions on queue withdrawal, resulting in a more efficient interconnection process. We note that the majority of responsive commenters support the requirement to provide contingent facility information at the conclusion of the system impact study phase. In response to MISO's request that we address how the final action applies to its system impact study process, we will evaluate each transmission provider's tariff provisions at the time that it submits its compliance filing. In that filing, MISO can explain how its compliance proposal allows for the interconnection customer to use contingent facilities information to understand risk exposure and expedite decisions on queue withdrawal.
205. A majority of responsive commenters support the proposed requirement to provide the costs and in-service completion time for each identified contingent facility.
206. Duke, MidAmerican, and EEI oppose the proposed requirement to provide estimated network upgrade costs and in-service completion times for each identified contingent facility.
207. A number of commenters state that some or all of the information referenced in the proposal is already made available in their region. ISO-NE states that estimated costs and in-service completion times associated with contingent facilities are available in the
208. TVA comments that it is difficult to estimate the in-service timing of contingent facilities in the system impact study phase, as often the full scope of work is not known until the facilities study.
209. Several commenters suggest that the Commission modify or clarify this aspect of the proposal. NextEra suggests clarifying the proposal to limit the information the transmission provider provides to the interconnection customer based on what the transmission provider could reasonably access so that transmission providers need not obtain information that they may not readily have available.
210. Forecasting Coalition and Alevo suggest that the transmission provider provide additional information to the interconnection customer. Alevo suggests that transmission providers also provide “a detailed list of the symptoms that the transmission owner/operator is trying to cure.”
211. AWEA and Generation Developers argue that the transmission provider should have to provide information on each identified contingent facility's estimated costs and timing even if the interconnection customer has not explicitly requested it.
212. We adopt the NOPR proposal, subject to modification, and require the transmission provider to provide, upon request of the interconnection customer, the estimated network upgrade costs and estimated in-service completion time associated with each identified contingent facility when this information is readily available
213. In response to comments on the administrative burden created by this proposal, we find NextEra's and Portland's comments persuasive. We therefore modify the proposal to clarify that transmission providers must provide information regarding costs and in-service completion times only if such information is “readily available.” This will also address TVA's concerns about increasing the costs of the system impact study phase. This clarification strikes a balance between providing more information for the interconnection customer and limiting the scope of what the transmission provider must do.
214. In response to EEI's concern about commercially-sensitive information and CEII, we clarify that the final action does not require the transmission provider to disclose any such information without appropriate non-disclosure protections.
215. In response to comments from AWEA and Generation Developers requesting that transmission providers provide information regarding costs and in-service completion times regardless of whether the interconnection customer requests it, we disagree. We note, consistent with comments from MidAmerican, that not all interconnection customers may need access to this information.
216. In response to comments from Alevo and Forecasting Coalition requesting that the transmission provider provide additional information related to line ratings and underlying symptoms, we find that such information is outside the scope of the NOPR proposal, which focuses on contingent facilities.
217. AWEA and Generation Developers support the proposed definition of contingent facilities.
218. We adopt the proposed definition in the NOPR for contingent facilities, with a minor modification to reflect Southern's comments. Specifically, we adopt the following definition of contingent facilities (with clarifying additions to the language originally proposed in the NOPR in italics):
Contingent Facilities shall mean those unbuilt interconnection facilities and network upgrades upon which the interconnection request's costs, timing, and study findings are dependent, and if
219. Most responsive commenters oppose harmonization.
220. Based on the comments submitted, it is clear that transmission providers have different approaches for identifying contingent facilities. We find that the present record does not support the use of a distribution factor test or another standard method for identifying contingent facilities across all regions because it is not clear a single method would apply across different queue types and footprints. Therefore, we find that harmonization is not appropriate at this time.
221. To increase transparency and ensure consistency in the analysis of interconnection requests, the Commission proposed a requirement that transmission providers detail all the network models and underlying assumptions used for interconnection studies in their
Base Case Data. Transmission Provider shall provide base power flow, short circuit and stability databases, including all underlying assumptions, and contingency list upon request subject to confidentiality provisions in LGIP Section 13.1.
222. The Commission sought comment on whether transmission providers should post other specific network model details and underlying assumptions on OASIS and should describe in the
223. Numerous commenters express support for the proposal to require transmission providers to list all the network models and underlying assumptions used for interconnection studies.
224. MidAmerican asserts that the proposed reforms would assist customers in helping to verify the accuracy of required interconnection facilities and network upgrades.
225. Xcel supports adding a description of the network model and assumptions in the
226. Many commenters voice concerns regarding the proposed requirement that transmission providers post this information on OASIS.
227. NYISO notes that, rather than posting such data on the non-password protected portion of NYISO's OASIS, NYISO posts interconnection studies to the password-protected portion of its website because the studies contain CEII.
228. MISO states that it posts its network models for all MISO market participants, members, and interconnection customers that have signed non-disclosure agreements. MISO requests clarification that, if the Commission adopts its proposal, it will not require OASIS posting if this information is available elsewhere.
229. EEI argues that transmission providers should have discretion as to where to post this information and that interconnection customers can already request certain information covered by this proposal under existing CEII processes; it asserts that other information, such as dispatch information, how transmission providers build their models, and how contingency files are developed, may include proprietary, confidential, and commercially sensitive information or intellectual property.
230. TDU Systems state that the Commission's
231. Several commenters oppose the proposal and argue that current posting procedures are sufficient.
232. Commenters that oppose the proposal argue that it may be administratively burdensome.
233. NorthWestern expresses concern that the proposal would be unnecessary and cumbersome given base case changes and asserts that a complete list of models would not benefit an interconnection customer.
234. NYISO opposes the provision of shift factors, which, it argues, only pertain to power flow and thermal analyses, which are more applicable to interconnections in RTOs/ISOs that offer physical transmission rights.
235. Xcel notes that, because each interconnection request is unique, the specific network model assumptions used are also usually distinctive. Xcel argues that the Commission should grant transmission providers flexibility to provide the detailed, unique specifics of the network models in individual study agreements.
236. We adopt the NOPR proposal, with modifications. Specifically, this final action revises section 2.3 of the
Base Case Data. Transmission Provider shall
237. Most responsive commenters note that the proposal could significantly increase transparency in the study process. We disagree with commenters that argue that current posting procedures are sufficient. The record before us demonstrates that transmission providers do not consistently make their network models and assumptions available, and access to information regarding the assumptions used is often inconsistent across regions.
238. However, we find persuasive concerns voiced by several commenters regarding the proposal's requirement to post the network model and assumption information on OASIS. Specifically, we recognize that a requirement to move information onto OASIS could burden transmission providers that currently make this information available to interconnection customers elsewhere. Therefore, we believe a transmission provider should be able to decide to maintain the required information on its website as long as it has a link to the location of the information on OASIS, as OASIS is the central location for all the information needed to request interconnection service. Accordingly, the revisions to section 2.3 of the
239. In response to those arguments alleging that maintaining network models and underlying assumptions on OASIS or a password-protected website may be administratively burdensome, we find the benefits of increased transparency resulting from the revisions to section 2.3 of the
240. In response to confidentiality and data security concerns associated with providing certain information and system access, we reaffirm that there are safeguards that can be put in place to satisfactorily address these concerns. With the revisions in this final action, section 2.3 of the
241. With regard to CEII, we note that the Commission's CEII regulations in 18 CFR 388.113 only govern “the procedures for submitting, designating, handling, sharing, and disseminating [CEII]
242. Upon consideration of the comments, we withdraw the NOPR
243. Multiple commenters support the proposal but offer suggestions to increase transparency.
244. Generation Developers request that the modeling provision specify the minimum model assumptions that must be posted, including: (1) Shift factors used by region, sub-region, and even utility area; (2) generation dispatch assumptions by fuel-type of resource by region and sub-region for off-peak and peak hours; (3) load power factors; (4) power flows; (5) whether violations of NERC Category A (TPL-001), Category B (TPL-002), and Category C (TPL-003) require network upgrades and contingent facilities in all or some instances; (6) treatment of currently overloaded facilities; (7) the extent to which Network Resource Interconnection Service (NRIS) is hard-coded in the base model; and (8) contingency files.
245. NextEra notes that, in addition to models, interconnection customers would benefit from two best practices: (1) Providing information about other interconnection requests “in the same location by point on the transmission grid,” instead of county-level data;
246. While we appreciate the additional suggestions on what types of information transmission providers should post, the information requested by the commenters is outside of the scope of the proposal as set forth in the NOPR. In response to AWEA's requests, we note that when the Commission acts pursuant to FPA section 206, it “must show that [a] utility's existing rate is unjust and unreasonable and . . . that [the Commission's] replacement rate is just and reasonable.” Thus, the Commission would have to meet the requirements of FPA section 206 to make changes to a currently effective tariff provision.
247. In response to developer requests for increased transparency of congestion and curtailment information, the Commission proposed to require that transmission providers post congestion and curtailment information in one location on their OASIS sites so that interconnection customers can more easily access information that may aid in their decision-making.
248. The Commission also sought comment on whether transmission providers should provide interconnection-request-specific congestion and curtailment information and whether transmission providers should be required to provide this information to interconnection customers during the interconnection study process (
249. The Commission also sought comment on the level of information to be provided, the frequency at which the information should be provided, and how many months/years the provided information should cover.
250. Some responsive commenters support the proposed requirement for congestion and curtailment information to be posted in one location on each transmission provider's OASIS site.
251. Joint Renewable Parties, Alliant, Generation Developers, and ITC state that access to the information will improve interconnection customers' ability to appropriately site projects and will reduce queue withdrawals, which occur due to high interconnection facility and network upgrade costs.
252. In support of the proposal, NEPOOL and Alevo both argue that transmission owners, transmission providers, and system operators should post data that are as granular as possible. They argue that readily available transmission capacity data at the front end will enable market participants to size their projects appropriately and to anticipate network upgrade costs.
253. Several commenters argue that sufficient procedures already exist for interconnection customers. TVA, EEI, and Xcel contend that the Commission should make existing data collection resources available to potential interconnection customers, rather than requiring transmission providers to create redundant new ones.
254. CAISO and PG&E note that the requested information is largely already available on CAISO's website.
255. MISO argues that the sort of granular information the Commission has proposed to be posted will not significantly resolve issues with queue processing.
256. NextEra notes that operational snapshots of the transmission provider's system are more useful than statistics of total hours or MW of curtailment.
257. PJM agrees with the proposal to require transmission providers to post congestion data representing total hours of curtailment on all interfaces and asserts that it currently posts these data publicly on its website.
258. However, PJM states that it opposes the NOPR's proposal to require transmission providers to post total hours of transmission provider-ordered generation curtailment and transmission service curtailment due to congestion on a facility or interface, the cause of the congestion, and total megawatt hours (MWh) of curtailment due to lack of transmission for that month.
259. EEI, Six Cities, MISO TOs, CAISO, and Xcel assert that historical congestion and curtailment information may have no bearing on future congestion or curtailment at any specific location, and the posting of this information should not be considered a commitment by the transmission provider to guarantee the availability of additional capacity or expose the transmission provider to damages or other remedies should interconnection customers' expectations regarding curtailment risk not materialize.
260. Xcel notes that the impact of congestion and curtailment varies by region, mostly due to the existence of regional markets, different scheduling practices, and the treatment of firm transmission service.
261. NYISO states that it has historically published significant system information on its public website, including congestion and curtailment information.
262. MISO asserts that queue congestion is a sub-region-wide issue and not an issue of locating around more granular points of congestion, which the proposed requirements would illuminate. MISO contends that for optimally locating around localized points of congestion, the initial scoping meetings are sufficient to advise customers regarding less congested points of interconnection within an interconnection customer's general preferred area.
263. PG&E questions whether this information should be posted on OASIS, instead of on CAISO's website, since an interconnection customer will not necessarily have access to OASIS until it becomes a transmission customer.
264. Duke, NorthWestern, Southern, Xcel, and Non-Profit Utility Trade Associations argue that the proposal should not extend to transmission providers that operate outside of RTOs/ISOs because the information is neither available nor relevant.
265. NorthWestern and Non-Profit Utility Trade Associations state that the definition of “congestion” is unclear in non-RTOs/ISOs.
266. Duke, EEI, and OATI assert that the Commission should consult with NAESB regarding standards for making congestion and curtailment information accessible on OASIS.
267. NYISO suggests that instead of the proposed OASIS postings, the Commission should consider adding the option of a pre-application report for large facilities, similar to that required to be offered for small facilities under Order No. 792 and the
268. In this final action, we decline to adopt the proposal in the NOPR to require transmission providers to post certain specified congestion and curtailment information, as described further below.
269. We agree with commenters that access to congestion and curtailment data could better inform the decision-making of interconnection customers and allow them to more appropriately size and site projects, resulting in more efficient use of the transmission system and fewer late stage queue withdrawals. Accordingly, we encourage all transmission providers that already make such information available to continue to do so.
270. However, upon consideration of the comments in this proceeding, we decline to require transmission providers to post the specific information that the Commission originally proposed in the NOPR. We find persuasive those comments that assert that, in some instances, generating information on the causes of congestion or on unit-specific or constraint-specific curtailment information is technically infeasible or would require significant additional effort.
271. In addition, as several commenters argue, many transmission providers already publish congestion and curtailment data such as LMP data and dispatch reports on their public websites.
272. Accordingly, we decline to adopt the proposed revisions to add a new paragraph (l) to 18 CFR 37.6 that would require transmission providers to post specific congestion and curtailment information in one location on OASIS.
273. The Commission proposed to revise the definition of “Generating Facility” in the
274. A majority of responsive commenters, including utilities, RTOs/ISOs, and renewable interests, support the proposal.
275. In this final action, we adopt the NOPR proposal to modify the definition of “Generating Facility” in the
276. ESA and California Energy Storage Alliance, both of which support the proposal, raise concerns that the proposal may inadvertently prohibit the deployment of electric storage resources as transmission assets.
277. AES and Alevo both oppose the change of definition, arguing that electric storage resources can also act as transmission assets instead of, or in addition to, participating in the markets and that the proposal may prohibit the deployment of electric storage resources as transmission assets.
278. We find that there is no need to further revise the definition of Generating Facility to address these concerns because the definition, as revised here, would not affect whether electric storage resources operate as transmission assets. The Commission previously has found that, in certain situations, electric storage resources can function as a generating facility, a transmission asset,
279. The purpose of this definition change is to make clear that electric storage resources with a capacity of more than 20 MW may interconnect pursuant to the
280. ESA asserts that the proposal does not address the differences between electric storage resources and traditional generators.
281. Alevo and AES state that the proposal does not account for the full capability of electric storage resources.
282. EEI and Portland request that the Commission hold a technical conference on this proposal.
283. Southern argues that redefining Generating Facility to include electric storage resources would complicate the
284. NYISO, while stating that it does not take a position, suggests that any revisions should also reflect that the facility may store energy for withdrawal, as energy storage facilities typically both inject and withdraw energy to the grid.
285. We disagree with EEI's and Southern's arguments that the
286. We find that ESA's suggestion that we remove the term “generator” from the
287. EEI seeks clarification on whether the proposed change will affect tax treatment of generators.
288. In response to EEI's concern that the proposed change to the
289. We find that this definitional change will not affect the jurisdictional issues EEI raises. The
290. The
291. To implement this proposal, the Commission proposed to modify section 3.4 of the
292. The Commission also sought comment on whether: (1) To require different interconnection processing statistics to be posted on OASIS by the transmission provider; (2) the Commission has proposed the appropriate summary data requirements to enhance transparency and what customizations of these requirements should be made to adjust for different regional processes; (3) interconnection customers have sufficient information regarding the cause of study delays; (4) transmission providers should have to provide a more detailed explanation to interconnection customers regarding the cause(s) of study delays; (5) a transmission provider should have to inform interconnection customers regarding its process for revising study timelines once a delay occurs; and (6) the transmission provider should also describe in sufficient detail any relevant issues that could further affect the revised timeline for a particular interconnection customer.
293. Numerous commenters support a requirement for transmission providers to report on their interconnection study performance.
294. Some commenters support requiring transmission providers to provide additional or even more detailed statistics than the Commission proposed
295. Some supporting commenters would prefer scaling back or eliminating specific aspects of the NOPR proposal. PJM opposes the Filed Report Requirement; it argues that this requirement would not increase efficiency and that the ability to meet study deadlines is often outside the transmission provider's control.
296. Alevo and Invenergy favor financial incentives or penalties over reporting requirements to encourage timely study completion.
297. Some commenters express concerns regarding the potential administrative burden imposed by the proposal.
298. APS states that the proposal compromises transmission provider flexibility to complete studies and argues that the time required to properly assess an interconnection request may vary significantly.
299. A few commenters state that they do not object to the NOPR's proposed reporting requirement.
300. Other commenters expressly oppose the proposal to require the posting of interconnection study statistics.
301. Xcel states that delays are often caused by interconnection customer actions and minor disputes between interconnection customers and transmission providers, but there is no evidence that transmission providers are being opaque or have not provided sufficient justifications for delays. Xcel notes that interconnection customers can challenge unreasonable delays through a variety of means—including the Commission's Enforcement hotline and the FPA section 206 process—and that Commission audits review the interconnection process.
302. Some commenters consider currently available information to be sufficient for interconnection customers.
303. NYISO states that it currently maintains on its OASIS a list of all valid interconnection requests, together with the status of the interconnection request including, for example, where the project is in the study process and what studies have been completed.
304. NYISO urges the Commission to allow it to tailor appropriate process improvements with the goal of expediting the studies rather than merely tracking their status.
305. In this final action, we adopt the NOPR proposal modifying the
306. The current requirement that transmission providers complete interconnection studies on a timely basis is based on a “reasonable efforts”
307. Many commenters that oppose this proposal cite concerns about the potential administrative burden. We find unpersuasive comments that these requirements will be administratively burdensome for transmission providers in general, to those with small queues, or those that jointly own, but do not operate, their transmission assets. We find that the reporting requirement we adopt strikes a reasonable balance between providing increased transparency and information to interconnection customers while not unduly burdening transmission providers. We find that the increased transparency resulting from these new requirements should provide for improved queue management and better informed interconnection customer planning—results that may be important enough to support some corresponding burden on transmission providers. Further, as noted by NextEra, transmission providers already know the status of their studies, which suggests that the reporting requirement should impose minimal, additional administrative burdens on transmission providers. With regard to the assertion that the reporting requirement will unduly burden transmission providers with smaller interconnection queues, we find it reasonable for a transmission provider with a small volume interconnection queue to detail the reasons for the delay of a lone study or a small number of studies, information that is still beneficial to interconnection customers. In these instances, the reporting requirement would not be more burdensome than for transmission providers with high volume queues that must provide this information for a greater number of studies, if additional reporting requirements are triggered. With regard to Portland's contention that the reporting requirement will disproportionately burden transmission providers that jointly own, but do not operate, their transmission assets, we find little evidence in the record to support this assertion. We note that a transmission owner's assignment of operational responsibility to a joint owner does not necessarily relieve it of its responsibilities or performance obligations.
308. Multiple commenters argue that interconnection customers are often the cause of interconnection study delays. Others question the usefulness of the information to be posted for interconnection customers or other stakeholders. We find that the detailed information provided to the Commission through the Filed Report Requirement should be particularly beneficial in identifying process deficiencies and the causes of delays in regions that experience significant delays in interconnection study processing. Additionally, this requirement complements the requirement that the causes of study delays be provided to interconnection customers upon request and does not duplicate the requirement in sections 6.3, 7.4, and 8.3 of the
309. Some commenters encourage consideration of modifications and alternatives to the Commission's proposal. We find that the reporting requirements we adopt in this final action strike a reasonable balance between transparency into the timing and processing of interconnection
310. In response to commenters that seek to eliminate the Filed Report Requirement, we reiterate that this information should be useful for identifying the causes of delays in regions that experience a significant number of study delays. A number of entities should find the publication of this information useful, including stakeholders active in or considering entrance into a regional interconnection queue, the Commission, and transmission providers as they actively monitor their queue management efforts. We reiterate that we do not expect this information to be overly burdensome, as it should largely consist of information already tracked by the transmission provider. In response to commenters that propose alternative metrics to trigger reporting requirements, the Commission notes that the timeframes stated in the tariff are clear and defined and thus should be familiar to the transmission provider and appropriate to use for measuring transmission provider performance.
311. In response to commenters that advocate development of solutions and requirements through the regional stakeholder process, we find that the information required through interconnection study metrics should better inform stakeholder discussions, including discussions about need for further action. Further, many interconnection customers develop generation projects in multiple regions. Therefore, having a minimum set of information that is comparable across regions would allow for quicker and more useful assessment by interconnection customers of the viability of potential projects. Furthermore, this reform is not intended to disrupt stakeholder processes. We note that, on compliance, each transmission provider may explain how it will comply with the requirements adopted in this final action.
312. CAISO objects to the requirement to post interconnection study information on OASIS.
313. In this final action, we are modifying the location requirement for the quarterly posted summary interconnection study metrics. In the NOPR proposal, the quarterly summary statistic information required posting on OASIS. However, we agree with CAISO's comments that transmission providers should have the flexibility to post this information on their OASIS sites or on a public website. If the transmission provider posts on its website, however, it must provide a clear link to the information on OASIS.
314. In response to OATI's request, we decline to specifically require that transmissions providers work through NAESB to develop a uniform posting location for these requirements. Transmission providers may, of course, coordinate as they determine appropriate to implement the Commission's requirements and to develop any relevant posting protocols.
315. Generation Developers and NextEra advocate elimination of the “reasonable efforts” standard as a way to improve study timeliness,
316. Several commenters prefer to retain the ability of transmission providers to use “reasonable efforts” to complete interconnection studies.
317. TVA expresses concern that the transmission provider efforts needed to meet all deadlines would reduce the current flexibility that benefits both interconnection customers and transmission providers.
318. TDU Systems urge the Commission to consider adding a tolling provision to relevant provisions of the
319. Rather than set study timeframes, APS and Bonneville believe that interconnection customers would benefit more from discussion and establishment of realistic study timeframes than from the reporting requirements.
320. If the Commission adopts the NOPR proposal, ISO-NE asks that the Commission revise the reporting construct so that performance is evaluated in accordance with the reasonable efforts standard and not the timeframes established in the
321. CAISO opposes the interconnection study reporting requirement proposal as applied to CAISO and other transmission providers with firm study deadlines.
322. In response to concerns that the Commission is implementing firm interconnection study deadlines, we clarify that the NOPR did not propose, and the final action declines to adopt, firm deadlines for completing interconnection studies. Further, the NOPR did not propose to, and this final action does not eliminate, the reasonable efforts standard or reduce transmission provider flexibility. Many commenters seem to equate measurement of a transmission provider's ability to meet the study timeframes in their tariffs as the equivalent of establishing firm study deadlines. Many commenters argue against firm study deadlines and against elimination of the reasonable efforts standard.
323. We do not believe the current record supports elimination of the “reasonable efforts” standard to meet study deadlines and to instead impose firm deadlines. At this time, we believe the reasonable efforts standard continues to be the appropriate approach to interconnection study processing. We find that reliance on improved reporting is a preferable approach to encourage timely processing of interconnection studies, rather than moving to a regime of firm study deadlines. Such reporting should also help inform the Commission if any future action should be considered.
324. We disagree with ISO-NE's argument that interconnection study metrics should be calculated to reflect compliance with the reasonable efforts standard rather than tariff deadlines. The reasonable efforts standard is not meant to specify a timeframe but rather to impose a performance standard on the transmission provider. If ISO-NE's request
325. APS, Bonneville and ISO-NE contend that the Commission should allow transmission providers to establish interconnection study timeframes that more realistically reflect the time that it takes to complete interconnection studies. This request is outside the scope of this proceeding because the final action is not proposing to modify the study timeframes currently memorialized in transmission providers' LGIP.
326. We disagree with CAISO's contention that transmission providers with firm deadlines should not be subject to the reporting requirements of this final action. Interconnection customers and the queue management process would still benefit from posting relevant metrics regarding study completion in prescribed timeframes. We also note that, if a transmission provider has firm study deadlines that it always meets, then it would not trigger the Filed Report Requirement.
327. Southern states that there are too many potential clock resets and restudies to result in any meaningful metrics.
328. Consistent with Order No. 890, ISO-NE requests that the Commission clarify that the starting point for interconnection study metrics can be the date when the study begins or some other agreed upon date instead of the date the study agreement is signed.
329. Additionally, ISO-NE requests that the Commission extend the period for posting the information from 30 to 60 days to allow sufficient time for the transmission provider to collect the information, such as from third-party consultant invoices.
330. PG&E requests clarification as to the application of the Commission's proposed metrics.
331. In response to Southern's and TVA's comments, we clarify that the start date for each study included in the performance reporting metrics is the date that the transmission provider receives a fully executed study agreement. If multiple study agreements have been executed for an interconnection request, or interconnection studies have been completed, delayed, or are ongoing, then the metric reporting period should begin the date that the transmission provider received the last executed study agreement and be measured to the most recent relevant study conducted or planned for that study agreement. In response to TVA's comment about adjusting the performance metrics for interconnection customer-caused delays, we note that one of the objectives of the quarterly metrics is to identify regions where the transmission provider consistently completes interconnection studies on a delayed basis. The metric is not intended to identify the causes of those delays. This information is potentially useful to existing stakeholders as well as generation developers considering pursuing projects in that region and the lack of metric adjustment for delaying factors provides for easier comparability of interconnection study completion timeframes across regions. The Commission believes that stakeholders will be most interested in explanations for missed deadlines in queue backlogged regions and an informational report to the Commission from such regions will be useful for identifying the delay causes.
332. We disagree with ISO-NE that the starting point for interconnection study metrics should be a date other than the date the transmission provider receives a fully executed study agreement. The metrics adopted in this final action provide information on the transmission provider's ability to meet the timeframes described in the
333. We also disagree with ISO-NE that we should extend the posting time period from 30 to 60 days. Interconnection customers make decisions with information as it becomes available, and we believe that 30 days allows sufficient time for the transmission provider to post the required information.
334. In response to PG&E's question about the application of the proposed metrics, we clarify that these metrics apply to interconnection requests within the queue, including clustering and fast-track projects. We expect that a change to a project that triggers material modification provisions, though it will lose its queue position, would be in the queue as would repowering projects. Thus, the study performance metric calculations must include such projects.
335. The interconnection of a new generating facility to a transmission system may affect the reliability of a neighboring, or affected, transmission system. Currently, section 3.5 of the
336. Order No. 2003 further explained that, if the affected system operator does not provide information in a timely manner, a transmission provider may proceed without accounting for any information the affected system could have provided.
337. Order No. 2003 does not require that transmission providers publish their affected system coordination process. During the Order No. 2003 proceeding, the Commission declined Duke's request to require affected systems to participate in the interconnection process with interconnection customers.
338. The Commission stated in the NOPR that providing affected system coordination guidelines and timeframes could better inform interconnection customers and could result in fewer late-stage withdrawals due to the unforeseen cost of affected system network upgrades.
339. In the NOPR, the Commission sought comment on the following: prescribing guidelines for affected systems coordination; imposing study requirements and associated timelines on affected systems that are also public utility transmission providers; standardizing the process for coordinating with an affected system during the interconnection process; developing a standard affected system study agreement; and additional steps (
340. Multiple commenters responded to the questions posed by the NOPR. We have not included a summary of the comments pertaining to affected systems coordination because the Commission did not propose any specific reforms pertaining to affected systems in the NOPR and is considering these issues in another proceeding, as discussed below. However, these comments informed that discussion.
341. On April 3 and 4, 2018, Commission staff convened a technical conference in Docket No. AD18-8-000 to explore issues related to the coordination of affected systems raised in this proceeding. The technical conference also explored issues related to the coordination of affected systems raised in the complaint filed by EDF Renewable Energy, Inc. against Midcontinent Independent System Operator, Inc., Southwest Power Pool, Inc., and PJM Interconnection, L.L.C. in Docket No. EL18-26-000. The Notice Inviting Post-Technical Conference Comments, which issued concurrently with this final action, states that initial and reply comments are due within 30 days and 45 days, respectively, from the date of the notice's issuance. The Commission is considering next steps in light of the technical conference held in Docket Nos. AD18-8-000 and EL18-26-000. We decline to take further action in this rulemaking proceeding. Any further action on this issue would reference Docket No. AD18-8-000.
342. In the NOPR, the Commission proposed reforms designed to enhance interconnection processes by making use of underutilized interconnection service, providing interconnection service earlier, and accommodating changes in the development process.
343. The Commission proposed to modify the
344. The Commission proposed that an interconnection customer that seeks interconnection service below its generating facility capacity should be subject to reasonable provisions that enforce a maximum export limit and a process for notifying an interconnection customer that it has exceeded such limit.
345. The Commission also specifically proposed that interconnection customers be subject to reasonable penalties if they exceed their requested service levels, and that such penalties could be discrete financial penalties, a requirement to pay the cost of additional interconnection facilities or network upgrades, or the loss of interconnection rights. The Commission sought comment on the potential penalties that may be imposed if an interconnection customer exceeds its service level.
346. The Commission also specifically sought comment on the types and availability of control technologies and protective equipment to ensure that a generating facility does not exceed its level of interconnection service.
347. Consistent with the proposals above, the NOPR proposed to add the following new paragraph at the end of section 3.1 of the
348. The NOPR proposed to add the following language to the end of section 6.3 of the
349. The NOPR proposed to insert the following language in section 7.3 of the
350. The NOPR proposed to add the following language to the end of section 8.2 of the
351. The NOPR proposed to add the following language to Appendix 1, Item 5, of the
352. Lastly, the NOPR proposed to change the definition of “Large Generating Facility” and “Small Generating Facility” in section 1 of the
Large Generating Facility shall mean a Generating Facility
Small Generating Facility shall mean a Generating Facility
353. Most responsive commenters support the proposal.
354. A number of commenters see benefits to the proposal. Several commenters see the potential for lower costs.
355. AWEA states that developers of new technologies have an interest in requesting interconnection service at levels below generating facility capacity.
356. ESA and NextEra also point out that, in Order No. 792, the Commission revised the
357. ELCON, ESA, and NextEra also note that the proposal will reduce the overbuilding of interconnection facilities and network upgrades.
358. CAISO notes that the flexibility afforded by the proposal can benefit interconnection customers—especially for newer resources that combine storage, conventional generation, high auxiliary load, and/or onsite demand-side management.
359. Multiple commenters note that similar programs are already in place in some RTOs/ISOs, either on a formal or informal basis, including CAISO, MISO, PJM, and ISO-NE.
360. CAISO and PG&E state that CAISO allows interconnection requests for less than generating facility capacity, as long as the interconnection customer installs appropriate monitoring and control technologies to enforce the maximum export limit.
361. PG&E notes that CAISO also allows interconnection projects to downsize their capacity, which is functionally equivalent to limiting a project with excess capacity.
362. MISO notes that its generator interconnection agreement allows interconnection customers to request interconnection service below the capacity of the proposed generating facility and limits the net injection to the allowed interconnection service level.
363. PJM states that it currently allows interconnection customers to limit injection rights subject to additional studies at both the requested level of interconnection service to identify required network upgrades, as well as at the generating facility's full capacity.
364. ISO-NE states that it supports the proposal and has already implemented a similar process under its existing interconnection procedures.
365. Non-Profit Utility Trade Associations, NYISO, and SEIA do not object to the proposal.
366. In response to the Commission's question in the NOPR regarding whether, instead of revising the
367. In this final action, we adopt the NOPR proposal to modify sections 3.1, 6.3, 7.3, 8.2, and Appendix 1 of the
368. The majority of responsive comments either support the NOPR proposals outright or emphasize the importance of allowing transmission providers to retain the tools necessary to continue to ensure reliable operations. Furthermore, as noted by some commenters, some RTOs/ISOs have already permitted such flexibility in the generator interconnection process without causing reliability issues.
369. We find that the reforms and clarifications made in this final action, coupled with existing provisions in the
370. The reforms adopted here are consistent with existing provisions of the
371. Most importantly, article 9 of the
372. We note that nothing in article 9.7.4.1 of the
373. Furthermore, article 5.9 of the
374. Finally, with respect to the Non-Profit Utility Trade Associations' suggestion that a NERC reliability standard be considered that would constrain interconnection customers operating at levels below their rated generating facility capacity to the rating at which the facilities are studied, we find that suggestion to be outside the scope of this rulemaking proceeding. As discussed above, the existing system protection facility provisions of the
375. Commenters disagree on the appropriate way to model and conduct studies of resources that seek to interconnect below their capacity. Some commenters argue that the studies should focus solely on the reduced generating facility capacity. For example, AWEA, ESA, and NextEra assert that transmission providers should not be able to study interconnection requests at full generating facility capacity. They argue that the interconnection customer should be able to determine operational assumptions and limitations, especially given the sophisticated and reliable characteristics of available monitoring and control technologies.
376. ESA argues that, if a transmission provider is skeptical that proposed control systems are adequate, it should identify the shortcomings of the proposed control scheme to the customer and suggest what modifications address these shortcomings.
377. On the other hand, NYISO contends that, to ensure reliability, short circuit analysis of the full generating facility capability and steady-state and dynamic study evaluations of the specific mechanism, which would serve to enforce this limit, are necessary.
378. Similarly, ESA and NextEra suggest that short circuit and stability studies should be performed using full generating facility capacity, whereas thermal studies should be at the level of interconnection requested.
379. Bonneville and Non-Profit Utility Trade Associations emphasize that transmission providers should be able to study at full generating facility capacity in cases where safety or reliability concerns may arise.
380. On the other hand, TDU Systems contends that, to ensure transparency, the transmission provider must be able to document the need for a study at full generating facility capacity.
381. ITC and Six Cities support the NOPR proposal that the costs of all additional studies should be borne by the interconnection customer.
382. SoCal Edison takes a middle view, stating that the necessary studies would depend on the specifics of each interconnecting project.
383. We adopt the NOPR proposal that the transmission provider will study requests for interconnection service at the level of interconnection service requested by the interconnection customer for purposes of interconnection facilities, network upgrades, and associated costs, but may, at the transmission provider's discretion as clarified below, also perform other studies at the full generating facility capacity to ensure safety and reliability of the transmission system, with the study costs borne by the interconnection customer.
384. We clarify that, if the transmission provider determines, based on good utility practice and related engineering considerations and after accounting for the proposed control technology, that studies at the full generating facility capacity are necessary to ensure safety and reliability of the transmission system when an interconnection customer requests interconnection service that is lower than full generating facility capacity, then it must provide a detailed explanation for such a determination in writing to the interconnection customer. For example, some interconnection customers may have proposed generating facilities that may raise short-circuit/fault-duty concerns that require certain studies to be performed at full generating facility capacity, even if the generating facilities will normally be limited to operation below full generating facility capacity. If the transmission provider determines in accordance with good utility practice and related engineering considerations after accounting for the proposed control technology that additional network upgrades are needed based on these studies, the transmission provider must: (1) Specify which additional network upgrade costs are based on which studies; and (2) provide a detailed explanation why the additional network upgrades are needed.
385. In response to Duke's comment that transmission providers should always perform system impact studies and facilities studies at full generating facility capacity for reliability reasons, we reiterate that, if the transmission provider either accepts the interconnection customer's proposed control technology or designs its own control technology as part of the system protection facilities for the interconnection, then the transmission provider should, subject to the limited exception discussed above, perform the necessary studies to ensure safety and reliability of the transmission system and evaluate system performance to interconnect the generating facility at the requested generating facility capacity level. In addition, to improve transparency, we clarify that the transmission provider must inform the interconnection customer, after the feasibility study phase regarding which studies (
386. We further clarify that, if disputes related to the transmission provider's use of discretion while processing interconnection requests for interconnection service that is lower than full generating facility capacity cannot be resolved, the parties may seek dispute resolution through any process that may be available in the relevant LGIP, LGIA or through DRS, and/or may bring the dispute to the Commission under a FPA section 206 complaint or, if appropriate, as part of the transmission provider's filing of an unexecuted LGIA.
387. Many commenters focus on ways to ensure that generating facilities do not exceed the energy injection limits in the interconnection agreement. Almost all agree that appropriate control technology is necessary to prevent interconnection customers from exceeding the approved interconnection service limit.
388. AWEA notes that programmable meters and other technologies that allow plant operators to self-curtail are widely available,
389. CAISO states that exceeding studied interconnection capacity can result in serious safety and reliability risks to the grid and the generator itself.
390. PJM explains that it currently requires that interconnection customers install appropriate power flow monitoring and control technologies at their generating facilities to limit the facilities' allowable injection on to the transmission system.
391. SoCal Edison states that, to mitigate the risk of exceeding an interconnection service limit, the interconnection customer should have to install a control system that meters total output at the high side of the main transformer banks.
392. The Non-Profit Utility Trade Associations also argue that interconnection customers should bear the costs of control technologies and protection system costs because such equipment is not useful to other customers.
393. NextEra further explains that an over-delivery would only result from a failure of the generation control system or inverter controls, akin to a computer malfunction, which NextEra notes is theoretically possible, but very rare.
394. In contrast, while MidAmerican agrees that the generating facility output must not exceed the level of interconnection service, it does not support a universal requirement for special hardware or software systems.
395. Xcel also advises the Commission to not regulate specific technical processes used to limit dispatch as technology may evolve and each region's processes are unique. Xcel notes that it uses a manual process for its net-zero facility in MISO, and believes its process is sufficient.
396. As discussed above, we find that the revisions and clarifications in this rulemaking coupled with existing provisions of the
397. With respect to SoCal Edison's argument that the interconnection customer's control technologies should have to meter total output at the high side of the main transformer banks, we see no need for this requirement because the
398. With respect to the Non-Profit Utility Trade Associations' argument that control technologies and protection system costs should be treated as directly assigned costs, as discussed earlier, we find that these control and protection technologies are system protection facilities as defined in existing
399. MidAmerican and NextEra argue that facilities without special control systems are no more likely to over-deliver than generators that have not requested interconnection service below their facility capacity. As an example, MidAmerican points out the case of a generator operating under provisional interconnection service, which has the ability to over-generate if it does not adhere to its interconnection service request level. NextEra makes a similar observation with respect to thermal generation generally.
400. With regard to the type of control strategy/design that NextEra proposed, we expect a transmission provider to find such a control system, or a control system of equal dependability, acceptable for the purposes of evaluating interconnection requests for interconnection service that is lower than full generating facility capacity. There may be circumstances in which a transmission provider could reasonably find that additional back-ups or other functions are necessary for a control system to be acceptable. We stress that the transmission provider should identify such circumstances based on relevant technical details, reliability requirements, and good utility practice,
401. As discussed further below, in the
402. Similarly, Idaho Power, Portland, and Southern assert that, if the customer has a future request to operate at a higher MW level, a new system impact study should be required.
403. Similarly, Idaho Power argues that the NOPR fails to address a situation where a customer agrees to accept a lower level of service to shift network upgrade costs to other interconnection customers behind in the queue that may be vying for limited capacity (
404. Non-Profit Utility Trade Associations argue that the Commission should allow for cost-sharing of upgraded systems funded by subsequent interconnecting customers if the generation-limited entity chooses to take advantage of that additional investment by subsequently increasing output.
405. The Commission agrees with those commenters that suggest that interconnection customers should be able to request reduced interconnection service after submitting an interconnection request. However, we do not believe this flexibility can be without limit, or it could adversely impact the interconnection process. As will be explained further below, interconnection customers already have the right to reduce the generating facility capacity at certain points in the interconnection process, even though such reductions may impact interconnection requests later in the queue. The provisions that allow an interconnection customer to reduce its requested generating facility capacity do not currently allow an interconnection customer to reduce its requested level of interconnection service at the same points. Therefore, in this final action, we are revising the
406. Section 4.4.1 of the
4.4.1. Prior to the return of the executed Interconnection System Impact Study Agreement to the Transmission Provider, modifications permitted under this Section shall include specifically: (a) a reduction up to 60 percent (MW) of electrical output of the proposed project,
4.4.2. Prior to the return of the executed Interconnection Facility Study Agreement to the Transmission Provider, the modifications permitted under this Section shall include specifically: (a) additional 15 percent decrease
407. We disagree with Southern's contention that an interconnection customer's request to modify the interconnection service amount to less than the generating facility capacity should always constitute a material modification of its interconnection request. A request to reduce the interconnection service amount is similar in many respects to a request to reduce generating facility capacity. Because the
408. ITC argues that transmission providers should be able to deny requests to reduce interconnection service where such a request would adversely affect lower-queued interconnection requests. Similarly, Idaho Power and Non-Profit Utility Trade Associations argue that the Commission has either failed to address the situation where a request to reduce interconnection service would adversely affect lower-queued interconnection requests or that appropriate cost-sharing provisions should apply if a below-generating facility capacity interconnection customer later requests an increase in interconnection service to take advantage of upgraded systems funded by subsequent interconnection requests. We find that no additional LGIP or LGIA revisions are necessary to address these scenarios because reductions in interconnection service level are similar in their queue-related impacts to reductions in generating facility capacity, which the existing
409. Furthermore, lower-queued interconnection requests have always faced potential impacts from the decisions of higher-queued interconnection requests. For example, lower-queued interconnection requests are frequently impacted by the withdrawal of higher-queued interconnection requests. The impact on lower-queued interconnection requests from a withdrawal higher in the queue is similar to what would happen when a higher-queued interconnection customer requests a reduction in interconnection service level. In both cases, the higher-queued interconnection request could avoid paying for some level of network upgrades (if such upgrades are required), and lower-queued interconnection requests could be impacted as a result. Furthermore, if an interconnection customer limited in output to below generating facility capacity later seeks an increase in interconnection service, this will be a new interconnection request with a new position at the end of the interconnection queue, very similar to the situation where a higher-queued interconnection request withdraws and later re-enters the queue. While we recognize that these two scenarios are not identical in all respects, we nevertheless believe that they are similar enough that the normal queue management and interconnection processes, including being subject to the full slate of interconnection studies and being potentially responsible for the cost of new network upgrades, can adequately address the issues raised by commenters.
410. Commenters disagree regarding penalties for over-generation. Some argue that no additional penalties are necessary. NextEra, NYISO, ESA, and MidAmerican argue that existing provisions in the
411. NextEra also notes that thermal generation may be able to produce higher levels of output under certain conditions and does not have any additional requirements, nor are there special requirements for the operation of System Protection Facilities.
412. Xcel states that, although penalties may sometimes be appropriate, if the system can reliably accept the energy, over-generation may sometimes be beneficial or may not be a significant reliability or free rider issue.
413. Some commenters see the value of additional penalties. For instance, Bonneville, ITC, TDU Systems, Six Cities, SoCal Edison, Xcel, Portland, and Duke support both financial and non-financial penalties, including curtailment, if an interconnection customer exceeds its service limit to maintain reliability.
414. Six Cities observes that a requirement to pay incremental network upgrade costs may be most appropriate in circumstances where an interconnection customer has consistently exceeded its specified level of interconnection service over some period of time, while a monetary penalty may be most appropriate to address isolated exceedances. Six Cities argues that RTOs/ISOs are in the best position to develop appropriate penalty proposals for application in their respective regions.
415. SoCal Edison requests that the Commission clarify that penalties apply to interconnection customers whose agreed-upon interconnection service level is for the full generating facility capacity, not just those whose agreed-upon interconnection service levels are below the full generating facility capacity.
416. With respect to penalties, based on the record here, we find that current provisions in the
417. As mentioned above, article 17 of the
418. TDU Systems conditionally support the Commission's proposal to change the definitions of Large Generating Facility and Small Generating Facility in the
419. Similarly, IECA argues that industrial combined heat and power and waste heat recovery facilities with net generating capacities in excess of 20 MW can export far less total electricity to the grid than a wind or solar facility with similar or less generating facility capacity.
420. On the other hand, Portland opposes the proposal to redefine the term generating facility based on the level of interconnection service. Instead, Portland argues that generating facility definitions should be based on nameplate capacity.
421. Six Cities states it is not sure what the Commission means by the statement that these definition changes “are not intended to conflict with any applicable [NERC] Reliability Standards or NERC's compliance registration process.”
422. Upon consideration of the comments, we withdraw the NOPR proposal to change the definitions of large and small generating facilities so that they are based on the level of interconnection service for the generating facility rather than the generating facility capacity.
423. As we have withdrawn this proposal, there is no need to address comments on the proposal or to address IECA's argument that a transmission provider should base a combined heat and power and waste heat recovery facility's size classification on the maximum amount of power that could be exported to the grid under normal manufacturing operations.
424. The Commission proposed to allow interconnection customers to enter into provisional agreements for limited interconnection service prior to the completion of the full interconnection process. Under this proposal, interconnection customers with provisional agreements would be able to begin operation up to the MW level permitted by a previously conducted, readily available interconnection study (available study), additional studies as necessary, and regularly updated studies. In the NOPR, the Commission noted that the transmission provider may require milestone payments prior to submission of the provisional agreement. The provisional agreement would be in effect while awaiting the final results of the interconnection studies, the execution of a LGIA, and the construction of any additional interconnection facilities and/or network upgrades that may result from the full interconnection process. The Commission also proposed that provisional large generator interconnection agreements and the associated provisional interconnection service would terminate upon completion of construction of network upgrades required for the interconnection customer's full level of service.
425. The Commission proposed that interconnection customers with provisional agreements must still assume all risk and liabilities associated with the required interconnection facilities and network upgrades for their interconnection that are identified pursuant to the full set of interconnection studies for the requested interconnection service.
426. The Commission therefore proposed to require that transmission providers allow interconnection customers to request provisional interconnection service and operate under provisional interconnection agreements based on available or additional studies as necessary and regularly updated studies that demonstrate that necessary interconnection facilities and network upgrades are in place to meet applicable NERC or other regional reliability requirements for new, modified, and/or expanded generating facilities. If available studies do not demonstrate whether the transmission provider can reliably accommodate provisional interconnection service, the transmission provider would perform additional studies as necessary. An evaluation of provisional service by the transmission provider would determine whether stability, short circuit, and/or voltage issues would arise if the interconnection customer seeking provisional interconnection service interconnects without modifications to the generating facility or the transmission provider's system. The Commission also proposed that transmission providers must assess any safety or reliability concerns posed by provisional agreements, and establish a process for the interconnection customer to mitigate any reliability risks associated with operation pursuant to provisional agreements.
427. The Commission sought additional comment on the proposal and the means by which transmission providers and interconnection customers could mitigate any risks and/or liabilities for provisional interconnection service. The Commission, acknowledging that transmission providers have limited resources to conduct studies, also sought comment on the circumstances under which provisional interconnection service would be beneficial and how common such circumstances would be for potential interconnection customers.
428. The Commission proposed to add the following new definitions to Section 1 of the
429. Additionally, the Commission proposed a new article 5.10 for the
430. Most responsive commenters either support the proposal
431. Alevo, ITC, MISO TOs, NextEra, and Six Cities agree that the interconnection customers should assume all associated risks and liabilities with regard to provisional interconnection service.
432. As noted in the NOPR, certain regions already include some form of provisional interconnection service.
433. CAISO provides different avenues for “provisional” interconnection service.
434. SoCal Edison supports the existing CAISO process but argues that the NOPR proposal may unintentionally
435. Eversource states that transmission providers should have discretion to determine whether there is capacity available to accommodate provisional interconnection service.
436. EEI states that an interconnection customer should only be able to use provisional interconnection service when: (1) Studies indicate that there is a level of interconnection that can occur without any additional upgrades and the interconnection customer wishes to make use of that level of interconnection while the upgrades required for its full interconnection request are completed; and (2) where a previously completed study indicates there is a level of interconnection that can occur without any additional upgrades while such study is updated.
437. ISO-NE opposes the establishment of provisional interconnection service, arguing that it would unnecessarily increase uncertainty and create difficult obligations for system operators.
438. In this final action, we adopt the NOPR proposal to define Provisional Interconnection Service and Provisional Large Generator Interconnection Agreement in section 1 of the
439. In response to Alevo's question regarding whether provisional interconnection service could become permanent, we clarify that provisional interconnection service could not become permanent because it is only available to interconnection customers awaiting the completion of the full interconnection process and will terminate upon completion of construction of interconnection facilities and network upgrades.
440. In response to CAISO, we clarify that “a certain amount of capacity already studied”
441. In response to requests for clarification of the conditions for requesting provisional interconnection service, we clarify that interconnection customers may seek provisional interconnection service when available studies or additional studies as necessary indicate that there is a level of interconnection that can occur without any additional interconnection facilities and/or network upgrades and the interconnection customer wishes to make use of that level of interconnection service while the facilities required for its full interconnection request are completed.
442. In response to ISO-NE's objection that the provisional interconnection service proposal could cause lower-queued projects to “leapfrog” higher-queued interconnection customers, we acknowledge that there may be instances when a lower-queued project may interconnect and receive provisional interconnection service before a higher-queued project completes the full interconnection process. It is possible that the resources needed to complete the transmission provider's interconnection studies may be required to perform provisional studies for a lower-queued interconnection customer. But, a higher-queued interconnection customer should have the opportunity to request provisional service prior to a lower-queued interconnection customer. The availability of this service would not unduly disadvantage higher-queued interconnection customers, which would have the first chance to use any available provisional service, but may have been unable or uninterested in doing so. In addition, the availability of provisional service should not advantage lower-queued interconnection customers in the processing of their full interconnection service request. We emphasize that provisional interconnection service may not provide an interconnection customer its full requested level of interconnection service. We further note that any interconnection customer, regardless of queue position, may request provisional interconnection service.
443. Duke, Xcel, and Southern see no need for the Commission to develop a
444. In this final action, we agree with commenters and decline to adopt a separate
445. EEI argues that a transmission provider should not have to perform additional studies to offer provisional interconnection service and should not have to perform periodic studies to update the level of maximum permissible provisional interconnection service.
446. Duke and NYISO oppose the requirement to conduct quarterly restudies.
447. Eversource argues that additional studies could turn the interconnection process into a protracted iterative design process while the interconnection customer determines its cheapest option for network upgrades.
448. In this final action, we modify the NOPR proposal and article 5.9.2 of the
5.9 [Limited Operation]
449. We also revise article 5.9.2 of the LGIA from the version proposed in the NOPR as follows (deleting bracketed, un-italicized text and adding the italicized text):
5.
Upon the request of Interconnection Customer, and prior to completion of requisite
450. In response to Tri-State's and TVA's concern about the additional burden associated with providing provisional interconnection service, and Eversource's and Six Cities' concern that provisional interconnection service will prolong the interconnection process, we acknowledge that providing provisional interconnection service may require additional studies, which could prolong the interconnection process for some interconnection customers. However, because provisional interconnection service is partly based on the results of available studies, and the studies to confirm that provisional service continues to be available are less intensive than full interconnection studies, interconnection customers in the queue that do not select provisional interconnection service should not experience additional significant delay. In the regions where provisional interconnection service is currently available, the Commission is unaware of any delays to the interconnection process due to transmission provider processing of provisional studies. Furthermore, as stated above, we recognize the individual needs of the transmission providers, and the modification from the NOPR proposal to allow transmission providers the flexibility to determine the frequency to study and update the maximum permissible output of the generating facility should further minimize delays and lessen any burden.
451. Imperial and Modesto ask the Commission to clarify how the provisional service would be subject to section 3.5 of the
452. In response to concerns about negative effects to other systems or system reliability, we emphasize that available studies or additional studies as necessary performed by transmission providers at the interconnection customer's expense, should identify any associated negative effects on system reliability. We also reiterate that Commission staff convened a technical conference in Docket No. AD18-8-000 to explore issues related to the coordination of affected systems raised in this proceeding and from a complaint filed in Docket No. EL18-26-000. Thus, while the Commission is not taking action on affected systems issues in this rulemaking, the Commission is considering these kinds of issues. As a reminder, the Notice Inviting Post-Technical Conference Comments in Docket No. AD18-8-000, which issued concurrently with this final action, states that initial and reply comments are due within 30 days and 45 days, respectively, from the date of the notice's issuance.
453. In the NOPR, the Commission proposed to add a new definition for Surplus Interconnection Service to section 1 of the
454. In the NOPR, the Commission pointed to MISO's Net Zero Interconnection Service, which is offered under MISO's tariff. MISO designed this service “to allow an existing interconnection customer to increase the gross generating capacity at the point of interconnection of an existing generating facility without increasing the total interconnection service at the point of interconnection.”
455. To ensure system reliability, the Commission proposed to require reactive power, short circuit/fault duty, and stability analyses studies for this service, and that transmission providers perform steady-state (thermal/voltage) analyses as necessary to ensure evaluation of all required reliability conditions.
456. The Commission proposed to require that the transmission provider, transmission owner (as applicable), and the surplus interconnection service customer execute, or file unexecuted, a new agreement for surplus interconnection service. The Commission noted that the surplus interconnection customer could be the interconnection customer for the existing generating facility, one of its affiliates, or a new interconnection customer selected through an open and transparent solicitation process.
457. While the Commission did not propose specific contractual arrangements with respect to surplus interconnection service in the NOPR, the Commission sought comment on how these arrangements should work and on whether requirements for such arrangements should be established in the Commission's
458. Under the NOPR proposal, an existing generating facility owner or its affiliate would have priority to use any surplus interconnection service and would be able to execute or request the filing of an unexecuted surplus interconnection service agreement without posting that service to OASIS or going through an open solicitation process.
459. With regard to specific requirements, the Commission proposed to add the following new definition to section 1 of the
460. The Commission proposed to add a new section 3.3 to the
461. The Commission proposed to add a new section 3.3.1 to the
462. Finally, the Commission proposed to add a new section 3.3.2 to the
463. Several commenters support this proposal. ESA supports the proposal and the ability to transfer interconnection capacity between parties because it may encourage co-location of storage and generation. It also states that the net-zero model developed by MISO, following the Commission's guidance in that proceeding, does not meet the objective of encouraging the use of surplus interconnection service and that a separate, faster process to transfer surplus is necessary.
464. Several commenters express concerns with some aspects of, but do not completely oppose, the Commission's proposal. For example, EEI states that the concept is reasonable but would burden transmission providers and should thus be optional.
465. Other commenters, including several RTOs/ISOs, oppose the proposal entirely. For example, ISO-NE states that its markets are already managing surplus transfers through its process that integrates its forward capacity market with its interconnection queue. ISO-NE argues that the Commission proposal would significantly disrupt or misalign this process.
466. Several commenters state that either there is no surplus on their systems or that it is unclear what “surplus” means. For example, CAISO questions how to define surplus interconnection capacity and states that it assigns interconnection capacity by the actual size of the generator; thus, there is no surplus service in its region.
467. In this final action, we adopt, with certain modifications and clarifications, the NOPR proposals to: (1) Add a definition for “Surplus Interconnection Service” to section 1 of the
468. We clarify that surplus interconnection service is created because generating facilities may not operate at full capacity at all times. Consistent with the requirements of
469. As noted above, Order No. 2003 mandates that transmission providers assume that generating facilities operate at their full capacity. To illustrate this, we note that Order No. 2003 listed, as separate services, Energy Resource Interconnection Service (ERIS),
shall mean an Interconnection Service that allows the Interconnection Customer to connect its Generating Facility to the Transmission Provider's Transmission System to be eligible to deliver the Generating Facility's electric output using the existing firm or nonfirm capacity of the Transmission Provider's Transmission System on an as available basis. Energy Resource Interconnection Service in and of itself does not convey transmission service.
shall mean an Interconnection Service that allows the Interconnection Customer to integrate its Large Generating Facility with the Transmission Provider's Transmission System (1) in a manner comparable to that in which the Transmission Provider integrates its generating facilities to serve native load customers; or (2) in an RTO or ISO with market based congestion management, in the same manner as all other Network Resources. Network Resource Interconnection Service in and of itself does not convey transmission service.
470. Similarly, Order No. 2003 stated that NRIS “provides for all of the Network Upgrades that would be needed to allow the Interconnection Customer to designate its Generating Facility as a Network Resource and obtain Network Integration Transmission Service” so that for “an Interconnection Customer [that] has obtained Network Resource Interconnection Service, any future transmission service request for delivery from the Generating Facility would not require additional studies or Network Upgrades.”
471. Thus, to provide interconnection service to an original interconnection customer at a particular point of interconnection, the transmission provider must conduct a study that assumes that the generating facility will produce at its full output and that the interconnection customer will fully utilize the amount of interconnection service requested. Consequently, it is possible for an original interconnection customer to have surplus interconnection service at a particular interconnection point because the generating facility capacity that the transmission provider originally studied pursuant to the
472. As established in this final action and explained further below, surplus interconnection service cannot exceed the total interconnection service already provided by the original interconnection customer's LGIA. Furthermore, if the original LGIA is for ERIS, any surplus interconnection customer associated with the original LGIA at the same point of interconnection would also need to be an ERIS customer in order to avoid the potential need for new network upgrades. If the original LGIA is for NRIS, then either ERIS or NRIS service could be offered to the surplus interconnection service customer. The provisions addressed in this final action will allow an existing interconnection customer to make a specified and limited amount of surplus interconnection service available at a particular interconnection point under a variety of circumstances, including, for example, on a continuous basis (
473. We note that, to avoid abuse of this reform, which is intended to increase utilization of existing, underutilized interconnection service provided at a particular point of interconnection, we are restricting surplus interconnection service when new interconnection service would be more appropriate. Specifically, surplus interconnection service cannot be offered if the original interconnection customer's generating facility is scheduled to retire and permanently cease commercial operation before the surplus interconnection service customer's generating facility begin commercial operation. This restriction is consistent with the Commission's statement in Order No. 2003 that interconnection service is “associated with interconnecting the Interconnection Customer's Generating Facility to the Transmission Provider's Transmission System.”
474. As this statement demonstrates, the interconnection service provided under an original interconnection customer's LGIA is associated with interconnecting that interconnection customer's generating facility. Once that original generating facility retires and ceases commercial operation, whether that retirement was scheduled or caused prematurely by unexpected circumstances, there is no longer any interconnection service being provided under the original interconnection customer's LGIA. Because surplus interconnection service is inherently derived from an original interconnection customer's interconnection service under its LGIA, retirement and permanent cessation of commercial operation of the original
475. We note that this final action makes it possible for a surplus interconnection service customer to increase the total generating facility capacity at a point of interconnection, provided that the total combined generating output at the point of interconnection for both the original and surplus interconnection customer is limited to and shall not exceed the maximum level allowed under the original interconnection customer's LGIA.
476. Comments on the NOPR reveal substantial regional variation in the potential availability of surplus interconnection service and existing or prospective processes that would facilitate its use. To the extent that a transmission provider believes that it already complies with the surplus interconnection service requirements of this final action, it may include an explanation in its compliance filing in response to this final action.
477. We clarify that, for a process to be consistent with or superior to, or an independent entity variation from, the final action's surplus interconnection service requirements, the transmission provider must demonstrate, at a minimum, that its tariff: (1) Includes a definition of surplus interconnection service consistent with the final action; (2) provides an expedited interconnection process outside of the interconnection queue for surplus interconnection service, consistent with the final action; (3) allows affiliates of the original interconnection customers to use surplus interconnection service for another interconnecting generating facility consistent with the final action; (4) allows for the transfer of surplus interconnection service that the original interconnection customer or one of its affiliates does not intend to use; and (5) specifies what reliability-related studies and approvals are necessary to provide surplus interconnection service and to ensure the reliable use of surplus interconnection service.
478. As a threshold consideration, we respond to NYISO's concern regarding whether the NOPR proposal on surplus interconnection service is consistent with the principles of open access.
479. While open access principles are fundamental to the Commission's regulation of transmission in interstate commerce,
In Order No. 807, the Commission concluded that the waived requirements were not “necessary to achieve the Commission's open access goals.”
480. We find that policy considerations comparable to those that the Commission relied upon to support Order No. 807 are present here. Surplus interconnection service is not available to third parties absent some process for allowing the use or transfer of the surplus interconnection service to another interconnection customer. As described above, some original interconnection customers do not use the full generating facility capacity of their interconnection service due to the nature of their operations. In these circumstances, no other interconnection customer would be able to obtain interconnection service associated with the network upgrades funded by the original interconnection customer. Creation of a surplus interconnection service that allows another interconnection customer to make use of surplus interconnection service will enhance access to the transmission system at the point of interconnection.
481. The question is then how to align the process for determining which resources may access surplus interconnection service with the Commission's goals to promote transparent and nondiscriminatory practices. We are convinced, as we were in Order No. 807, that certain requirements and processes—in this instance, a competitive solicitation—are not necessary to achieve our overall open access goals. As a general matter, we note that surplus interconnection service is, by definition, limited in nature. This is because: (1) The total output of the original interconnection customer plus the surplus interconnection service customer behind the same point of interconnection shall be limited to the maximum total amount of interconnection service granted to the original interconnection customer; (2) the original interconnection customer must be able to stipulate the amount of surplus interconnection service that is available, to designate when that service is available, and to describe any other conditions under which surplus interconnection service at the point of interconnection may be used; and (3) surplus interconnection service shall only be available at the preexisting point of interconnection of the original interconnection customer.
482. Furthermore, we note that the Commission is making no changes to the open access nature of the generator interconnection process established by Order No. 2003. This final action requirement does not restrict a new interconnection customer's ability to submit an interconnection request for any requested point of interconnection directly with the transmission provider, rather than seeking surplus interconnection service with respect to an original interconnection customer's point of interconnection. Therefore, an original interconnection customer with surplus interconnection service shall not be capable of preventing a new interconnection customer from exercising its open access rights to the transmission grid.
483. In order to realize the benefits of an efficiently-used transmission system, the final action adopts the NOPR proposal to allow an original interconnection customer or its affiliate to use any surplus interconnection service. Additionally, we withdraw the NOPR proposal to require an open and transparent solicitation process if an original interconnection customer that has surplus interconnection service
Utilization of Surplus Interconnection Service. [The ]Transmission Provider must provide a process that allows an Interconnection Customer to utilize or transfer Surplus Interconnection Service at an existing [Generating Facility]
484. We acknowledge that the requirements adopted here reflect a change in Commission policy with respect to some of the requirements previously imposed on MISO's Net Zero Interconnection Service.
485. Commenters disagree on whether there should be an expedited process for transferring surplus interconnection capacity. For example, California Energy Storage Alliance supports a faster process that does not require additional interconnection studies.
486. As described earlier, we adopt the NOPR proposal to add a new definition for “Surplus Interconnection Service” to section 1 of the
487. In response to those comments, we clarify that the use or transfer of surplus interconnection service does not entail queue jumping because surplus interconnection service does not compete for the same potential network upgrades that may be at issue in the normal interconnection queue. Surplus interconnection service is more limited interconnection service because it can only be located at the original interconnection customer's previously studied and approved point of interconnection. The requirements for the use of surplus interconnection service: (1) Provide efficient use of the transmission system; (2) ensure that the use of surplus interconnection service is safe and reliable; and (3) help mitigate the possibility of unduly discriminatory treatment. Because the necessary studies for surplus interconnection service shall confirm that the combination of the surplus interconnection customer's generating facility with the original interconnection customer's generating facility does not result in a need for new network upgrades, it would be inefficient to put surplus interconnection customers into the interconnection queue.
488. Furthermore, transmission providers in some regions routinely conduct similar studies outside of the interconnection process. For example, MISO frequently conducts Quarterly Operating Limits studies, which are similar in nature to the studies required for surplus interconnection service, and the Commission is unaware of any delays to other customers related to the processing of these studies.
489. SoCal Edison expresses concern that the proposal might encourage interconnection customers to request more interconnection capacity than they intend to use, in order to create a surplus that they might sell later.
490. As discussed earlier, the interconnection service provided under any LGIA is associated with interconnecting that interconnection customer's generating facility to the transmission provider's system, with a maximum level equal to the generating facility capacity. Accordingly, an interconnection customer cannot amass large excesses of interconnection service beyond its own needs. Furthermore, as discussed earlier, interconnection customers are free to seek interconnection service through the non-surplus interconnection process of the transmission provider. While an original interconnection customer could maintain control over a certain amount
491. As further described below, some commenters assert that the NOPR's surplus interconnection proposals treat interconnection service as a property right of the interconnection customer even though they may not have been so treated in the past. CAISO states that Commission precedent holds that the interconnection capacity does not confer a property right, and that where an interconnection customer builds less generating facility capacity than that for which it requested interconnection service, it does not retain that interconnection capacity indefinitely, and transmission providers like CAISO may subsequently remove it from their base case.
492. On the other hand, some interconnection customers assert that contracted interconnection service is indeed a property right. Generation Developers support recognizing that surplus capacity is a property right and asset of the existing interconnection customer.
493. We are, in this final action, adopting a requirement that transmission providers establish a process for the use or transfer of surplus interconnection service, and we do not view that policy as establishing a new property right to interconnection service. Rather, as NYISO contends, interconnection service is a contractual right provided by an LGIA. We also agree with CAISO that where the original interconnection customer, for example, reduces the generating facility capacity of its facility from what was originally proposed for interconnection, it would not retain rights indefinitely to any excess interconnection capacity thus created.
494. Some commenters argue that the proposed priority for original interconnection customers and their affiliates should have a limited term. MidAmerican
495. While the Commission sought comment in the NOPR on whether any limitations should be placed on the original interconnection customer's priority use of its interconnection service, we find that the original interconnection customer, through its LGIA, may use or transfer any surplus interconnection service until it retires the generating facility that is the subject of the LGIA. We see no reason to modify that ability. Accordingly, original interconnection customers will retain the ability to use, either for themselves, for an affiliate, or for sale to a third party of their choosing, any surplus interconnection service that may exist under their LGIAs, until their original generating facility retires. However, as described more fully in subsection (h) below, this right becomes more limited once the original interconnection customer schedules the retirement of its original generating facility.
496. Commenters that were responsive to the Commission's questions regarding contractual arrangements generally agree that contractual arrangements are necessary between the surplus interconnection customer and the original interconnection customer, as well as with the transmission owner.
497. ITC argues that the Commission should specify in the
498. Generation Developers argue that the Commission should require a transmission provider to have a
499. We agree with commenters that agreements between the original interconnection customer, the surplus interconnection service customer (whether affiliated or not), and the transmission provider are necessary to establish conditions such as the term of operation, the interconnection service limit, and the mode of operation for energy production (
500. However, we decline to establish these agreements as part of the
501. Some commenters discuss the NOPR as it might relate to retirement of generators and replacement or repowering.
502. Other commenters discuss whether surplus interconnection service should terminate at the same time the original interconnection customer's generating facility retires. Cogeneration Association argues that this matter should be stated in the LGIA or collateral agreement, but that the default position should be that the termination of rights of the surplus interconnection customer should occur simultaneously with the termination of rights of the original interconnection customer.
503. The purpose of this reform is to enable the efficient use of any surplus interconnection service that may exist in connection with an original interconnection customer's use of its generating facility. The retirement or repowering of that original interconnection customer's generating facility would represent activities outside the normal use of that generating facility. Accordingly, we find that, with one exception discussed below, retirement and repowering issues are outside the scope of this rulemaking, and should instead be addressed elsewhere (
504. With respect to continuation of surplus interconnection service after the retirement of the original interconnection customer's generating facility, we find that surplus interconnection service is, by definition, tied to the continued existence of the original interconnection customer's interconnection service. There must be some existing interconnection service from which the ability to provide surplus interconnection service has been identified. As described above, once the original interconnection service terminates, there is no longer an original interconnection service from which the ability to provide surplus interconnection service could be identified. Therefore, surplus interconnection service shall not be available when the original interconnection customer retires and permanently ceases commercial operation.
505. However, we believe it is appropriate to permit a limited continuation of surplus interconnection service following the retirement and permanent cessation of commercial operation of the original interconnection customer's generating facility to ameliorate the business and financial risk to the surplus interconnection service customer if the original interconnection customer retires unexpectedly, when two conditions are met. First, the surplus service interconnection customer's generation facility must have been studied by the transmission provider for sole operation at the point of interconnection at the time of the interconnection of the surplus service interconnection customer. Second, the original interconnection customer (and now
506. If these conditions are met, then the transmission provider must permit the surplus interconnection service customer to continue the surplus interconnection service for a limited period not to exceed one year. To prevent gaming and abuse of the continuation of surplus interconnection service, such service shall be limited to no more than one year after the date of retirement and permanent cessation of commercial operation of the original interconnection customer. If these conditions are not met, then those agreements regarding the surplus interconnection service must be drafted to, and must, terminate simultaneously with the termination of the original interconnection agreement from which surplus interconnection service was provided.
507. We note again that interconnection customers are under no obligation to choose surplus interconnection service rather than seeking their own stand-alone interconnection service directly from the transmission provider. Therefore, any interconnection customers that require greater assurance up front that their interconnection service will not be affected by the retirement of another generating facility should carefully consider whether surplus interconnection service is the right match for their particular needs.
508. MISO argues that, as a part of the final action, the Commission should allow MISO to remove certain restrictions on its existing Net Zero Interconnection Service that it argues exceed the restrictions proposed for the surplus interconnection service.
509. We agree with MISO that this final action includes fewer restrictions on the use of surplus interconnection service than what the Commission imposed on MISO's Net Zero Interconnection Service, which has a similar goal. As noted above, the requirements we enact in this final action for surplus interconnection service depart in some respects from our precedent regarding MISO's Net Zero Interconnection Service. This final action reflects a shift in the Commission's view of these issues as described in earlier subsections of this final action. To the extent that MISO wishes to modify the procedures surrounding its Net Zero Interconnection Service, MISO may propose to do so on compliance in this proceeding, and the Commission will evaluate that proposal to determine if it complies with the requirements of the final action.
510. Under the
511. In the NOPR, the Commission explained that the
512. In the NOPR, the Commission also proposed to require transmission providers to develop a definition of permissible technological advancements that the interconnection process can accommodate without the change being considered a material modification.
513. To implement the technological change procedure, the Commission also proposed to require transmission providers to define technological advancements in their LGIPs. The Commission stated that the definition should consider technological advancements to equipment that may
514. Accordingly, the Commission proposed to revise section 4.4.2 of the
4.4.2 Prior to the return of the executed Interconnection Facility Study Agreement to the Transmission Provider, the modifications permitted under this Section shall include specifically: (a) Additional 15 percent decrease in plant size (MW), [and] (b) Large Generating Facility technical parameters associated with modifications to Large Generating Facility technology and transformer impedances; provided, however, the incremental costs associated with those modifications are the responsibility of the requesting Interconnection Customer
515. The majority of commenters support
516. Multiple RTOs/ISOs support or do not oppose the NOPR's technological advancement proposal, while some do not necessarily believe that the NOPR proposal is necessary. For example, CAISO states that it supports the proposal.
517. Other commenters do not support the NOPR proposal or believe that the proposed changes are unnecessary. For example, EEI and some public utility transmission providers outside the RTOs/ISOs comment that current material modification provisions are adequate.
518. We adopt the NOPR proposal subject to certain clarifications. We require transmission providers to include in their
519. The technological change procedure must specify what technological advancements can be incorporated at various stages of the interconnection process, and the procedure must clearly identify which requirements apply to the interconnection customer and which apply to the transmission provider. The procedure should state that, if an interconnection customer seeks to incorporate technological advancements into its generating facility, it should submit a technological advancement request. For the transmission provider to determine that a proposed technological advancement is not a material modification, the procedure must specify the information that the interconnection customer must submit as part of a technological advancement request. The procedure must also specify the conditions under which a study will or will not be necessary to determine whether a proposed technological advancement is a material modification.
520. For a transmission provider to be able to determine whether a proposed technological advancement is not a material modification, the interconnection customer's technological advancement request must demonstrate that the proposed incorporation of the technological advancement would result in electrical performance that is equal to or better than the electrical performance expected prior to the technology change and not cause any reliability concerns (
521. The transmission provider must determine whether a requested technological advancement is a material modification and whether or not a study is necessary to complete the analysis of whether the technological advancement is a material modification. The procedure must state that, if a study is necessary to evaluate whether a particular technological advancement is a material modification, the transmission provider must clearly indicate to the interconnection customer the types of information and/or study inputs that the interconnection customer must provide to the transmission provider, including for example, study scenarios, modeling data, and any other assumptions. The procedure should also explain how the transmission provider will evaluate the technological advancement request to determine whether it is a material modification.
522. If the transmission provider cannot accommodate a proposed technological advancement without triggering the material modification provision of the
523. We find that the current definition of material modification may create uncertainty about whether a transmission provider must consider a technological advancement to be a material modification, and we agree with commenters that the requirement that we adopt in this final action will increase transparency, create process efficiencies, and encourage technological innovation that could lower consumer costs.
524. Some transmission providers, such as PJM, believe that a technological change procedure is unnecessary because their tariffs already include a method to determine whether a change to an interconnection request is a material modification. In response to these comments, if a transmission provider believes its existing interconnection procedures regarding the incorporation of technological advancements would qualify for a variation from the final action requirements or that it already complies with the requirements adopted in this final action, it may provide such an explanation in its compliance filing.
525. EEI, Duke, Southern, TVA, and Xcel assert that the existing material modification procedures are adequate to incorporate technological advancements. However, they do not dispute our concern that transmission providers have significant discretion over what equipment changes constitute material modifications. EEI takes issue with the proposal for transmission providers to specify in the technological change procedure the conditions when a study is necessary.
526. Regarding Xcel's request for a technical conference, we believe our determination here is supported by the record evidence and therefore do not believe that a technical conference on this issue is necessary.
527. A handful of commenters offer suggestions regarding the definition of permissible technological advancements. Some caution against an overly prescriptive definition to account for the unpredictability of technology evolution.
528. EDP argues that changes between wind and solar technologies should be treated as non-material modifications.
529. EEI requests further clarification of what is meant by “performance that is equal or better than the electrical performance expected prior to the technology change.”
530. We adopt the NOPR proposal and require transmission providers to develop a definition of permissible technological advancements that the interconnection process can accommodate without triggering the material modification provision of the
531. MISO TOs request clearer Commission direction to develop material modification guidelines. They state that RTO/ISO guidelines should clarify that a change that does not exceed the interconnection customer's interconnection rights or materially impact short circuit capability limits, steady-state thermal and voltage limits, or dynamic system stability and response, is not a material modification.
532. With regard to timing, EEI supports a 30-day study result deadline from commencement and a deposit of at least $10,000 per material modification proposal and clarification that the interconnection customer is financially responsible for necessary additional studies.
533. AWEA supports allowing technological advancements at any point including after an interconnection agreement is executed and a generating unit is online.
534. We adopt the NOPR proposal to require the interconnection customer to tender a deposit if the transmission provider determines that additional studies are needed to evaluate whether a technological advancement is a material modification. We find that the amount of the deposit should be specified in the transmission provider's technological change procedure. Requiring such a deposit is just and reasonable because a deposit will reimburse the transmission provider for the time and effort needed to complete the technological advancement study as well as minimize the submission of frequent and/or frivolous technological advancement requests. The transmission provider shall describe for the interconnection customer any costs incurred to conduct any necessary additional studies, provide its costs to the interconnection customer, and either refund any overage or charge for any shortage for costs that exceed the deposit amount. We are setting the default deposit amount at $10,000. However, to the extent that a transmission provider considers a $10,000 deposit to be too high or low, it may propose a reasonable alternative amount in its compliance filing and include justification supporting this alternative amount. We agree with EEI that the interconnection customer should bear financial responsibility for any necessary additional studies that may need to be performed to determine whether a technological advancement is a material modification.
535. Each transmission provider's technological change procedure must also include the timeframe for the transmission provider to perform the study it needs to determine whether the proposed technological advancement is a material modification and return the results to the interconnection customer. We note that some commenters suggested a 30-day study result deadline to determine whether a proposed technological advancement is material.
536. Regarding the question of when in the process the transmission provider is no longer required to accommodate technological advancements, we adopt the NOPR proposal to permit interconnection customers to submit requests to incorporate technological advancements prior to the execution of the interconnection facilities study agreement. In response to commenters that suggest that interconnection customers should be able to incorporate technological advancements at any point in the interconnection process without possible loss of queue position,
537. The NOPR proposed to require that transmission providers evaluate their methods for modeling electric storage resources for interconnection studies, identify whether their current modeling and study practices adequately and efficiently account for the operational characteristics of electric storage resources, and explain why and how their existing practices are or are not sufficient. The Commission also sought comment on whether establishing a unified model for studying electric storage resources would expedite the study process and therefore reduce time and costs expended by transmission providers. The Commission also asked what information electric storage resources should provide when submitting interconnection requests that transmission providers do not already require.
538. Several commenters support the proposal to require transmission providers to evaluate their methods for modeling electric storage resources for interconnection studies.
539. Other commenters support the proposal but ask the Commission to give transmission providers flexibility to address any necessary changes.
540. Public Interest Organizations ask the Commission not to require all electric storage resources, including electric storage resources that will serve as a transmission asset, to go through the formal large generator interconnection process.
541. Other commenters, primarily the RTOs/ISOs, believe current modeling practices are adequate for the interconnection of electric storage resources.
542. Schulte Associates suggests that electric storage resources should be able to propose consideration as a transmission asset under the
543. Some commenters argue that there is a need for clear modeling guidelines for electric storage resources. MISO and ESA recommend that the Commission require a consistent means by which transmission providers and system operators model electric storage charging.
544. In consideration of the comments, we decline to move forward with any requirements for modeling electric storage resources in this final action. We agree with commenters that modeling electric storage resources as a single asset, as opposed to separate generation and load assets, and based on their intended use has merits. These approaches could streamline the interconnection of electric storage resources, save costs, and avoid modeling the charging of electric storage resources the same as other unpredictable, non-controllable load resources. However, given the limited experience interconnecting electric storage resources and the abundant desire for regional flexibility, we are not imposing any standard requirements at this time and instead continue to allow transmission providers to model electric
545. In response to the Commission's question in the NOPR,
546. Others argue that the proposed reforms should not apply to small generating facilities.
547. PG&E and SoCal Edison ask the Commission to confirm that the NOPR does not require changes to PG&E's wholesale distribution access tariff and GIPs, which primarily concern SGIAs.
548. We decline to make the new requirements from this final action applicable to the
549. In response to the parties that support adopting the final action reforms for small generators, we find that, while some of these reforms have the potential to aid small generator interconnection, the differences between the large and small interconnection processes are significant enough to prevent us from acting in this proceeding.
550. Multiple commenters have commented on issues not raised in the NOPR. For instance, Joint Renewable Partners argue that the Commission has allowed the states to continue to administer Qualifying Facility (QF) interconnections where the QF sells the entire net output to the interconnecting utility, which has resulted in less favorable interconnection practices for QFs.
Forecasting Coalition states that rates for interconnection service will decrease, and reliability will increase, if LGIPs require transmission providers to consider non-transmission alternatives, including dynamic line ratings.
551. We consider the comments summarized in the above section to be outside the scope of this proceeding. The NOPR proposed a number of specific reforms, to which commenters have reacted. The comments discussed in the above section have raised issues unrelated to the NOPR's proposed reforms. Even if we were inclined to agree with the proposals made in these comments, we would not adopt them
552. Duke recommends that any new information required to be posted on OASIS be permitted to be posted without requiring new templates to be created through the NAESB process.
553. We decline to specifically require that transmission providers work through NAESB for the development of templates or standards for any OASIS postings they make in compliance with this final action. Transmission providers may coordinate as they determine appropriate to implement the Commission's requirements and to develop relevant posting protocols. Additionally, we note that, in this final action, we adopt OASIS requirements for the “Transparency Regarding Study Models and Assumptions” and “Interconnection Study Deadlines” sections. Additionally, in the “Transparency Regarding Study Models and Assumptions” and “Interconnection Study Deadlines” adopted requirements, we allow transmission providers to only include a link on OASIS to the information required if it is posted on the transmission provider's website.
554. EEI, Duke, ITC, MISO TOs, and Xcel request that the Commission allow 180 days for compliance with any final action.
555. Section 35.28(f)(1) of the Commission's regulations requires every public utility with a non-discriminatory OATT on file to also have on file the
556. Some public utility transmission providers may have provisions in their existing LGIPs or LGIAs subject to the Commission's jurisdiction that the Commission has deemed to be consistent with or superior to the
557. The collection of information contained in this final action is being submitted to the Office of Management and Budget (OMB) for review under section 3507(d) of the Paperwork Reduction Act of 1995.
558. The reforms adopted in this final action revise the Commission's
559. While the Commission expects the revisions adopted in this final action will provide significant benefits, the Commission understands that implementation can be a complex and costly endeavor. The Commission solicited comments on the accuracy of the provided burden and cost estimates and any suggest methods for minimizing the respondents' burdens. The Commission did not receive any comments concerning its burden or cost estimates. However, the Commission has made changes to its NOPR proposals that are adopted in this final action. First, the Commission has withdrawn the proposals regarding scheduled periodic restudies, self-funding by the transmission owner, and modeling of electric storage resources. Second, the Commission has modified the dispute resolution requirements so that they will apply both inside and outside RTOs/ISOs. Therefore, we have adjusted the burden estimate accordingly.
Auditing and accounting (code 13-2011), $53.00.
Computer and Information Systems Manager (code 11-3021), $100.68.
Computer and mathematical (code 15-0000), $60.70.
Economist (code 19-3011), $77.96.
Electrical Engineer (code 17-2071), $68.12.
Information and record clerk (code 43-4199), $39.14.
Information Security Analyst (code 15-1122), $66.34.
Legal (code 23-0000), $143.68.
Management (code 11-0000), $81.52.
The average hourly cost (salary plus benefits), weighting all of these skill sets evenly, is $76.79. The Commission rounds it to $77 per hour.
Year 1 costs reflect costs to comply with the final action. Year 2 represents ongoing costs that the transmission provider will face on an ongoing basis to fulfill the directives of this final action. The reforms adopted in this final action, once implemented, would not significantly change existing burdens on an ongoing basis.
The one-time burden of 65,220 hours will be averaged over three years (65,220 ÷ 3 = 21,740 hours/year over three years).
The ongoing burden of 2,112 hours applies to only Year 2 and beyond.
The number of responses is also averaged over three years (1,320 responses (one-time) + 528 responses (Year 2) + 528 responses (Year 3)) ÷ 3 = 792 responses/year.
The responses and burden for Years 1-3 will total respectively as follows:
Year 1: 792 responses; 21,740 hours.
Year 2: 792 responses; 21,740 hours + 2,112 hours + 2,112 hours = 25,964 hours.
Year 3: 792 responses; 21,740 hours + 2,112 hours + 2,112 hours = 25,964 hours.
560. Interested persons may obtain information on the reporting requirements by contacting the following: Federal Energy Regulatory Commission, 888 First Street NE, Washington, DC 20426 [Attention: Ellen Brown, Office of the Executive Director], email:
561. Comments concerning the collection of information and the associated burden estimate(s) in the final action should be sent to the Commission in this docket and may also be sent to the Office of Information and Regulatory Affairs, Office of Management and Budget, 725 17th Street NW, Washington, DC 20503 [Attention: Desk Officer for the Federal Energy Regulatory Commission].
562. Due to security concerns, comments should be sent electronically to the following email address:
563. The Commission is required to prepare an Environmental Assessment or an Environmental Impact Statement for any action that may have a significant adverse effect on the human environment.
564. The Regulatory Flexibility Act of 1980 (RFA)
565. The Commission estimates that the total number of public utility transmission providers that would have to modify the LGIPs and LGIAs within their currently effective OATTs is 132. Of these, the Commission estimates that approximately 43 percent are small entities (approximately 57 entities). The Commission estimates the average total cost to each of these entities will require on average 494 hours or $38,045 in Year 1,
566. In addition to publishing the full text of this document in the
567. From the Commission's Home Page on the internet, this information is available on eLibrary. The full text of this document is available on eLibrary in PDF and Microsoft Word format for viewing, printing, and/or downloading. To access this document in eLibrary, type the docket number of this document, excluding the last three digits, in the docket number field.
568. User assistance is available for eLibrary and the Commission's website during normal business hours from the Commission's Online Support at (202) 502-6652 (toll free at 1-866-208-3676) or email at
569. The final action is effective July 23, 2018. The Commission has determined with the concurrence of the Administrator of the Office of Information and Regulatory Affairs of OMB that this action is not a “major rule” as defined in section 351 of the Small Business Regulatory Enforcement Fairness Act of 1996. This final action is being submitted to the U.S. Senate, the U.S. House of Representatives, and the U.S. Government Accountability Office.
Conflicts of interest, Electric power plants, Electric utilities, Reporting and recordkeeping requirements.
By the Commission.
Securities and Exchange Commission.
Proposed rule.
The Securities and Exchange Commission (“Commission”) is proposing new and amended rules and forms under both the Investment Advisers Act of 1940 (“Advisers Act”) and the Securities Exchange Act of 1934 (“Exchange Act”) to require registered investment advisers and registered broker-dealers (together, “firms”) to provide a brief relationship summary to retail investors to inform them about the relationships and services the firm offers, the standard of conduct and the fees and costs associated with those services, specified conflicts of interest, and whether the firm and its financial professionals currently have reportable legal or disciplinary events. Retail investors would receive a relationship summary at the beginning of a relationship with a firm, and would receive updated information following a material change. The relationship summary would be subject to Commission filing and recordkeeping requirements. The Commission also is proposing two rules to reduce investor confusion in the marketplace for firm services, a new rule under the Exchange Act that would restrict broker-dealers and associated natural persons of broker-dealers, when communicating with a retail investor, from using the term “adviser” or “advisor” in specified circumstances; and new rules under the Exchange Act and Advisers Act that would require broker-dealers and investment advisers, and their associated natural persons and supervised persons, respectively, to disclose, in retail investor communications, the firm's registration status with the Commission and an associated natural person's and/or supervised person's relationship with the firm.
Comments should be received on or before August 7, 2018.
Comments may be submitted by any of the following methods:
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549.
Studies, memoranda or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the Commission's website. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at
Emily Rowland, Jennifer Songer, Gena Lai, Roberta Ufford, Jennifer Porter (Branch Chief), and Sara Cortes (Assistant Director), Investment Adviser Regulation Office at (202) 551-6787 or
The Commission is proposing new rule 204-5 under the Investment Advisers Act of 1940 [15 U.S.C. 80b],
Individual investors rely on the services of broker-dealers and investment advisers when making and implementing investment decisions. Such “retail investors” can receive investment advice from a broker-dealer, an investment adviser, or both, or decide to make their own investment decisions.
Retail investors also can choose to receive advisory services from other sources, such as banks, that are not required to be registered with the Commission.
We recognize the benefits of retail investors having access to diverse business models and of preserving investor choice among brokerage services, advisory services, or both. We also believe that retail investors need clear and sufficient information in order to understand the differences and key characteristics of each type of service. Providing this clarity is intended to assist investors in making an informed choice when choosing an investment firm and professional, and type of account to help to ensure they receive services that meet their needs and expectations.
The Commission, as the primary regulator of both broker-dealers and investment advisers, has considered ways to address this confusion and preserve investor choice for some time, including through the RAND study of investor perspectives commissioned in 2006, the 913 Study conducted in 2010-2011, and a solicitation of data and other relevant information in 2013.
Similarly, the staff in the 913 Study and the Commission's Investor Advisory Committee, as part of its recommendation that the Commission adopt a fiduciary duty for broker-dealers, recommended uniform, simple, and clear summary disclosures to retail customers about the terms of their relationships with broker-dealers and investment advisers, including any material conflicts of interests.
In 2017, Commission Chairman Clayton continued the discourse on these issues by outlining a series of questions and welcoming the public to submit their views on standards of conduct and related disclosures for investment advisers and broker-dealers. More than 250 commenters responded.
Many commenters recommended a short disclosure document addressing the nature and scope of services, fees and material conflicts of interest.
We agree that it is important to ensure that retail investors receive the information they need to understand the services, fees, conflicts, and disciplinary history of firms and financial professionals they are considering. Likewise, we believe that we should reduce the risk that retail investors could be confused or misled about the financial services they will receive as a result of the titles that firms and financial professionals use, and mitigate potential harm to investors as a result of that confusion. We also believe the information should be reasonably concise. Accordingly, we are proposing new rules to require broker-dealers and investment advisers to deliver to retail investors a customer or client relationship summary (“Form CRS”) that would explain general information about each of these topics.
Together, these requirements would complement a separate release that the Commission is proposing concurrently to enhance existing broker-dealer conduct obligations (“Regulation Best Interest”).
We are proposing to require registered investment advisers and registered broker-dealers to deliver a relationship summary to retail investors. In the case of an investment adviser, initial delivery would occur before or at the time the firm enters into an investment advisory agreement with the retail investor; in the case of a broker-dealer, initial delivery would occur before or at the time the retail investor first engages the firm's services. Dual registrants would deliver the relationship summary at the earlier of entering into an investment advisory agreement with the retail investor or the retail investor engaging the firm's services.
The relationship summary would be as short as practicable (limited to four pages or equivalent limit if in electronic format), with a mix of tabular and narrative information, and contain sections covering: (i) Introduction; (ii) the relationships and services the firm offers to retail investors; (iii) the standard of conduct applicable to those services; (iv) the fees and costs that retail investors will pay; (v) comparisons of brokerage and investment advisory services (for standalone broker-dealers and investment advisers); (vi) conflicts of interest; (vii) where to find additional information, including whether the firm and its financial professionals currently have reportable legal or disciplinary events and who to contact about complaints; and (viii) key questions for retail investors to ask the firm's financial professional. Form CRS would be required by Form ADV Part 3 and rule 204-5 of the Advisers Act for investment advisers, and by Form CRS and rule 17a-14 of the Exchange Act for broker-dealers.
We are proposing to define “relationship summary” as a written disclosure statement that firms must provide to retail investors.
As discussed further below, the relationship summary would be in addition to, and not in lieu of, current disclosure and reporting requirements for broker-dealers and investment advisers.
To aid firms in understanding the type of disclosures we propose to require, we have created mock-ups of a relationship summary for an investment advisory firm, a brokerage firm, and a dual registrant, and have included them as Appendices C-E to this release. The mock relationship summaries are for illustrative purposes only, reflect the business models of hypothetical firms, and are not intended to imply that they reflect a “typical” firm. They do not provide a safe harbor and, depending on the circumstances of a particular firm, a relationship summary that merely copies the mock-ups may not provide sufficient or accurate information about the firm, including for purposes of meeting the firm's obligations under the antifraud provisions of the federal securities laws. Investors seeking to comment on the relationship summary may want to submit our short-form tear sheet for providing feedback on the relationship summary, available at Appendix F. Below we request comments on all requirements of the relationship summary, including format, content, method of filing, method of delivery, updating, and other aspects as discussed below.
We preliminarily believe that providing this information before or at the time a retail investor enters into an investment advisory agreement or first engages a brokerage firm's services, as well as at certain points during the relationship (
We are proposing requirements designed to make the relationship summary short and easy to read. We believe that the required disclosure provides an overview of information that would help retail investors when choosing a firm, financial professional, and account type. The proposed formatting requirements would help retail investors, many of whom may not be sophisticated in legal or financial matters, to understand the information in the relationship summary and be in a better position to ask informed questions. The proposal is also informed by our experience with the mutual fund summary prospectus, which has illustrated the benefits of highlighting certain information in summary form, coupled with layered disclosure and disclosure designed to facilitate comparisons across investments.
As noted in the General Instructions, the requirements of the relationship summary are designed to promote effective communication between the firm and its retail investors.
Second, we are proposing to require that, whether in electronic or paper format, the relationship summary should be no more than four 8
In the past, the Commission has declined to impose page limits on disclosures required by the Investment Company Act of 1940 (“Investment Company Act”), including the summary prospectus, expressing concern that page limits could constrain appropriate disclosure and lead funds to omit material information about fund offerings.
Brief disclosure would also facilitate a layered approach to disclosure in which firms would include certain information in the relationship summary, along with references and links to other disclosure where interested investors can find additional information.
We considered requiring more detailed disclosure for broker-dealers similar to many items in the Form ADV brochure that advisers currently must deliver to clients. This longer disclosure would provide, for example, more information about fee amounts for specific accounts and products and more detailed descriptions of a wider range of conflicts of interest. We believe, however, that brief disclosure that focuses on the proposed topics would be more effective in capturing the attention of retail investors, encouraging them to explore certain key areas further, including by asking questions, and allowing them to make a quick comparison among a number of options.
Alternatively, we considered shorter disclosure, such as a one-page document (or equivalent length if in electronic format) that would provide either a much abbreviated general description of a firm's services, fees, and conflicts, or a list of suggested questions for retail investors to discuss with their financial professional. We are concerned, however, that these approaches might not provide retail investors with enough information to compare firms and types of accounts. In addition, we are concerned that providing only a list of questions, without sufficient background information for investors to know why the question is important to ask, could make it less likely that investors would ask the questions or have an informed conversation. Only providing questions also would not ensure a standardized minimum of information that retail investors would receive across firms and therefore would not facilitate comparing firms or account types.
The relationship summary would require eight separate items covering: (i) Introduction; (ii) relationships and services the firm provides to retail investors; (iii) standard of conduct applicable to those services; (iv) the fees and costs that retail investors will pay; (v) comparisons of brokerage and investment advisory services (for standalone broker-dealers and investment advisers);
For certain items, firms will have some flexibility in how they include the required information.
Based on studies that indicate the effectiveness of graphical presentation for retail investors,
We request comment on the following for the relationship summary.
• Should firms only be required to deliver the relationship summary to retail investors? Or should they be required to deliver one to other types of investors, too, such as individuals representing sole proprietorships or other small businesses, or institutional investors that are not natural persons, including workplace retirement plans and funds? Would such investors have the need for the information in the relationship summary to facilitate a choice among different firms, financial professionals, and account types? Or would these investors rely directly on the more detailed disclosures in the Form ADV Part 2 brochure or pursuant to Regulation Best Interest?
• Should retail investors be defined for purposes of Form CRS to include all natural persons, as proposed? Should we instead exclude certain categories of natural persons based on their net worth or income level, such as accredited investors,
For purposes of section 18(b)(3) of the Securities Act, the term “qualified purchaser” means any person to whom securities are offered or sold pursuant to a Tier 2 offering as defined in Regulation A. 17 CFR 230.256. Tier 2 offerings generally may be sold only to (i) accredited investors; (ii) natural persons for whom the aggregate purchase price to be paid by the purchaser for the securities is no more than 10% of the purchaser's annual income or net worth; or (iii) non-natural persons for which the aggregate purchase price to be paid by the purchaser for the securities is no more than 10% of its revenue or net assets for the most recently completed fiscal year. 17 CFR 230.251.
• Should we conform the definition of retail investor to the definition of retail customer as proposed in Regulation Best Interest, which would include non-natural persons who use the recommendation primarily for personal, family, or household purposes? Should the definition of retail investor include trusts or similar entities that represent natural persons, as proposed? Are there other persons or entities that should be covered? Should we expand the definition to cover plan participants in workplace retirement plans who receive services from a broker-dealer or investment adviser for their individual accounts within a plan?
• Should we include any additional definitions of terms or phrases in the relationship summary? Should we omit any definitions we have proposed for the relationship summary? Should any of the proposed definitions be changed? If so, why?
• Will the length and presentation proposed for the relationship summary be effective for retail investors? Are there other approaches we should consider? What are the benefits and drawbacks of shorter or longer disclosure for retail investors relative to the proposed approach?
• We are proposing that the relationship summary discuss all of the firm's advisory and brokerage services in one relationship summary. Should we instead permit firms to prepare a separate relationship summary for different business lines or different programs or types of accounts and/or services that a broker-dealer or investment adviser offers? If we adopt such an approach, how could we modify the requirements to allow for comparison among account options within and across firms? For example, should we require that each such separate summary refer to the other summaries and include hyperlinks or other electronic features if presented on a firm's website? Should we require the use of hyperlinks that direct the investor directly to specific disclosure (
• In the alternative, should we permit or require firms to prepare one relationship summary for the entire affiliated group or firm complex,
• Should we permit the relationship summary, or any part of it, to substitute for other disclosure obligations that broker-dealers or investment advisers have, if the disclosure obligations overlap? If so, for what disclosures could the relationship summary substitute? If not, why not?
• Does the proposal sufficiently encourage electronic design and delivery? Are there other ways we can modify the requirements to make clear that paper-based delivery is not the only permissible or desired delivery format?
• With respect to firms that use paper delivery to meet investor preferences, are the proposed presentation and content requirements appropriate for a relationship summary provided in paper or in PDF (
• Are there special technical specifications we should consider for other forms of electronic or online delivery on phones, tablets and other devices, and for information conveyed via videos, interactive graphics, or tools and calculators? Are the Instructions to the relationship summary sufficiently flexible to permit delivery on phones, tablets and other devices and to accommodate information conveyed via videos, interactive graphics, or tools and calculators? Should we require that firms make the relationship summary available by specific forms of electronic delivery or certain electronic devices? How can the Commission encourage investment advisers and broker-dealers to make fuller use of innovative technology to enable more interactive, user-friendly relationship summary disclosure, while still creating a short, easy-to-read relationship summary that includes the proposed content? Are there potential tools that the Commission should encourage or require firms to use in order to make
• Would retail investors be more likely to read a firm's relationship summary if we required or permitted firms to use certain design elements—such as larger font sizes or greater use of white space, colors, or visuals? Could this be accomplished while still providing retail investors with the information we are proposing to require in a short and easy-to-read relationship summary?
• We are proposing that the firm use plain language principles and the Instructions refer to the SEC's Plain English Handbook. Should we modify any of these principles? Should the Instructions refer to any other principles to promote understandable wording?
• Do firms commonly market to non-English speakers or provide information—including marketing materials—in languages other than English? To what extent would firms expect to deliver a relationship summary in a language other than English? Should we propose requirements to prepare relationship summaries in languages other than English? For example, should we require that firms prepare, file, and deliver a relationship summary in any language in which they disseminate marketing materials? Are there concerns with translating the relationship summary without also having to translate the firm's other disclosures? If so, what are those concerns?
• Should we limit the relationship summary to four pages (or equivalent limit if in electronic format), as proposed? Is this enough space for firms to provide meaningful information? Should we instead eliminate page limits (and their equivalent for electronic format) or increase the amount of permitted pages or their equivalent? Are there particular items that may require longer responses than others? If so, how should the Commission take these into account in considering page limits? For example, if commenters believe the use of graphics will be more effective to communicate fees, should we permit a greater number of pages to account for the use of graphics? Conversely, will retail investors read four pages? Should the page limit be shorter, such as one to three pages? If so, what information in the proposed requirements should we omit? Should we have different page limits for dual registrants than for firms that offer only brokerage or only advisory services? If we do require shorter disclosure, what information should firms be required to provide regardless of the length?
• Are there too few or too many items that would be required in the relationship summary? Are there other items that we should also require or proposed items that we should delete? Do commenters agree that we should only permit the items required by the relationship summary? Is there other information that we should permit, but not require, firms to include? If so, what items are those?
• Do commenters agree that all items should be presented in the same order under the same heading to promote comparability across firms? Why or why not? If the items are not listed in the same order, could retail investors still easily compare firm relationship summaries? Does the prescribed order work, or should we consider a different order? Is there information that we should always require to appear on the first page or at the beginning of an electronic relationship summary? Are there any specifications we should include to enhance comparability for electronic delivery of the relationship summary in various forms?
• Should we, as proposed, prescribe headings for each item or allow firms to choose their own headings? Should we require or permit a different style of headings, such as a question and answer format or other wording to encourage retail investors to continue reading?
• Should we permit firms to include additional disclosure with the relationship summary, such as a comprehensive fee table, or other disclosures? Would the inclusion of additional disclosures affect whether retail investors would view the relationship summary? What are the benefits and drawbacks of such an approach?
• Should we generally permit firms to use charts, graphs, tables, and/or other graphics or text features to explain the information required by the relationship summary (so long as any such feature meets requirements as specified in the Instructions), as proposed? Should we permit firms to choose the graphical presentation that they will use? Are there specific graphical presentations that we should require? Should we permit other mediums of presentation, such as the use of video presentations?
• Do any elements of the proposed presentation requirements impose unnecessary costs or compliance challenges? Please provide specific data. Are there any changes to the proposal that could lower those costs? Please provide examples.
• Are the mock relationship summaries useful and illustrative of the proposed form requirements? Do they appropriately show the level of detail that firms might provide?
With respect to each item for which we prescribe wording in the relationship summary, we request the following comment on each of those required disclosures:
• Does the narrative style work for the prescribed wording or are there other presentation formats that we should require? Should the Commission instead require more prescribed wording? Conversely, is there prescribed wording we have proposed that we should modify or replace with a more general instruction that allows firms to use their own description?
We are proposing that the beginning of the relationship summary contain a title highlighting the types of investment services and accounts the firm offers to retail investors, specifically “Which Type of Account is Right for You—Brokerage, Investment Advisory or Both?” for dual registrants and “Is a[n] [Brokerage/Investment Advisory] Account Right for You?” for standalone brokerage firms or investment advisory firms, respectively.
An introductory paragraph would briefly explain the types of accounts (brokerage accounts and/or investment advisory accounts) and services the firm offers. Using prescribed wording, all firms would be required to state: “There are different ways you can get help with your investments. You should carefully consider which types of accounts and services are right for you.” In a new paragraph and using prescribed wording and bold font, a standalone broker-dealer would be required to state: “We are a broker-dealer and provide brokerage accounts and services rather than advisory accounts and services.”
The proposed introductory paragraph sets up a key theme of the relationship summary—helping retail investors to understand and make choices among account types and services. For example, some retail investors want to receive periodic recommendations while others prefer ongoing advice and monitoring. Some retail investors wish to pursue their own investment ideas and direct their own transactions, while others seek to delegate investment discretion to the firm. Emphasizing that there are different types of accounts and services from which a retail investor may choose would help the retail investor make an informed choice about whether the firm provides services that are the right fit for his or her needs and help the retail investor to choose the right firm or account type. Although the disclosures are intentionally simplified and generalized, we believe they would help retail investors to obtain more detailed information.
We request comment generally on the proposed requirement for firms to include specific information in the introduction.
• In addition to the title, firm name and SEC registration status, and date, is there other information that we should require at the beginning of the relationship summary? Should we instead require a cover page? Are the titles we proposed in the Instructions appropriate? What alternatives should we consider? Should we allow firms to select their own title for the relationship summary?
• Should we require firms to include the prescribed wording, as proposed, or should we allow more flexibility in the words they use? Should we modify the prescribed wording? Does the proposed wording capture the range of business models among investment advisers and broker-dealers? Would the prescribed wording require a firm to provide any inaccurate information given that firm's circumstances? Instead of the proposed prescriptive wording, should the Commission permit or require a more open-ended narrative?
• Is there additional information we should require in the introduction?
• Should we require that standalone brokerage and investment advisory firms include a statement that the retail investor may instead prefer investment advisory or brokerage services, respectively? Why or why not?
After the introduction, the proposed relationship summary would provide information about the relationships between the firm and retail investors and the investment advisory account services and/or brokerage account services the firm provides to retail investors.
This item requires firms to provide specific information with a mix of prescribed wording and short narrative statements. As discussed above, if a prescribed statement is not applicable to the firm's business or would be misleading to a reasonable retail investor, the firm would be permitted to omit or modify that statement.
We considered an approach whereby firms would be required to complete a prescribed checklist of common characteristics of brokerage and advisory accounts, indicating which characteristics applied to their accounts and services. This approach could improve comparability among firms. We are concerned, however, that this approach would not be sufficiently flexible to accommodate the variety of business models and services that broker-dealers and advisers provide, and that a mix of prescribed wording and narrative format would help investors better understand the firm's services. We believe that our proposed approach provides enough information to help retail investors understand and choose between investment advisory accounts and brokerage accounts without overwhelming them with too much information.
Next, broker-dealers that offer accounts in which they offer recommendations to retail investors would state that the retail investor may select investments or the broker-dealer may recommend investments for the retail investor's account, but that the retail investor will make the ultimate investment decision regarding the investment strategy and the purchase or sale of investments.
Next, we propose requiring broker-dealers to state if they offer additional services to retail investors, including, for example: (a) Assistance with developing or executing the retail investor's investment strategy (
Finally, broker-dealers would be required to include the following if they significantly limit the types of investments available to retail investors in any accounts: “We offer a limited selection of investments. Other firms could offer a wider range of choices, some of which might have lower costs.”
Limitations on investments offered could have a significant effect on investor choice and performance of the account over time. In particular, firms that offer proprietary products exclusively preclude investor access to competing products that could offer lower fees or result in better performance over time. As a result, retail investors should understand these limitations before they enter into a relationship with a firm.
Next, investment advisers would state that they offer advice on a regular basis, or, if they do not offer advice on a regular basis, they would state how frequently they offer advice.
Additionally, investment advisers would state if they offer advisory accounts for which they exercise investment discretion (
We believe it is important for retail investors considering an advisory account to understand the difference between discretionary services and non-discretionary services, as that distinction would affect the degree of control the retail investor would provide to the adviser. Discretionary advice is also a common feature of many investment advisory accounts,
Finally, as we are proposing for broker-dealers, investment advisers that significantly limit the types of investments available to retail investors in any accounts would include the same statement that broker-dealers would be required to include, and if such limits only apply to certain accounts, the investment adviser would identify those accounts, for the same reasons discussed above.
We request comment generally on the proposed requirement for firms to include specific information about the relationships and services offered in their advisory and brokerage accounts.
• Would the proposed summary of relationships and services help retail investors to make informed choices about whether investment advisory or brokerage services better suit their needs? If not, how should we revise it?
• Would the proposed requirements result in disclosure that is clear, concise, and meaningful to retail investors? Would this information help retail investors to better understand the general differences in the services that investment advisers and broker-dealers provide? Are there other differences in the services provided by investment advisers and broker-dealers that we should require firms to discuss in this section? If so, should we permit or require information about those differences in the summary of services? Are there any common misconceptions about services provided by broker-dealers, investment advisers, or dual registrants that the relationship summary should specifically seek to clarify or correct?
• Would more or less information about a firm's services be helpful for retail investors? Are there any elements of the proposed requirements that firms should or should not include? If so, why? Should any of the required disclosures be included in a different section of the relationship summary? Is the proposed order of the information appropriate, or should it be modified? If so, how should it be modified? Should we allow firms the flexibility to present this information in a different order if doing so makes their relationships and services more understandable to retail investors?
• Is the proposed heading and the introductory wording for firms clear and useful to retail investors? Are there alternative headings we should consider?
• Does the mix of prescribing wording for some information and requiring brief narratives for other information strike the right balance between having similar, neutral wording to promote comparisons and permitting firms to conform the language to reflect the services they offer? Should the Commission instead require more prescribed wording in this Item? Conversely, is there prescribed wording we have proposed that we should modify or replace with a more general instruction that allows firms to use their own description?
• Does the prescribed wording we are proposing capture the range of business models of investment advisers and broker-dealers? Would the prescribed wording require any firm to state something inaccurate in the relationship summary? Should we instead provide more flexibility to change the prescribed wording?
• Should we require broker-dealers to include prescribed wording about transaction-based fees and investment advisers to state the type of fee for an advisory account at the beginning of this
• How should broker-dealers describe execution-only accounts, sometimes referred to as “discount” brokerage, and accounts in which they provide recommendations concerning securities, sometimes referred to as “full-service” brokerage? Should we, as proposed, require that broker-dealers offering recommendations to retail investors state that the retail investor may select investments or the broker-dealer may recommend investments, but the retail investor will make the ultimate investment decision? Should we also, as proposed, require that broker-dealers only offering discount brokerage accounts to retail investors state that the retail investor will select the investments and make the ultimate investment decision? Should we require prescribed language about these accounts, or should we permit a brief narrative as proposed? Should firms be permitted or required to use the terms “full-service” accounts and “discount” brokerage accounts, or other terms, so long as they are likely to be understood? Do investors understand the meanings of these terms?
• Should investment advisers that provide investment advisory services be required to discuss both discretionary and non-discretionary account services, regardless of whether they offer both discretionary and non-discretionary accounts? Should they instead be permitted to describe only the service they offer? Do firms offer accounts that involve limited discretionary services that would not be covered in the proposed discussions of discretionary and non-discretionary accounts? If so, how should the requirements be changed to reflect these accounts? Should we also require investment advisers to state that they offer advice on a regular basis, or, if not on a regular basis, state how frequently they offer advice? Should we require the disclosure of any additional information about the advice an investment adviser provides?
• We are proposing to require firms to disclose if they offer certain additional services, such as assistance with developing or executing the retail investor's investment strategy, and performance monitoring, and to briefly describe any regular communications they have with retail investors. Are there services in addition to those in the Instructions that broker-dealers and investment advisers also should disclose? Should we require disclosure of the same types of additional services for both broker-dealers and investment advisers?
• We understand that, to some extent, all firms limit the investments offered to retail investors. Would other disclosures regarding a firm's product offering limitations be helpful to investors, in addition to the proposed disclosures for firms that significantly limit the types of investments that are available? Why or why not? Should we, for example, require firms that only offer proprietary investments to also state that the only investments available to a retail investor are investments that the firm or its affiliates issue, sponsor, or manage? How feasible would this disclosure be for a firm that has several account types? Should we consider other alternatives?
• Is it clear what we mean by “significantly limit” with regard to the requirement to disclose limitations on investment choices? Should we provide additional examples or more prescriptive instructions regarding when firms must disclose such limitations? Are there other ways a firm may significantly limit the types of investments that should be captured by this instruction?
• Should we permit firms to prepare different relationship summaries for different types of services and lines of business, particularly where the firm offers a broad array of accounts and services? Would separate relationship summaries still promote comparability across firms and the ability to understand the differences between advisory and brokerage services?
• Would the proposed summary of services allow retail investors to easily compare the services provided by different firms? If not, what changes to the requirements should we make to increase comparability?
• Would other disclosures about a firm's services be more helpful for retail investors? Should we permit or require firms to describe services they offer to retail investors, in addition to brokerage and advisory services, such as insurance services? Would such disclosure about other services give retail investors a more complete overview of a firm's offerings, or would it detract from the other disclosures, for example, by overwhelming the more important information about a firm's brokerage and advisory services?
• Should we require firms to include more details about the specific services provided for each type of advisory account or brokerage account that they offer? Should the relationship summary help investors to choose among a variety of account options that the firm offers, rather than providing more summary information about the advisory and brokerage services that are offered?
• Some dual registrants have implemented a default relationship for retail investors, where, for example, the firm will act as a broker-dealer with respect to the account unless specifically stated otherwise. Should we require these firms to disclose that they are acting as a broker-dealer (or investment adviser, as applicable) with respect to the account unless the firm specifically states otherwise?
• Should we, as proposed, allow firms with affiliated broker-dealers or investment advisers to state that they offer retail investors additional brokerage or advisory services, as applicable, through their affiliates? Should we require such statements, if applicable? Should we permit or require firms to expand on the different types of services available to their retail investors through the firm's affiliates? Should affiliates be required or permitted to use a single relationship summary that describes the services of all affiliates? If not, why not? What are the advantages and disadvantages to the retail investor?
• Should we also permit or require disclosure regarding a firm's relationships with other third parties, such as where the registered representatives of a broker-dealer are also investment adviser representatives of an unaffiliated investment adviser or where an investment adviser uses a single unaffiliated broker-dealer to provide execution and custody and generally does not consider execution through other firms?
• Should we require investment advisers and broker-dealers to disclose whether they have a minimum account size and state that minimum (or range of minimums) if the account minimum varies by account? If applicable, should we require disclosure that the selection of investments or services is limited by account size? Would this help investors understand whether they are eligible for certain accounts or certain services and understand the ways in which their investment choices may be limited? Are there any drawbacks to requiring such disclosure?
• So-called robo-advisers and online broker-dealers represent a fast-growing trend within the brokerage and investment advisory industries. They employ a wide range of business models. For example, differences among robo-advisers and online broker-dealers include: The degree of reliance on computer algorithms (as opposed to individualized human judgment) to generate financial advice; the level of human interaction between the client or customer and firm personnel; and the use of the internet to communicate with
Following the relationships and services section, the relationship summary would include a brief section, using prescribed wording, to describe the firm's legal standard of conduct to the retail investor.
We understand that the standard of conduct that applies to firms and financial professionals has been a source of investor confusion.
Second, all broker-dealers providing services to retail investors would state, “When we provide any service to you, we must treat you fairly and comply with a number of specific obligations.” This would inform retail investors that broker-dealers have a duty of fair dealing under the federal securities laws and self-regulatory organization rules, as well as other obligations and standards to which they must adhere.
Finally, broker-dealers would be required to state, “Unless we agree otherwise, we are not required to monitor your portfolio or investments on an ongoing basis.” This sentence reflects that neither Regulation Best Interest nor existing broker-dealer standards oblige the broker-dealer to monitor the performance of retail investor's accounts,
After the description of the standard of conduct, broker-dealers would be required to state: “Our interests can conflict with your interests.” If the broker-dealer provides to retail investors recommendations that are subject to Regulation Best Interest, it would also include the language, “When we provide recommendations, we must eliminate these conflicts or tell you about them and in some cases reduce them.”
After the description of the standard of conduct, investment advisers would then be required to state, “Our interests can conflict with your interests. We must eliminate these conflicts or tell you about them in a way you can understand, so that you can decide whether or not to agree to them.” As with broker-dealers, we believe that this information, in combination with the conflicts section below, can make retail investors aware that conflicts exist and that investment advisers, as part of their fiduciary duty, have obligations regarding conflicts.
We request comment generally on the proposed standard of conduct descriptions, and in particular on the following issues:
• Should we require, as proposed, that all firms include a brief prescribed statement about the legal standards of conduct that apply to them under the federal securities laws, including the new standard proposed in Regulation Best Interest and an investment adviser's fiduciary duty? Is such disclosure likely to be meaningful to retail investors? Does the prescribed wording capture what retail investors should or want to understand about broker-dealers' and investment advisers' standards of conduct? Would the prescribed wording require any firm to provide any inaccurate information? Are there modifications to the proposed wording or alternative wording that would make the legal standards more clear in a succinct way? Should we require or permit additional information, and if so, what? Alternatively, would a briefer statement be appropriate? Are there any common misconceptions about broker-dealers' and investment advisers' standard of conduct that the relationship summary should specifically seek to clarify or correct?
• Should we require or permit broker-dealers to include additional detail about the best interest standard proposed in Regulation Best Interest or their duty of fair dealing? Would this or other disclosure provide retail investors with useful information? Should we provide flexibility in how broker-dealers describe the best interest standard or duty of fair dealing?
• We are proposing to require that broker-dealers state that they must comply with a number of specific obligations when providing any service to customers. Should we permit or require more detailed disclosure about these obligations? For example, should we permit or require broker-dealers to disclose their obligations to make sure that the prices a customer receives when a trade is executed are fair and reasonable, and to make sure that the commissions and fees the customer pays are not excessive?
• Should we require disclosure that further describes the investment adviser fiduciary standard, including any additional details described in the proposed interpretation? If so, what wording should we require? Should we provide flexibility in describing the fiduciary standard?
• For dual registrants, would the side-by-side descriptions of the standards of conduct for broker-dealers and investment advisers assist retail investors in understanding the differences between these standards? Are there modifications we can make to the wording or the presentation to facilitate this comparison?
• Should we permit or require firms to disclose additional information about the legal differences between broker-dealers and investment advisers, such as explaining that broker-dealers are subject to regulation by self-regulatory organizations in addition to the SEC? Should we permit or require firms to disclose the differences in licensing requirements for financial professionals of broker-dealers and investment advisers, such as the frequency of licensing or qualifications examinations? Would such disclosure about financial professionals fit within this section of the relationship summary that focuses on the firm? What information would be most relevant to retail investors?
• We understand that state laws and other regulations,
We are proposing to require broker-dealers and investment advisers to include an overview of specified types of fees and expenses that retail investors will pay in connection with their brokerage and investment advisory accounts. This section would include a description of the principal type of fees that the firm will charge retail investors as compensation for the firm's advisory or brokerage services, including whether the firm's fees vary and are negotiable, and the key factors that would help a reasonable retail investor understand the fees that he or she is likely to pay.
Fees and costs are important to retail investors,
We are not proposing a requirement that firms personalize the fee disclosure for their retail customers, or provide a comprehensive fee schedule, as some commenters had proposed.
Likewise, we believe that requiring a comprehensive fee schedule in the relationship summary also could be more complex than a retail investor would find useful for an overview disclosure such as this. However, we believe our proposed layered disclosure would achieve similar results in a less costly and complex manner. The relationship summary would provide required information about fees, and a later section titled “Additional Information” would provide references and links to other disclosures where interested investors can find more detailed information.
We are also not proposing to require firms to include examples of how fees could affect a retail investor's investment returns. We recognize that the Commission has required firms to disclose examples showing the effects of fees and other costs in certain contexts. For example, we have required mutual funds to provide in their summary prospectuses an example that is intended to help investors compare the cost of investing in the mutual fund with the cost of investing in other mutual funds.
Some commenters suggested requiring that a firm disclose the types of compensation firms and their financial professionals receive, including from third parties, in connection with providing investment recommendations.
In addition, both standalone and dual registrant broker-dealers would include the following (emphasis required): “With stocks or exchange-traded funds, this fee is usually a separate commission. With other investments, such as bonds, this fee might be part of the price you pay for the investment (called a “
We are not proposing to require broker-dealers to provide the range of their transaction-based fees. We understand that these fees vary widely based on the specific circumstances of a transaction. For example, a broker-dealer that transacts in only one type of security—such as equities—can have a wide range of transaction fees for such securities, depending on factors such as the size of the transaction, the type of investment purchased, the type of account and services provided, and how retail investors place their orders (for example, online, telephone or with the assistance of a financial professional). A broker-dealer that transacts in multiple types of securities—for example, equities and real estate investment trusts (REITs)—could have an even wider range of transaction fees. Given this variability, and our intent that the relationship summary be short and that it be provided in addition to, and not in lieu of, other disclosure, we believe that requiring firms to provide a range of transaction-based fees in the relationship summary could be confusing or provide limited benefit to retail investors.
Following the examples of transaction-based fees, broker-dealers would be required to state that some investments impose additional fees that will reduce the value of retail investors' investments over time, and provide examples of such investments that they offer to retail investors.
Requiring the disclosure of these investment fees and expenses, sometimes described as “indirect fees,” follows commenters' recommendations that investment advisers and broker-dealers disclose certain indirect costs to retail investors.
Additionally, broker-dealers would be required to state whether or not the fees they charge retail investors for their brokerage accounts vary and are negotiable, including a description of the key factors that they believe would help a reasonable retail investor understand the fee that he or she is likely to pay for the firm's services.
Broker-dealers would next be required to state, if applicable, that a retail investor will also pay other fees in addition to the firm's transaction-based fee, and to list those fees, including account maintenance fees, account inactivity fees, and custodian fees.
Broker-dealers would then be required to disclose certain specified incentives they have to put their own interests ahead of retail investors' interests based on charging transaction-based fees for brokerage accounts.
Finally, dual registrants would be required to include the following with respect to brokerage services: “From a cost perspective, you may prefer a transaction-based fee if you do not trade often or if you plan to buy and hold investments for longer periods of time.”
These requirements are consistent with the current fee disclosure requirements for the Form ADV brochure and how investment advisers typically describe asset-based fees, and we believe that retail investors would find this type of disclosure helpful.
An investment adviser that provides advice to retail investors about investing in a wrap fee program would be required to include specified language about the program fees.
Many retail investors participate in wrap fee programs.
Next, investment advisers would be required to state that some investments impose additional fees that will reduce the value of a retail investor's investment over time, and provide examples of such investments that the firm offers to retail investors.
In addition, investment advisers would be required to state whether or not the fees they charge retail investors for their advisory accounts vary and are negotiable.
Investment advisers would next be required to state, if applicable, that a retail investor will pay transaction-based fees when the firm buys and sells an investment for the retail investor (
An investment adviser that provides advice to retail investors about investing in a wrap fee program also would be required to state: “Although transaction fees are usually included in the wrap program fee, sometimes you will pay an additional transaction fee (for investments bought and sold outside the wrap fee program).”
As with broker-dealers, investment advisers that charge an ongoing asset-based fee for advisory services would next be required to address the incentives they have to put their own interests ahead of their retail investors' interests based on the type of fee charged for investment advisory services.
These disclosures would help retail investors understand how the fee structures for advisory accounts could affect their investments and the incentives that firms and financial professionals have to place their interests ahead of retail investors' interests. The disclosures for investment advisers that provide advice about investing in a wrap fee program also would help retail investors to understand that in certain circumstances a wrap fee would cost them more than separately paying for advice and for transactions in a different type of advisory account. Similarly, wrap fee sponsors that complete the Form ADV Wrap Fee Program Brochure are required to explain that the wrap fee program may cost the client more or less than purchasing such services separately and describe the factors that bear upon the relative cost of the program, such as the cost of the services if provided separately and the trading activity in the client's account.
Finally, dual registrants that charge ongoing asset-based fees for advisory accounts would be required to include the following with respect to their investment advisory services: “An asset-based fee may cost more than a transaction-based fee, but you may prefer an asset-based fee if you want continuing advice or want someone to make investment decisions for you.”
We request comment generally on the proposed fees and costs disclosures, and in particular on the following issues:
• Is the proposed disclosure discussing fees and expenses useful to investors?
• Do the proposed requirements encourage disclosure that is simple, clear and useful to retail investors? Would the proposed disclosure help investors to understand and compare the fees and costs associated with a firm's advisory services and brokerage services? Are there any revisions to the descriptions of fees that would make the proposed disclosure more useful to investors? Is it clear that retail investors would incur different costs for different types of accounts and advice services? Are there common assumptions or misconceptions regarding account fees and services that firms should be required to discuss, clarify, or address?
• Is the proposed order of the information appropriate, or should it be modified? If so, how should it be modified?
• Do the proposed requirements strike the right balance between requiring specific wording and allowing firms to draft their own responses? Why or why not? Should the Commission permit or require a more open-ended narrative or require more prescribed wording? Do the proposed Instructions cover the range of business models and fee structures that investment advisers and broker-dealers offer fully and accurately? Are there other fees that should be required to be disclosed for broker-dealers or investment advisers?
• Is the proposed format useful for retail investors to understand and compare fees and costs as between broker-dealers and investment advisers? Should we require further use of bullet points, tables, charts, graphs or other illustrative format? Should we require, as proposed, that dual registrants present the fee and cost information in a tabular format, comparing advisory services and brokerage services side-by-side, or permit other formats such as in a bulleted format?
• How would the required disclosures contribute to readability and length of the proposed relationship summary? Should each of these disclosures be required? Should any of these disclosures not be required but instead permitted? Should any of these disclosures be required to appear in the relationship summary, but outside the proposed summary of fees and costs?
• Should any additional disclosures about fees and costs be included for investment advisers? In particular, should we require any disclosures from an investment adviser's Form ADV Part 2A narrative brochure, such as more details about an investment adviser's fees? Some other disclosures about fees that are included in Form ADV Part 2A, but that we have not included in the proposed relationship summary, include an adviser's fee schedule; whether the adviser bills clients or
• Should we require or permit advisers to disclose whether they charge performance-based fees, which is a type of compensation investment advisers may charge to “qualified clients,” that is based on a share of capital gains on, or capital appreciation of, such clients' assets?
• Should we permit or require each firm to provide the range of its fees? If so, should broker-dealers be required to include a range for each type of transaction-based fee it charges or the aggregate range for all of the firm's transaction-based fees? Should investment advisers be required to include a range for each type of principal fee they charge retail investors for advisory services, or the aggregate range for all of its principal advisory fees? Do broker-dealers and investment advisers currently compute or have the ability to compute such aggregated fee information? What factors determine the type or amount of fee that firms charge (
• Should we require firms to state whether their fees are “negotiable,” as we have proposed? At firms that offer negotiable fees, are retail investors generally able to negotiate their fees, and if not, would they find this disclosure helpful or could it be confusing? Will firms be able to succinctly describe the key factors they believe would help a reasonable retail investor understand the fee that he or she is likely to pay for a firm's services (
• Will any of the required disclosures be misleading or make it more difficult for investors to select the right type of account for them?
• Should we make the proposed relationship summary more personalized to individual retail investors, such as by requiring or permitting estimates for each retail investor, reflecting the fees and charges incurred for the retail investor's brokerage or advisory account? Is personalization feasible for this type of relationship summary disclosure? If so, what information should be included in the personalized fees and cost disclosure, and how should such information be presented? How would firms calculate those estimates? How often should we require firms to update the personalized fees and compensation disclosure, and how should the personalized fee disclosure updates be delivered or made available to retail investors? What would be the costs to firms to prepare and update personalized fee and compensation disclosures?
• Should we require firms to provide investors with personalized fee information in a different disclosure, such as an account statement? What would be the cost and benefits, including the costs of books and records requirements, of personalizing information to investors relative to the proposal? Do firms currently provide retail investors with personalized fee disclosure estimates at or before account opening? Do they provide personalized fee disclosures in periodic account statements? For firms that provide personalized fee disclosures, do they include all fees paid by the retail investor as well as compensation received by the firm and financial professionals, even if such compensation is not paid directly or indirectly by the retail investor, such as commissions, mark-ups, mark-downs, other fees embedded in the investment or fees from third parties? What other types of fee information do firms include? Do they automate such disclosures? How expensive and complex a process is creating and delivering such personalized fee disclosures?
• Should we require firms to state where retail investors can find personalized information about account fees and costs, such as on account statements and trade confirmations? What other source of such information might be available for prospective customers and clients? Should we require firms to include hyperlinks to fee and cost calculators on
• Should we require firms to provide an example showing how sample fees and charges apply to a hypothetical advisory account and a hypothetical brokerage account, as applicable? Should we require a more general example that shows the impact of hypothetical fees on an account? If so, what assumptions should we require firms to make in preparing such an example? For example, should we specify assumptions such as the kinds of assets that are most typical for a broker-dealer's customers, stated commission schedules, and aggregate third-party compensation? If the assumptions were standardized, would such examples be useful to the retail investor, whose circumstances may be different from the assumptions used or would they help give an investor a better idea about what kind of fees are being charged? Would such examples provide retail investors with a clear understanding of the application of ongoing asset-based, transaction-based and product-level fees to an account? Should we require one example for an advisory account and one example for a brokerage account? How should the information be presented (
• Should firms be permitted or required to include in the relationship summary a detailed fee table or schedule? Should we permit or require firms to create a fee schedule as separate disclosure, and then include it as an attachment (or cross reference it with a website address and hyperlink) to the relationship summary? What should be included in such a fee table or schedule? Should it include compensation received by the firm and financial professionals, even if such compensation is not paid directly or indirectly by the retail investor, such as commissions or fees from third parties?
• Regarding fees related to funds and other investments that reduce the value of the investment over time, would the required disclosures by investment advisers and broker-dealers be clear and understandable to retail investors?
• Should firms describe the types of compensation they and their financial professionals receive from sources other than the retail investor in the description of their conflicts of interest, as we have proposed (for example, with respect to revenue sharing arrangements, such as payments for “shelf space,”
• Should we require firms to state, as proposed, that a retail investor will also pay other fees in addition to the firm's principal fee for brokerage or advisory services, and to list such fees? Should we also require firms to state ranges for such fees?
• We are proposing disclosures that are intended to help retail investors understand how the principal types of fees firms charge for advisory and brokerage accounts affect the incentives of the firm and their financial professionals. Are these disclosures clear? Do they capture all incentives that broker-dealers or investment advisers may have from their fee structures? Are there other considerations related to fees and compensation that we should require firms to highlight for retail investors that are not captured here or elsewhere in the relationship summary? Should we require firms to include the prescribed wording, as proposed, or should we allow more flexibility in the words they use? Should we modify the prescribed wording? For example, should we expressly permit or require broker-dealers to modify the prescribed wording regarding their incentive to encourage retail investors to engage in transactions, to the extent they also receive compensation that might lower such incentive, such as asset-based compensation (
• For our prescribed wording for investment advisers regarding the adviser's incentive to increase the assets in a retail investor's advisory account, would different wording better reflect this incentive? Does the proposed wording capture the conflict of interest, or does the wording suggest that advisers will increase retail investors' assets by generating higher investment returns? Because many advisers do not charge ongoing asset-based fees as their principal fees for retail investor advisory accounts, and instead charge fixed fees, hourly fees, commissions or other types of fees, should we require these firms to state the incentives they have as a result of receiving such other types of fees? If so, what are the incentives that such firms have that are important for retail investors to understand and would be relevant to the relationship summary?
• These proposed disclosures about a firm's incentives can also be considered to involve conflicts, as they address the incentives that investment advisers and broker-dealers have as a result of receiving certain types of fees. Should we require this disclosure in the conflicts of interest disclosure instead of the summary of fees and costs? Should we require firms to include in the summary of fees and costs any other fee-related conflicts that we propose to include in the conflicts of interest disclosure, as discussed in Section II.B.6 below? Should we require firms to include other fee-related conflicts in these sections that are not included elsewhere in the relationship summary?
• Would our proposed disclosure for advisers and broker-dealers, that retail investors may, in certain circumstances, prefer one type of fee over another, be useful to retail investors? Are these proposed disclosures clear? Do they adequately capture the typical circumstances in which retail investors would prefer one fee type over another? Are there other considerations related to fees and compensation that we should require or permit firms to highlight for retail investors that are not captured here or elsewhere in the relationship summary? Should we require firms to include the prescribed wording, as proposed, or should we allow more flexibility in the words they use? Should we modify the prescribed wording? Does the proposed prescribed wording capture the range of business models among investment advisers and broker-dealers? Would the prescribed wording require a firm to provide any inaccurate information given that particular firm's circumstances?
• Should we require firms to make disclosures about wrap fee programs, as proposed? Would the proposed disclosures help investors to understand the fees and costs associated with a wrap fee program as compared to unbundled advisory accounts and brokerage accounts? Would the proposed disclosures help retail investors to make informed choices about whether a wrap fee program suits their needs, as compared with unbundled investment advisory or brokerage services? If not, how could we revise it? Are there any revisions to the descriptions of wrap fee programs that would make the proposed disclosures more useful to investors?
• Are there other differences between wrap fee programs, unbundled advisory accounts, and brokerage accounts that we should require firms to include, such as other differences in fees and services? Would more or less information about wrap fee programs be helpful for retail investors? For instance, should we require firms to disclose information about the firms that participate in the wrap fee programs they recommend (e.g., the wrap fee program sponsors or managers), and any particular conflicts relevant to investors in wrap fee programs? Should we require more or less disclosure, or different disclosure, about the amount and frequency of additional transaction fees retail investors incur in wrap fee programs? Are there any elements of the proposed requirements that we should exclude? If so, why? Should any of the required disclosures be included in a different section of or an appendix to the relationship summary?
• Have we appropriately tailored the information required for advisers that provide advice about investing in both a wrap fee and a non-wrap fee program, and advisers that only provide advice about investing in a wrap fee program?
• Should we require broker-dealers that sponsor wrap fee programs to include any additional disclosures about wrap fee programs, other than the disclosures that would be made by dual registrants?
• We understand that client-facing firms—or advisers that provide advice to retail investors about investing in wrap fee programs—are not necessarily the same firms that sponsor wrap fee programs (we define a wrap fee program sponsor in Form ADV General Instructions as a firm that sponsors, organizes, or administers the program or selects, or provides advice to clients regarding the selection of, other investment advisers in the program). Should we require each client-facing firm to include the proposed wrap fee disclosures in its relationship summary, even if the firm is not the wrap fee program sponsor, as proposed? Please describe how this information is currently provided to wrap fee program clients.
• Should we require only sponsors of wrap fee programs (and not all client-facing firms) to include the proposed wrap fee disclosures in the relationship summary, similar to the Form ADV wrap fee brochure delivery requirement, which requires only investment advisers that sponsor wrap fee programs to deliver to their wrap fee clients the Form ADV wrap fee brochure? If so, should we permit only one sponsor of a wrap fee program that has multiple sponsors to include the proposed wrap fee disclosures in the relationship summary, similar to the delivery requirements for the Form ADV wrap fee brochure?
• In addition to wrap fee programs, are there other types of retail investor programs and services for which it would be useful to require investment advisers and broker-dealers to disclose additional information about the nature and scope of services, fees and conflicts of interest? If so, which programs and services, and why should we require such disclosure?
• Are there any common misconceptions about broker-dealers' and investment advisers' compensation that the relationship summary should specifically seek to clarify or correct (
We are proposing to require standalone investment advisers and standalone broker-dealers to prepare this section under the following headings: “Compare with Typical Brokerage Accounts” (for standalone investment advisers) or “Compare with Typical Advisory Accounts” (for standalone broker-dealers).
We are proposing to require these disclosures to help retail investors choose among different account types and services. Having a clear explanation of differences in the fees, scope of services, standard of conduct, and incentives that are generally relevant to advisory and brokerage accounts would help retail investors that are considering one such type of relationship to compare whether their needs might be better met with the other type of relationship. In addition, we are proposing to prescribe wording in this section because it is intended to provide a general comparison of what we believe is a typical brokerage or investment adviser account that is offered to retail investors. Moreover, we believe prescribing language will promote uniformity and allow retail investors to receive the same information to use in comparing choices from different standalone firms.
Standalone investment advisers would be required to include the following prescribed language (emphasis required): “You could also open a brokerage account with a
Standalone investment advisers would then include the following information about the standard of conduct applicable to broker-dealers: “A broker-dealer must act in your best interest and not place its interests ahead of yours when the broker-dealer recommends an investment or an investment strategy involving securities. When a broker-dealer provides any service to you, the broker-dealer must treat you fairly and comply with a number of specific obligations. Unless you and the broker-dealer agree otherwise, the broker-dealer is not
Standalone investment advisers would then include the following statement discussing incentives created by a typical broker-dealer's fee: “If you were to pay a transaction-based fee in a brokerage account, the more trades in your account, the more fees the broker-dealer charges you. So it has an incentive to encourage you to trade often.”
Finally, a tabular chart would compare certain specified characteristics of a transaction-based fee and an ongoing asset-based fee side-by-side, set off by the wording “You can receive advice in either type of account, but you may prefer paying:”
Standalone broker-dealers would be required to include the following prescribed language (emphasis required), which would highlight for the retail investor the different fee structure of many investment advisers: “You could also open an advisory account with an
Standalone broker-dealers would then include the following disclosure about an investment adviser's standard of conduct: “Advisers are held to a fiduciary standard that covers the entire relationship. For example, advisers are required to monitor your portfolio, investment strategy and investments on an ongoing basis.”
Standalone broker-dealers would then include the following disclosure about a typical investment advisory asset-based fee, as follows: “If you were to pay an asset-based fee in an advisory account, you would pay the fee periodically, even if you do not buy or sell.”
The next statement would note certain incentives created by an investment adviser's ongoing asset-based fee. Broker-dealers would include the following: “For an adviser that charges an asset-based fee, the more assets you have in an advisory account, including cash, the more you will pay the adviser. So the adviser has an incentive to increase the assets in your account in order to increase its fees.”
Finally, standalone broker-dealers would be required to include the same tabular chart that standalone investment advisers would include.
We request comment generally on the proposed comparison disclosures to be provided by standalone investment advisers and broker-dealers, and in particular on the following issues:
• Is it useful to require firms to include disclosures about services and fees they do not offer, so that investors know other choices are available and are better able to compare different types of firms?
• Is it clear from the headings that the information provided in this section describes a typical investment adviser and broker-dealer, and does not describe the circumstances of all investment advisers and broker-dealers? Why or why not? Should we modify the headings or provide additional information at the beginning of this section?
• Do the proposed requirements encourage disclosure that is simple, clear, and useful to retail investors? Would the proposed disclosure help investors to understand and compare the fees, services and standard of conduct associated with a firm's advisory services and brokerage services? Are there any revisions to the descriptions of fees, services, standard of conduct, and incentives that would make the proposed disclosure more useful to investors?
• Is the proposed order of the information appropriate, or should it be modified? If so, how should it be modified?
• Is the proposed disclosure about how often a typical advisory firm monitors retail investors' accounts useful to retail investors, given that different firms may view “ongoing monitoring” differently?
• Is the proposed format useful for retail investors to understand and compare fees, services, standard of conduct and incentives among broker-dealers and investment advisers? Should we permit or require further use of tables, charts, graphs or other graphics or text features?
• Should we require firms to include the prescribed wording, as proposed, or should we allow more flexibility in the words they use? Does the proposed prescribed wording capture the range of typical business models and fee structures that investment advisers and broker-dealers offer? Would the prescribed wording require a firm to provide any inaccurate information given that particular firm's circumstances? If so, how should it be modified? Instead of the proposed prescriptive wording, should the Commission permit or require a more open-ended narrative?
• How would the required explanations and various disclosures contribute to readability and length of the proposed relationship summary? Should each of these explanations be required, permitted, or prohibited? Should any of these explanations be required to appear in the relationship summary, but outside the comparisons section?
• Are there other considerations related to investment advisers and broker-dealers that we should require or permit firms to highlight for retail investors? For example, should we require advisers to state that broker-dealers sometimes offer both full-service and discount brokerage accounts, and the differences between them, including fees? Are there any disclosures that we should omit?
• Is the proposed prescriptive wording describing the standard of conduct required for investment advisers and broker-dealers clear and useful to retail investors? Would the proposed disclosure help investors to understand the standard of conduct associated with a firm's advisory services and brokerage services? Should such disclosure be modified? If so, how should it be modified?
• Should we amend the proposed wording that describes the standard of conduct for broker-dealers to incorporate or refer to any fiduciary obligations that certain broker-dealers have under state law or other laws or regulations?
• Our proposal would require a standalone investment adviser to include prescribed disclosure about a broker-dealer's incentives based on a typical broker-dealer's principal fee structure, and vice versa. Should these disclosures be substantially similar to the disclosures we propose certain dual registrants to include, as proposed?
• Our proposal would require a standalone investment adviser and a standalone broker-dealer to include prescribed disclosure that a retail investor may prefer one type of fee over another in certain circumstances. Should these disclosures be substantially similar to the disclosures we propose certain dual registrants to include, as proposed? Or should we modify these disclosures for firms that do not offer retail investors both brokerage and advisory services? If so, how should these disclosures be modified?
We are proposing to require that investment advisers and broker-dealers summarize their conflicts of interest related to certain financial incentives. Specifically, firms would be required to disclose conflicts relating to: (i) Financial incentives to offer to, or recommend that the retail investor invest in, certain investments because (a) they are issued, sponsored or managed by the firm or its affiliates, (b) third parties compensate the firm when it recommends or sells the investments, or (c) both; (ii) financial incentives to offer to, or recommend that the retail investor invest in, certain investments because the manager or sponsor of those investments or another third party (such as an intermediary) shares revenue it earns on those products with the firm; and (iii) the firm buying investments from and selling investments to a retail investor for the firm's own account (
Investment advisers, broker-dealers, and their financial professionals have incentives to put their interests ahead of the interests of their retail investor clients and customers. The federal securities laws do not preclude broker-dealers or investment advisers from having conflicts of interest that might adversely affect the objectivity of the advice they provide; however, firms and financial professionals have obligations regarding their conflicts. Investment advisers are required to eliminate, or, at a minimum, fully and fairly disclose conflicts of interest clearly enough for a client to make an informed decision to consent to such conflicts and practices,
Conflicts of interest with retail investors often arise when firms and/or their financial professionals recommend or sell proprietary products or products offered by third parties, recommend products that have revenue sharing arrangements, and engage in principal trading.
We are not proposing to require or permit the relationship summary disclosure to include specific information about all of the conflicts of interests that are or could be present in a firm's relationship with retail investors. For example, conflicts that can be applicable to investment advisers include using certain affiliated service providers,
It is important for firms to disclose information about each of these conflicts to retail investors; however, we believe that requiring an exhaustive discussion of all conflicts in the relationship summary would make the relationship summary too long for its intended purpose—that is, focusing on key aspects of a firm and its services, as well as helping retail investors to make an informed choice between receiving the services of a broker-dealer or an investment adviser or among different broker-dealers or investment advisers. Since investment advisers already report conflicts of interest in Form ADV Part 2, a more exhaustive discussion of conflicts by investment advisers would be duplicative of certain disclosures provided in Form ADV Part 2, which is provided to clients of investment advisers, including retail investors.
We are proposing to require specific information about conflicts of interest related to financial incentives for recommending or selling proprietary products or products offered by third parties, and from revenue sharing arrangements. Such incentives could include, for example, the firm earning more money or the financial professional receiving compensation or other benefits, including an increase in compensation such as a bonus, when a retail investor invests in the product. Disclosure of these conflicts would highlight for retail investors that firms and financial professionals have financial incentives to place their own interests first when making investment recommendations. Including these disclosures prominently, in one place, at or before the start of a retail investor's relationship with a firm or financial professional would facilitate retail investors' understanding of the incentives that may be present throughout the course of the relationship. Retail investors also have indicated they find information about the sources and amount of compensation from third parties useful and relevant to making informed financial decisions before engaging a firm.
We are also proposing to require disclosures about conflicts relating to principal transactions. Commenters recognized the importance of principal trading, with appropriate safeguards, including disclosure.
Specifically, we are proposing that firms use the heading “Conflicts of Interest” under which a broker-dealer, investment adviser or dual registrant would describe three categories of conflicts, as applicable to the firm.
First, we propose that a firm be required to state, as applicable, that it has a financial incentive to offer or
This conflict disclosure would highlight that a variety of financial incentives affects the incentives of the firm or its financial professional to offer or recommend certain investments to the retail investor.
We are also proposing to require examples of the types of investments associated with each of these conflicts (
Next, we propose that firms disclose revenue sharing arrangements by stating that the firm has an incentive to offer or recommend the retail investor to invest in certain investments because the manager or sponsor of those investments or another third party (such as an intermediary) shares with the firm revenue it earns on those investments.
Finally, we propose that firms address principal trading by stating that the firm can buy investments from a retail investor, and sell investments to a retail investor, from its account (called “acting as principal”).
While access to securities that are traded on a principal basis, such as certain types of municipal bonds, is important to many investors, principal trades by broker-dealers and investment advisers raise potential conflicts of
We request comment generally on the conflicts of interest disclosures proposed to be included in the relationship summary, and in particular on the following issues:
• Do the proposed conflicts of interest disclosures encourage firms to provide information that is simple, clear, and useful to retail investors? Would the proposed disclosures help retail investors to compare the conflicts of interest associated with advisory services and brokerage services and the conflicts among firms? Does the relationship summary help retail investors understand that compensation to firms and financial professionals creates incentives that could impact the advice or recommendations that they provide? If not, should it do so and if so, what modifications should be made to the summary to address this concern?
• Should we require brief statements about particular conflicts of interest, as proposed, or should we require a more open-ended narrative or more prescribed wording? Would an open-ended narrative permit firms to tailor the disclosure and describe all of the conflicts they believe retail investors should know? Or would firms seek to provide so much information about their conflicts that the proposed page limit (or equivalent limit in electronic format) would not provide enough space for all of the disclosures? How would the required explanations of various items contribute to the readability and length of the relationship summary?
• Our intent in using layered disclosure for conflicts (
• Should we instead require firms to make the conflicts of interest disclosure more detailed, even if it results in a lengthier relationship summary?
• Are the proposed conflicts of interest disclosures too limited? Are there other types of conflicts we should include, such as additional disclosure currently required in the Form ADV Part 2 brochure or brochure supplement (for investment advisers), or disclosure typically included in account opening documents or websites (for broker-dealers)? Should we, for example, require firms to describe all of their conflicts and how they address them, such as specific information about incentives to favor certain clients over others, agency cross-trades, relationships with certain clients, personal trading by personnel, soft dollar practices, directed brokerage, proxy voting practices, or acting as a market maker for a recommended security? Or should we require firms to list all of their conflicts and provide cross references to where additional information about each conflict can be found (i.e., cross referencing the relevant sections of Form ADV Part 2 and analogous broker-dealer disclosures)? Would this detract from the brevity of the disclosure? Is there another way to provide additional information about conflicts to retail investors in a way that would be meaningful to them and would facilitate their ability to obtain additional information?
• Are there certain types of investments that should be disclosed by firms as ones that the firm “issues, sponsors, or manages?” For example, should we require firms to disclose that any investment with a firm's name in the title is generally an investment that the firm issues, sponsors, or manages? If a firm uses a name other than its own name to market proprietary investments, should we require firms disclose such other names?
• Should we require firms to disclose whether they provide ancillary services to retail investors themselves or through their affiliates so that retail investors better understand that the firm has incentives to select its affiliates over third parties?
• With respect to the required disclosure regarding financial incentives a firm has to offer or recommend investment in certain investments because they are offered by the firm's affiliates, or third parties compensate the firm for selling their investments, or both, would firms understand what types of financial incentives would be covered by this item—and what would not be covered? Should the Commission provide additional guidance or instructions to clarify?
• Should we require firms to disclose that they use third-party service providers that offer the firms or their financial professionals additional compensation? For example, some investment advisers select broker-
• Firms would be required to provide examples of investments that firms have a financial incentive to offer. Are these requirements clear? Should we provide additional guidance? Should firms also be required to identify specific account types for which financial professionals receive incentives? Or should firms list all of their services or products that create the stated conflicts (or cross-reference to such disclosure elsewhere)? Should additional information be provided in this section of the relationship summary or should it be provided in an attachment?
• Should firms explicitly state that other firms offer similar products that could be less expensive for the retail investor? Should we require firms to disclose if the firm engages in principal trading, as proposed, including that the firm can earn a profit on these trades and may have an incentive to encourage the retail investor to trade with the firm? Should we require investment advisers to state the retail investor's specific approval on each principal transaction is required? Are there additional disclosures that we should require for broker-dealers?
• Should we require firms to disclose any additional conflicts of interest related to the compensation of financial professionals? For example, should firms be required to include any specific conflicts related to financial professionals' outside business activities? Should we require firms to include additional disclosure on compensation that a financial professional receives from third parties, such as compensation that an investment adviser representative receives in his or her capacity as a registered representative of an unrelated broker-dealer?
• Should we allow firms to choose the order they present the conflicts? For example, should firms be permitted to base the order on the conflicts they believe are most relevant in their business, or is a standardized order preferable to increase the comparability of the disclosures among different firms? If a firm does not engage in any practices that would be required to be disclosed, should we permit or require a firm to state that it does not have that conflict, or should we require firms to say nothing, as proposed? Would it be confusing to investors if, as proposed, the order was prescribed but some firms omit certain conflicts because they do not have the particular conflict? Would such presentation lessen the ability to compare conflicts across firms?
• Is the proposed format useful for retail investors in understanding and comparing conflicts of interest among firms? Would the use of tables, charts, graphs or other graphics or text features be helpful in explaining all or any particular conflict? If so, how could firms structure that disclosure?
• Should any of the conflicts be required to appear in the relationship summary, but outside of the conflicts of interest section?
We are proposing to require that firms include information on where retail investors can find more information about the firm's disciplinary events, services, fees, and conflicts, which facilitates the layered disclosure that the relationship summary provides.
Specifically, in the relationship summary, firms would state “We have legal and disciplinary events” if they are required to disclose (i) disciplinary information per Item 11 of Part 1A or Item 9 of Part 2A of Form ADV,
We considered requiring firms to provide additional details about the reported legal and disciplinary events of the firms and their financial professionals. For example, we could have proposed to require firms to include details about the type and number of the reported events. Broker-dealers and investment advisers do not report all of the same types of disciplinary events. We also considered whether to require firms to only discuss the types of disciplinary events that both broker-dealers and investment advisers report, require investment advisers to disclose complaints and other disciplinary events that only broker-dealers report, or create separate requirements to require firms to disclose certain types of events in the relationship summary without reference to information in other disclosures.
We are not proposing to take any of these approaches because this is summary disclosure rather than a comprehensive discussion of a firm's legal and disciplinary history. We believe that for many firms, requiring additional information would include too much detail for short summary disclosure, and updating these details in the relationship summary on an ongoing basis would add significant costs without compensating benefit. The information already is required to be disclosed elsewhere, and the relationship summary as proposed would direct retail investors to those resources. We believe that requiring an affirmative statement that the firm and its financial professionals have reportable legal or disciplinary events, if applicable, will flag this important issue for retail investors and help them to determine whether they want additional information in other disclosures. By proposing to base the new disclosure on information that is already reported elsewhere and also to include details about where to find more information, we would give retail investors the tools to learn more.
Next, all firms would be required to include the following wording to highlight where retail investors can find more information about the disciplinary history of the firm and its financial professionals, whether or not the firm is required to state the existence of legal or disciplinary events in the relationship summary: “Visit Investor.gov for a free and simple search tool to research our
Retail investors would further benefit from understanding how to report problems and complaints to the firm and regulators. Accordingly, we propose to require that firms include the following wording next in this section:
“To report a problem to the SEC, visit Investor.gov or call the SEC's toll-free investor assistance line at (800) 732-0330. [To report a problem to FINRA, [ ].] If you have a problem with your investments, account or financial professional, contact us in writing at [insert your primary business address].
Firms would be required to state where the retail investor can find additional information about their brokerage and investment advisory services, as applicable. Broker-dealers would be required to direct retail investors to additional information about their brokers and services on BrokerCheck (
Investment advisers likewise would be required to direct retail investors to additional information in the firm's Form ADV Part 2 brochure and any brochure supplement provided by a financial professional to the retail investor.
Unlike investment advisers, which deliver brochures and brochure supplements to clients, broker-dealers are not currently required to deliver to their retail investors written disclosures covering their services, fees, conflicts, and disciplinary history in one place.
We request comment generally on the disclosure about where to find additional information, and in particular on the following issues:
• Do commenters agree that it is important for retail investors to know of a firm and its financial professionals' legal and disciplinary events before entering into an agreement with a firm? Why or why not?
• Is including the disciplinary history disclosure in the additional information section sufficient to draw a retail investors' attention or encourage retail investors to ask follow-up questions on this topic?
• Would the proposed format with prescribed wording effectively communicate information about disciplinary events to retail investors? Or should we use a table with yes/no check boxes or another graphical format to describe this information, or should we permit a firm to state in its own words whether it has reported any events? What approach would permit easier comparison by retail investors across firms, including dual registrants?
• Would more detail about these events be more beneficial and easily understandable for retail investors? For example, should firms be required to provide background about the types of events that would trigger the disclosure (such as criminal, civil, and regulatory actions and, for broker-dealers and financial professionals, customer complaints, arbitrations and bankruptcies)? Should we require separate disclosures for firms and their financial professionals? Should we consider requiring a more specific list of the types of disciplinary events that firms and financial professionals report and require firms to state whether there are reported disclosures for each type? For example, should firms be required to state they have reported disclosures for criminal actions, civil actions and administrative proceedings, and for broker-dealers specifically, arbitrations and complaints? Should we instead require firms to disclose the total number of the legal and disciplinary events that are reported on Form BD, Form ADV, and/or Forms U4, U5, and U6, as applicable? Or should we require firms to report the total number of all reported criminal actions, civil actions, administrative proceedings, arbitrations, and complaints for them and their financial professionals, as applicable? Would this information be confusing for retail investors without more information about each reported event? If we do require this information, should we require firms to disclose the percentage of a firm's total financial professionals that have reported disciplinary events? As part of this approach, should we require a firm to disclose its total number of financial professionals to provide additional context for the percentage?
• Should we require firms to include specific wording directing retail investors to ask them questions about these events and to review more detailed disclosures by searching Investor.gov?
• Should firms be required or permitted to state that they do not currently have reportable legal and/or disciplinary events, if that is the case? Should we require firms to distinguish whether they or their financial professionals have reportable
• Do commenters agree with requiring disclosure if firms or financial professionals have reported legal and/or disciplinary events on Form BD, Forms U4, U5 or U6, and Form ADV, as applicable? Do commenters agree with the specific items on those forms that we have identified as triggering reportable events? Should we only require disclosure of the types of legal events that both broker-dealers and investment advisers report? For example, should we require all firms to disclose financial information, which broker-dealers are required to report pursuant to Items 11 (I, J, and K) on Form BD but investment advisers do not report? Or, in the alternative, should we exclude financial disclosures from a broker-dealer's reportable legal or disciplinary events? Do commenters agree that the legal or disciplinary events triggering disclosure on the relationship summary should be the same for financial professionals working for broker-dealers as for investment advisers? If not, why not?
• Do commenters agree that, for broker-dealers and financial professionals of broker-dealers and investment advisers, we should exclude information that is not released to BrokerCheck or IAPD pursuant to FINRA Rule 8312? BrokerCheck and IAPD include additional information, including summary information about certain arbitration awards against a financial professional, or against a firm in BrokerCheck, involving a securities or commodities dispute with a public customer. Although broker-dealers are not required to report arbitrations on Form BD, should we include arbitrations as reportable events in light of the BrokerCheck disclosures? If so, how would commenters suggest articulating the required disclosure?
• Pursuant to FINRA Rule 4530, broker-dealers are required to disclose certain information to FINRA that is not reported on Form BD (
• Do commenters believe that stating whether a firm has legal and disciplinary events and then providing hyperlinks on where to find additional information is the correct approach? Should we explicitly require deep links? Why or why not? Do commenters believe that retail investors will check Investor.gov? Should we require firms to cross reference other sources of disciplinary information, including providing direct links to the IAPD or BrokerCheck? Why or why not?
• Rather than asking firms to identify whether they have legal and disciplinary events, should the relationship summary note that retail investors may want to consider this information and then encourage retail investors to ask their financial professional for more details and include cross references to where further information can be found? Why or why not? With respect to robo-advisers or broker-dealers providing online services, will a financial professional be available to answer these types of questions?
• Should we adopt a definition of “financial professional” for purposes of this disclosure? If so, how would commenters suggest formulating the definition?
• Our intent in using layered disclosure, with short summaries of selected disclosures and information on where retail investors can find more information, is to encourage retail investors to ask questions and seek more information about the firm's and their financial professionals' services, fees, conflicts of interest and disciplinary events. Does the proposed relationship summary, in general, and this additional information section, in particular, achieve this goal? Are there modifications or alternatives we should consider to achieve this goal?
• In addition or as an alternative to the proposed cross references to an investment adviser's Form ADV brochure and brochure supplement(s) and account agreement, and to a broker-dealer's public website, account agreement and BrokerCheck, should the relationship summary direct retail investors to other sources of information? Should we require firms to include public website addresses and hyperlinks to the sources of additional information, if available? Do firms' websites typically include additional information about topics included in the relationship summary? Given that not all firms have a public website or maintain current information on a public website (
We are proposing to require that firms include questions for retail investors to ask their financial professionals in the relationship summary. By requiring these questions, we intend to encourage retail investors to have conversations with their financial professionals about how the firm's services, fees, conflicts and disciplinary events affect them. We encourage financial professionals to engage in balanced and meaningful conversations with their retail investors to facilitate investors making informed decisions, using these key questions as a guide. Firms should use formatting to make the questions more noticeable and prominent (for example, by using a larger font, a text box, different font, or lines to offset the questions from the other sections).
1. Given my financial situation, why should I choose an advisory account? Why should I choose a brokerage account?
2. Do the math for me. How much would I pay per year for an advisory account? How much for a typical brokerage account? What would make those fees more or less? What services will I receive for those fees?
3. What additional costs should I expect in connection with my account?
4. Tell me how you and your firm make money in connection with my account. Do you or your firm receive any payments from anyone besides me in connection with my investments?
5. What are the most common conflicts of interest in your advisory and brokerage accounts? Explain how you will address those conflicts when providing services to my account.
6. How will you choose investments to recommend for my account?
7. How often will you monitor my account's performance and offer investment advice?
8. Do you or your firm have a disciplinary history? For what type of conduct?
9. What is your relevant experience, including your licenses, education, and other qualifications? Please explain what the abbreviations in your licenses are and what they mean.
10. Who is the primary contact person for my account, and is he or she a representative of an investment adviser or a broker-dealer? What can you tell me about his or her legal obligations to me? If I have concerns about how this person is treating me, who can I talk to?
We are proposing to allow firms to modify or omit portions of these questions, as applicable to their business.
We recognize that advisers providing computer-generated, automated advice, often referred to as “robo-advisers,” and online-only broker-dealers may employ business models that offer varying levels of interaction or no interaction with a financial professional. We are proposing to require advisers providing automated advice or broker-dealers providing online-only services without a particular individual with whom a retail investor can discuss these questions to include a section or page on their website that answers each of the above questions, and provide a hyperlink in the relationship summary to that section or page.
We believe that many of these questions would help retail investors to elicit more detail concerning the items discussed in the relationship summary. For example, the questions asking why an investor should choose an advisory or brokerage account and how much the investor can expect to pay are intended to help the retail investor receive information about services and fees that are tailored to that particular investor's circumstances. We believe that the financial professional generally would have access to the information needed to provide this information to a particular retail investor during the account opening process.
The proposed questions cover all of the sections in the relationship summary. They also include one additional topic about the financial professional's relevant experience, including licenses and other qualifications. In our experience, the relevant experience, including licenses, education, and other qualifications for a particular financial professional are important to retail investors.
We request comment generally on the questions proposed to be included in the relationship summary, and in particular on the following issues:
• Would our proposed questions encourage discussions between retail investors and their financial professionals? Would they help retail investors become informed about how a firm's services, fees, conflicts, and disciplinary events affect them? Would they help investors to compare investment advisers and broker-dealers?
• Would financial professionals be able to answer these “Key Questions to Ask”? Do they have access to personalized information about the retail investor and the retail investor's account to be able to, for example, put together personalized fee information and estimates during the account opening process? To the extent responses would require information about the particular retail investor, would firms need to change the account opening process in order to obtain that information and provide responses?
• Should we require or permit firms to include these questions throughout the relationship summary rather than, or in addition to, including the questions in the “Key Questions to Ask”? In our proposal, for example, the fees and costs section of the relationship summary directs retail investors to ask their financial professionals for personalized fee information. Are there other disclosures in the relationship summary for which we should require or permit firms to also include a question to ask as part of the disclosure? If so, which disclosures? Could firms use technology such as pop-ups or hovers, or internal links, to connect the relevant question(s) in the key questions to ask to the disclosure in the relationship summary?
• Would firms create policies and procedures, including supervision and compliance reviews, relating to how their financial professionals respond to these questions? Would implementing and maintaining such processes be burdensome or costly for firms? Why or why not? Do investment advisers and broker-dealers currently have systems in place to answer these questions, particularly the request to “do the math for me” and provide not only fee
• Do firms anticipate that they would implement recordkeeping policies and procedures to address communications between financial professionals and retail investors about the “Key Questions to Ask”? What kind of recordkeeping policies and procedures would firms anticipate implementing in order to address such communications? Should we require financial professionals to highlight these key questions when they deliver a relationship summary to a retail investor? How could the questions be highlighted when the relationship summary is delivered electronically?
• Should we require financial professionals to initiate a conversation about these key questions if the retail investor does not raise these questions?
• Should we, as proposed, permit firms to omit any of the proposed questions that are not applicable to their business, and permit firms to add additional questions for retail investors to ask about the disclosures in their relationship summaries? For example, should robo-advisers and online broker-dealers be allowed to omit the questions concerning the financial professional's relevant experience and whether the investor's primary contact is an investment adviser or broker-dealer? Should we add questions specific to investment advisers offering automated advice, such as how the robo-adviser's models are designed, including the underlying assumptions?
• Should we include any additional questions in our proposed list of questions, or remove any proposed questions? If so, what additional questions should we add, and which questions should we remove, and why? For example, instead of including a question about a financial professional's licenses and other qualifications in this section, should we instead require firms to discuss information about licensing and other qualifications in the relationship summary, including educational background, designations held, and examinations passed? Should we add a question comparing services offered with financial planning and wrap fee programs?
• Do commenters agree that including a question about a financial professional's licenses and other qualifications would provide useful information to retail investors, given the expansive list of professional designations? Should we instead permit or require financial professionals to include a list of certain licenses or other qualifications in a separate disclosure and, if so, which designations should be included?
• We are proposing to permit firms to include up to fourteen questions. Do commenters agree with this approach? Should we allow firms to include more or fewer questions?
• We are proposing to require that robo-advisers and online-only brokers include a section or page on their websites that answers each of these proposed questions, and include a hyperlink in the relationship summary to where the answers are posted. How will these advisers and broker-dealers be able to answer the fact specific questions in a generalized format on the website? Are there alternative ways in which such advisers or broker-dealers should be required to provide answers to these proposed questions? For example, should robo-advisers use a chat or other message function, or answer questions by email? Would this work for robo-advisers that offer recommendations to retail investors without providing them any way to reach a financial professional at the firm? Should we require all advisers to include the responses to these questions on their websites, including robo-advisers that make available financial professionals to answer retail investors' questions?
• Should we require the order of the questions to be fixed? Does the proposed order advance our goal? What changes, if any, should be made to the proposed order? Should there be sub-categories of questions?
Our proposal would require registered investment advisers, registered broker-dealers that serve retail customers and dual registrants to deliver a relationship summary.
The relationship summary requirement would be in addition to, and not in lieu of, current disclosure and reporting requirements or other obligations for broker-dealers and investment advisers.
Investment advisers deliver to clients a “brochure” (and/or a “wrap fee program brochure,” as applicable) and “brochure supplement” required by Form ADV Part 2.
The current disclosure requirements and obligations result in varying degrees and kinds of information to investors, but we believe that all retail investors would benefit from a short summary that focuses on certain key aspects of the firm and its services. By requiring both investment advisers and broker-dealers to deliver a relationship summary that discusses both types of services and their differences, the relationship summary would help all retail investors, whether they are considering an investment adviser or a broker-dealer. A relationship summary would help retail investors to understand key aspects of a particular firm, to compare different types of accounts, and to compare that firm with other firms. While the information required by the relationship summary is generally already provided in greater detail for investment advisers by Form ADV Part 2, the relationship summary would provide in one place, for the first time, summary information about the services, fees, conflicts, and disciplinary history for broker-dealers.
As proposed, firms would be required to file their relationship summary with the Commission, and the relationship summary will be available on the Commission's public disclosure website. The essential purpose of the relationship summary is to provide information to retail investors to help them decide whether to engage a particular firm or financial professional and open an investment advisory or brokerage account. If a firm does not have retail investor clients or customers and is not required to deliver a relationship summary to any clients or customers, the firm would not be required to prepare or file a relationship summary.
We considered proposing other electronic filing platforms, either maintained by the Commission or by a third-party contractor. We are proposing IARD and EDGAR because they are familiar filing systems for investment advisers and broker-dealers. Investment advisers registered with the Commission file Form ADV on IARD.
There are several reasons we propose having the relationship summaries filed with the Commission. First, every relationship summary would be easily accessible through the Commission's website. The public would benefit by being able to use a central location to find any firm's relationship summary. Easy access to various relationship summaries through one source may facilitate simpler comparison across firms. Second, some firms may not maintain a website, and therefore their relationship summaries would not otherwise be accessible to the public. Although we are proposing that firms without a website include a toll-free telephone number in their relationship summaries that retail investors can call to obtain up-to-date information,
We propose to require that a firm deliver the relationship summary to each retail investor, in the case of an investment adviser, before or at the time the firm enters into an investment advisory agreement or, in the case of a broker-dealer, before or at the time the retail investor first engages the firm's services.
The timing of the initial delivery of the relationship summary for investment advisers generally tracks that of Form ADV Part 2A.
In addition, a firm would be required to provide a relationship summary to an existing client or customer who is a retail investor before or at the time a new account is opened or changes are made to the retail investor's account(s) that would materially change the nature and scope of the firm's relationship with the retail investor.
We are proposing different triggers for initial delivery of the relationship summary by investment advisers (before or at the time the firm enters into an investment advisory agreement with the retail investor) and by broker-dealers (before or at the time the retail investor first engages the firm's services). These proposed requirements are intended to make the relationship summary readily accessible to retail investors at the time when they are choosing investment services and are generally consistent with the approach many commenters recommended.
We also believe that retail investors who are existing clients and customers should be reminded of the information highlighted in the relationship summary before or at the time (i) a new account is opened that is different from the retail investor's existing account(s); or (ii) changes are made to the retail investor's existing accounts that would materially change the nature and scope of the firm's relationship with the retail investor.
As with other disclosures firms must deliver, firms would be able to deliver the relationship summary (including updates) electronically, within the framework of the Commission's guidance regarding electronic delivery of documents.
We believe that retail investors who are prospective clients or customers of a firm would benefit from receiving the relationship summary as early as possible when engaging the services of a financial professional or firm, so the retail investor has the relevant information to make that decision. Further to that goal, and in an effort to provide flexibility and recognize the proliferation of means of electronic communications that firms and retail investors may utilize, a firm would be able to deliver the relationship summary to new or prospective clients or customers in a manner that is consistent with how the retail investor requested information about the firm or financial professional.
In connection with account openings conducted online, the Commission previously stated in its 2000 Guidance that broker-dealers could obtain consent from a new customer to electronic delivery of documents through an account-opening agreement that contains a separate section with a separate e-delivery authorization, or through a separate document altogether.
We request comment on whether the Commission should provide additional guidance with respect to electronic delivery of the relationship summary to
The relationship summary is designed to provide information to assist retail investors in making a decision about whether to engage a firm and open a particular type of account, but it is also important for retail investors to know when there have been changes to this information to inform their continuing choice to keep their account with the firm. For example, as noted above, the staff's 917 Financial Literacy Study indicates that retail investors find the nature and scope of a firm's services, its fees and conflicts of interest, and the disciplinary history of financial professionals to be important in choosing financial intermediaries.
Our proposal would also require firms to communicate without charge the information in an amended relationship summary to retail investors who are existing clients or customers of the firm within 30 days after the updates are required to be made.
For purposes of this requirement, it is important that broker-dealers identify their existing customers who are retail investors and recognize that a customer relationship may take many forms. For example, under this requirement, a broker-dealer would be required to provide the relationship summary to customers who have so-called “check and application” arrangements with the broker-dealer, under which a broker-dealer directs the customer to send the application and check directly to the issuer. We believe this approach would facilitate broker-dealers building upon their current compliance infrastructure in identifying existing customers
Finally, our proposal would require a firm to file its relationship summary with the Commission and to maintain the relationship summary and all updates as part of its books and records and make it available to Commission staff upon request, as discussed in Section IV below.
We request comment on filing, delivery, and updating requirements generally, and on the following areas specifically:
• Does this approach to filing, delivery, and updating create unique challenges for firms that are providing the relationship summary electronically? Does this approach provide retail investors with ready access to the information that they need and want in connection with the decision to engage a broker-dealer or investment adviser?
• Should a relationship summary be required for all investment advisers, broker-dealers and dual registrants that provide services to retail investors, or should there be any exceptions? For example, should execution-only broker-dealers be excluded from the requirement to provide the relationship summary because they do not provide investment advice to their customers? Should clearing broker-dealers be excluded from the requirement to prepare and deliver the relationship summary to the extent their customers are introduced by an introducing broker-dealer pursuant to a clearing agreement? If so, why? Should the Commission consider any other exclusions for clearing broker-dealers or other entities? If so, why?
• Should a clearing broker-dealer and introducing broker-dealer be allowed to agree to allocate the responsibility to deliver the relationship summary pursuant to applicable self-regulatory rules?
• Should the relationship summary be required in addition to firms' existing disclosure requirements, as proposed? Is the relationship summary duplicative of or does it conflict with any existing disclosure requirements in any way? What, if any, changes would we need to make to the relationship summary if we were to permit its delivery in lieu of other disclosures and why would those changes be appropriate? Should the Commission instead make any changes to existing rules to permit the relationship summary to serve as the venue for disclosures required by those rules?
• Should investment advisers that deliver a relationship summary have different delivery requirements for the Form ADV brochure and brochure supplement?
• Is IARD the optimal system for investment advisers to file Form CRS with the Commission? Is EDGAR the optimal system for broker-dealers to file Form CRS with the Commission? Should dual registrants be required to file on both EDGAR and IARD?
• How important to investors and other interested parties is the fact that IAPD serves as the single public disclosure website to access an adviser's current filings with the Commission, and compare certain filings of other advisers? What would be the impact of retail investors having to access a separate website for the relationship summary?
• How should the relationship summary be filed? Should it be filed as a text-searchable PDF, similar to how Form ADV is currently filed? Would a structured PDF, a web-fillable form, HTML, XML, XBRL, Inline XBRL or another format be more appropriate, and why? Should the Commission require a single, specified format for all firms, require one format for EDGAR filings and another format for IARD filings, or permit filers to select from two or more possible formats? Would retail investors use the relationship summary to obtain information about one particular firm, or to compare information among firms? What type of format would make it easier for retail investors to use the relationship summary in these ways? For example, would retail investors seek to compare the information about fees across a number of firms, and if so, would a structured format, such as XML or Inline XBRL or an unstructured format, such as PDF or HTML, better facilitate such a comparison? Which filing formats would illustrate the formatting of relationship summaries that are provided electronically, for example, relationship summaries sent in the body of an email, posted on the firm's website, or formatted for a mobile device? Which formats might be most beneficial to retail investors?
• What time or expense is associated with particular formats? What time or expense would be required of the public to view disclosures in a particular format? Would open source, freely available formats be preferred by users and filers, or would commercial proprietary formats be preferred? Would a particular format require any filers or users to license commercial software they otherwise would not, and, if so, at what expense? Would a particular format or formats provide more or fewer features with respect to comparability, reusability, validation, or analysis? What other considerations are related to specific formats? Would a particular format make it possible to confirm that a firm complied with the Form CRS requirements and validate the information provided before filing? If so, which format would filers or users find the most useful?
• We propose to require that an investment adviser deliver the relationship summary before or at the time the firm enters into an investment advisory agreement with a retail investor or, in the case of a broker-dealer, before or at the time the retail investor first engages the firm's services. Would this requirement give a retail investor ample time to process the information and ask questions before entering into an agreement? Or should we require that the relationship summary be delivered a certain amount of time before the firm enters into an agreement with a retail investor (
• Would the delivery requirements applicable to firms that offer only online account openings, investment advice, and transactions provide sufficient notice to retail investors of the relationship summary's availability and content? Should the Commission require such firms to ensure that the relationship summary is delivered separately from other disclosures, with additional prominence and emphasis? For example, should firms consider employing the technology to require a retail investor to scroll through the entirety of the relationship summary before entering the next stage in the account opening process, accessing a different part of the website in order to obtain more information, or permitting the retail investor to check a box in order to accept the client agreement? Are there other requirements that should be considered for such firms in the delivery of the relationship summary when entering into the brokerage or advisory relationship, when the nature of that relationship changes, or when updates to the relationship summary are made?
• We also propose to require that a firm deliver a relationship summary before or at the time the firm implements changes that would materially change the nature and scope of the existing relationship with a retail investor, for example by the opening of an additional account or accounts and/or the migration of assets from one account type to another. Should the Commission provide more guidance for what might constitute a material change to the nature and scope of the relationship or the moving of a significant amount of assets from one type of account to another? If so, do commenters have suggestions on how the Commission should interpret “material change to the nature and scope of the relationship” and “significant amount of assets”? Should the delivery of the relationship summary under these circumstances be accompanied by additional oral
• Should we require that firms deliver an updated relationship summary to retail investors periodically (
• We propose to require that a firm deliver the relationship summary to a retail investor upon request. Would that requirement be helpful for retail investors? Would that requirement be burdensome for firms? Should we require firms to deliver the relationship summary upon request by
• We propose to require broker-dealers to initially deliver the relationship summary “before or at the time the retail investor first engages the firm's services.” Would the proposed formulation capture instances where a retail investor engages the services of a broker-dealer to carry out a transaction outside of an account, for example, by purchasing a mutual fund or variable annuity product through the broker-dealer via “check and application”? We do not intend to capture instances in which a broker-dealer makes a recommendation to a retail investor who does not already have an account with that broker-dealer, if that recommendation does not lead to a transaction with that broker-dealer. Would such recommendations be captured by the proposed language? Would a different formulation be clearer (
• For investment advisers, our proposal generally tracks the initial delivery requirements for Form ADV Part 2.
• We propose to permit firms to deliver the relationship summary electronically consistent with prior Commission guidance on electronic delivery, as discussed above. Is the guidance clear on how firms may meet their obligations with respect to delivering the relationship summary, or should we provide more guidance? Should any additional guidance be more or less prescriptive? Would our proposed approach adequately protect investors who have no internet access or limited internet access or who prefer not to receive information about firms electronically? Is the guidance workable for a disclosure delivered at or before the retail investor enters into an agreement with an investment adviser or first engages the services of a broker-dealer?
• Should we permit firms to meet their relationship summary obligations by filing their relationship summary with the Commission or by posting it online without giving or sending it to specific retail investors?
• Should firms also be required to notify retail investors that an updated relationship summary is available online? Should we require firms to highlight the information that has changed since the prior version in an updated relationship summary? If firms communicate the changes in the relationship summary by means other than delivery of the updated relationship summary, should they be required to inform existing retail investors that the existing version is outdated? Are there additional requirements that we should consider for amendments to relationship summaries, particularly for firms without a website?
• How can we encourage the prominence of the relationship summary for retail investors? We are proposing that, if the relationship summary is delivered on paper and not as a standalone document, firms should ensure that it is the first among any other materials or documents that are delivered at that time. Should we require that the relationship summary be given greater prominence than other materials that accompany it in some other way or that the relationship summary not be bound together with any of those materials? Should we impose additional requirements to encourage the prominence and separateness of the relationship summary? Should we include additional or different requirements for relationship summaries that are delivered electronically? Should we require that the entire text of the relationship summary be provided in the text of an email or other form of electronic messaging, instead of an attachment or a link to the summary disclosure on the firm's website? Are there more dynamic ways to present the relationship summary information online, such as with the use of tool tips, explanatory videos, or chat bots to provide answers to questions? Are there other ways of increasing the prominence of the relationship summary, whether delivered in paper format or electronically?
• Should we require a financial professional to make certain oral disclosures at time of delivery? For example, should we require that a financial professional ask the retail investor if he or she has any questions about the relationship summary? How would this be satisfied in the context of a primarily or exclusively online or electronic delivery?
• Should a firm be required to communicate any material changes made to the relationship summary within 30 days, as proposed, or sooner, for example in the case of transactions not in the normal, customary, or already agreed course of dealing? Should a firm have the option of choosing to communicate the new information by either filing an amended Form CRS or by communicating the new information to retail investors in another way? Should we provide more guidance on the types of ways in which the information may be communicated? Should we instead require a firm to deliver an amended relationship summary to its existing retail investors?
• Are there other changes in conditions that should trigger a delivery requirement?
• We are proposing that firms that do not maintain a website include in their relationship summaries a toll-free phone number for investors to call to obtain documents. Are there additional requirements or different approaches that we should consider for firms that do not maintain websites, to make it easier for the public to access their relationship summaries?
To provide adequate notice and opportunity to comply with the proposed relationship summary filing requirements, newly registered broker-dealers and new applicants for registration with the Commission as
Similarly, we believe it would be helpful to provide sufficient time for advisers and broker-dealers already registered with us to prepare the new Form CRS and file it electronically with the Commission. Accordingly, we propose to require a broker-dealer that is registered with us as of the effective date of the proposed new rules and rule amendments to comply with the new Form CRS filing requirements by the date that is six months after the effective date of the proposed new rules and rule amendments.
We are proposing to require that a firm deliver its relationship summary to all of its existing clients and customers who are retail investors on an initial one-time basis within 30 days after the date the firm is first required to file its relationship summary with the Commission.
We request comment on our proposed implementation requirements.
• Would a six-month period from the effective date of Form CRS provide enough time for newly registered broker-dealers and investment advisers that are filing their initial applications for registration with the Commission to complete Form CRS? If not, please explain why and how much time these advisers and broker-dealers would need to complete Form CRS.
• Should implementation of Form CRS filing requirements for broker-dealers be on a separate timetable from implementation of Form CRS filing requirements for investment advisers, as we have proposed, because registered investment advisers are not all required to file their Form ADV annual updating amendments on the same timetable? If not, please explain why and whether, in order to have one uniform initial filing date for broker-dealers and investment advisers, we should require investment advisers to potentially file their initial Form CRS more than once.
• Should a firm be required to comply with the rule's requirements for initial delivery to new and prospective clients and customers and for updating beginning on the date the firm is first required to electronically file its relationship summary with the Commission, as proposed? Should a firm deliver the relationship summary to all existing clients and customers who are retail investors within 30 days after first filing the relationship summary with the Commission, as proposed? These requirements would result in a different delivery timetable for broker-dealers and investment advisers because investment advisers would file Form CRS with their Form ADV annual updating amendments. Should we instead require all firms to deliver the relationship summary to retail investors beginning on the same date (
We are also proposing conforming amendments to Advisers Act rule 204-2 and Exchange Act rules 17a-3 and 17a-4, which set forth requirements for maintaining, making and preserving specified books and records, to require SEC-registered investment advisers and broker-dealers to retain copies of each relationship summary.
These proposed changes are designed to update the books and records rules in light of our proposed addition of Form ADV Part 3 for registered investment advisers and Form CRS for broker-dealers, and they mirror the current recordkeeping requirements for the Form ADV brochure and brochure supplement. The records for investment advisers would be required to be maintained in the same manner, and for the same period of time, as other books and records required to be maintained under rule 204-2(a), and the records for broker-dealers would be required to
We request comment on these proposed amendments.
• Are there other records related to the relationship summary or its delivery that we should require firms to keep? Should we require them to maintain copies of the relationship summary for a longer or shorter period than we have proposed? Should broker-dealers and investment advisers be required to keep relationship summary-related records for the same amount of time? Should firms be required to document their responses to the “key questions” from investors?
As discussed above, both broker-dealers and investment advisers provide investment advice to retail investors, but the regulatory regimes and business models under which they give that advice are different. For example, the principal services, compensation structures, conflicts, disclosure obligations, and legal standards of conduct can differ.
While investors should understand who their financial professional is, and why that matters, studies indicate that retail investors do not understand these differences and are confused about whether their firm or financial professional is a broker-dealer or an investment adviser, or both.
Specifically, we believe that certain names or titles used by broker-dealers, including “financial advisor,” contribute to retail investor confusion about the distinction among different firms and investment professionals, and thus could mislead retail investors into believing that they are engaging with an investment adviser—and are receiving services commonly provided by an investment adviser and subject to an adviser's fiduciary duty, which applies to the retail investors' entire relationship—when they are not.
As discussed below, our proposed restriction seeks to mitigate the risk that the names or titles used by a firm or financial professional result in retail investors being misled, including believing that the financial professional is a fiduciary, leading to uninformed decisions regarding which firm or financial professional to engage, which may in turn result in investors being harmed. Additionally, we believe that requiring firms and their associated natural persons or supervised persons to disclose whether the firms are broker-dealers or investment advisers and whether such financial professionals are associated with or supervised by, respectively, such firms would also help to address investor confusion and mitigate potential harm to investors resulting from that confusion. We preliminarily believe that restricting certain persons from using the term “adviser” or “advisor” coupled with the requirement that firms disclose their regulatory status in retail investor communications would deter potentially misleading sales practices. Investors who understand whether their financial professional or firm is a broker-dealer or investment adviser will be better consumers of the information presented in Form CRS, and less likely to mistakenly obtain the services of a broker-dealer when they intend to engage an investment adviser, or vice versa.
Over the past decade, various studies have documented that retail investors are confused regarding the services offered by, and the standards of conduct applicable to, broker-dealers and investment advisers, including their use of certain titles.
In 2005, the Siegel & Gale Study found that with respect to titles specifically, “[r]espondents in all focus groups were generally unclear about the distinctions among the titles brokers, financial advisors/financial consultants, investment advisers, and financial planners . . .”
The RAND Study concluded that, based on interviews with industry representatives, investor surveys, and focus groups, there was generally investor confusion about the distinction between broker-dealers and investment advisers. In particular, “[interview] participants [in the RAND Study] mentioned that the line between investment adviser and broker-dealers has become further blurred, as much of the recent marketing by broker-dealers focuses on the ongoing relationship between the broker and the investor and as brokers have adopted such titles as `financial advisor' and `financial manager.' ”
Moreover, focus group participants shed further light on this confusion when they “commented that the interchangeable titles and `we do it all' advertisements by broker-dealers made it difficult to discern broker-dealers from investment advisers.”
As discussed above, in light of significant intervening market developments and advances in technology, Chairman Clayton in 2017 invited input on, among other things, investor concerns about the current regulatory framework. Commenters highlighted the risk of harm to investors who obtain services from broker-dealers under the misimpression that they are receiving services protected by the fiduciary duty that applies to investment advisers.
For many years, the Commission has considered approaches for remedying investor confusion about the differing services and obligations of broker-dealers and investment advisers. In particular, in 2005 we considered addressing how investors perceive the differences between broker-dealers and investment advisers by proposing to proscribe the use of certain broker-dealer titles.
A broker-dealer can, and does, provide investment advice to retail investors without being regulated as an investment adviser, provided that such advice is “solely incidental to” its brokerage business and the broker-dealer receives no “special compensation” for the advice.
It is important for retail investors to better understand the distinction between investment advisers and broker-dealers and to have access to the information necessary to make an informed choice and avoid potential harm. Investor choices of firm type and financial professionals can, for example, affect the extent or type of services received, the amount and type of fees investors pay for such services, and the conflicts of interest associated with any such services. For example, if a retail investor prefers an advisory relationship with an active trading strategy, and he or she mistakenly retains a broker-dealer “financial adviser,” this investor potentially could incur more costs if he or she is placed in a brokerage account than he or she would have paid in an advisory account with an asset-based fee. Likewise, an investor could also be misled into believing that the broker-dealer is subject to a fiduciary standard that may not apply,
While we are proposing to require broker-dealers and investment advisers to provide retail investors with a relationship summary that would highlight certain features of an investment advisory or brokerage relationship, that information might be provided
We are proposing to restrict any broker or dealer, and any natural person who is an associated person of such broker or dealer, when communicating with a retail investor, from using as part of its name or title the words “adviser” or “advisor” unless such broker or dealer, is registered as an investment adviser under the Advisers Act or with a state, or any natural person who is an associated person of such broker or dealer is a supervised person of an investment adviser registered under section 203 of the Advisers Act or with a state and such person provides investment advice on behalf of such investment adviser.
In relevant part, the proposed rule would restrict a broker-dealer's or its associated natural persons' use of the term “adviser” or “advisor” as part of a name or title when communicating with a retail investor in particular circumstances.
We acknowledge that there may be titles other than “adviser” or “advisor” used by financial professionals that might confuse and thus potentially mislead investors. We considered whether we should restrict broker-dealers from using additional terms, such as, for example, “financial consultant.” Given this concern, we focused our proposal on the terms “adviser” or “advisor” because they are more closely related to the statutory term “investment adviser.” Thus, as compared to additional terms such as “financial consultant,” “adviser” and “advisor” are more likely to be associated with an investment adviser and its advisory activities rather than with a broker-dealer and its brokerage activities. Moreover, the term “investment adviser,” as compared to terms like “financial consultant,” is a defined term under the Advisers Act as 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.
Accordingly, we preliminarily do not believe these terms would cause retail investors to believe that their financial professional is an investment adviser when he or she is, in fact, a broker-dealer. We therefore preliminarily believe that restricting use of terms that are similar to “investment adviser” appropriately tailors the rule to terms that are likely to result in confusion or mislead retail investors about whether such broker-dealer is an investment adviser and thus a fiduciary.
As we discuss in more detail above, the proposed relationship summary is designed to provide clarity to retail investors regarding information about broker-dealers and investment advisers under a prescribed set of topics (
For instance, we preliminarily believe that restricting a broker-dealer or its associated natural persons from using “adviser” or “advisor” in a name or title would mitigate the risk that a retail investor would be misled into believing and expecting that his or her “financial advisor,”—who may solely provide brokerage services at a broker-dealer—is an
Similarly, a retail investor who engages a financial professional with the title “wealth advisor” who is associated solely with a broker-dealer entity would likely receive the broker-dealer's relationship summary, which focuses on the characteristics of the
We acknowledge that studies have demonstrated that many retail investors select financial professionals and firms based on personal referrals by family, friends, or colleagues.
The proposed rule would permit firms that are registered both as investment advisers (including state-registered investment advisers) and broker-dealers to use the term “adviser” or “advisor” in their name or title.
We are not proposing to apply the restriction to dually registered firms. We believe that it is inappropriate to restrict a dually registered firm from using a name or title that accurately describes its registration status. We recognize that under our proposed rule there might be occasions where a dually registered firm provides a particular retail investor only brokerage services, which could lead to some investor confusion.
At the firm level, we do not believe that the determination of when the restriction applies should be based on what capacity a dually registered firm is acting in a particular circumstance,
Dual hatted financial professionals of dually registered firms (including state-registered investment advisers) can provide brokerage services, advisory services, or both. We believe it is appropriate for financial professionals that provide services as an investment adviser to retail investors to be permitted to use names or titles which include “adviser” and “advisor,” even if, as a part of their business, they also provide brokerage services. As such, our proposed rule would not restrict, for example, a financial professional that is both a supervised person of an investment adviser and an associated person of a broker-dealer from using the term “adviser” or “advisor” in his or her name or title if such person provides investment advice to retail investors on behalf of the investment adviser.
By contrast, we recognize that some financial professionals of dually registered firms only provide brokerage services. We are concerned that if these financial professionals use “adviser” or “advisor” in their names or titles, retail investors may be misled about the nature of services they are receiving, and may incorrectly believe that such person would provide them investment advisory services rather than brokerage services. Therefore, we believe that a financial professional who does not provide investment advice to retail investors on behalf of the investment adviser,
We recognize that, as with dually registered firms, some dual hatted financial professionals may under some circumstances only offer brokerage services to a particular retail investor, which has the potential to cause confusion. For the same reasons discussed above regarding dually registered firms, however, we do not believe that the determination of when the restriction applies should be based on what capacity a dual hatted financial professional is acting in a particular circumstance,
Over the past decade, we and commenters have expressed concern about broker-dealer marketing efforts, including through the use of titles, and whether these efforts are consistent with a broker-dealer's reliance on the exclusion from the definition of investment adviser under section 202(a)(11)(C) of the Advisers Act.
Our concerns regarding broker-dealer marketing efforts are not new. For example, we have previously requested comment on whether we should preclude broker-dealers from relying on the solely incidental prong of the exclusion if they market their services
Taking into account our concerns and the views of commenters, we considered proposing a rule which would have stated that a broker-dealer that uses the term “adviser” or “advisor” as part of a name or title would not be considered to provide investment advice solely incidental to the conduct of its brokerage business and therefore would not be excluded from the definition of investment adviser under section 202(a)(11)(C) of the Advisers Act.
We also considered a broader approach that would have precluded a broker-dealer from relying on the solely incidental exclusion of section 202(a)(11)(C) if a broker-dealer “held itself out” as an investment adviser to retail investors.
We are not proposing any of these approaches however, because we preliminarily believe that a restriction on the use of “adviser” and “advisor” in names and titles in combination with the requirement to deliver a relationship summary would be a simpler, more administrable approach to address the confusion about the difference between investment advisers and broker-dealers, and to prevent investors from being potentially misled, compared to the alternatives presented above. While we acknowledge that there are other titles or marketing communications that may contribute to investor confusion or mislead investors, our proposal is tailored toward creating greater clarity with respect to the names and titles that are most closely related to the statutory term investment adviser. In particular, our proposed rule, in combination with the relationship summary, would help distinguish between who is and who is not an investment adviser and allow retail investors to select the business model that best suits their financial goals. The restriction of the use of the terms “adviser” and “advisor” that we are proposing is intended to augment protections provided to investors by applicable provisions of the federal securities laws. Broker-dealers and their natural associated persons can face liability for intentionally, recklessly, or negligently misleading investors about the nature of the services they are providing through, among other things, materially misleading advertisements or other communications that include statements or omissions, or deceptive practices or courses of business.
We request comment generally on our proposed restriction on the use of certain titles and in particular on the following issues:
• Given the required relationship summary, is it necessary to impose any restrictions on the use of names or titles?
• Do you agree with our proposed restriction on the use of “adviser” and “advisor”? Why or why not? To what extent does the disclosure provided in Form CRS complement our proposed
• Is our approach too broad or too narrow? Are there additional terms that we should explicitly include in the rule? For example, do any of the following names or titles have the potential to confuse investors about the differences between investment advisers and broker-dealers: Wealth manager; financial consultant; financial manager; money manager; investment manager; and investment consultant? Why or why not? What are the names or titles most commonly used that have the potential for investor confusion? Should we consider restricting the use of names, titles, or terms that are synonymous with “adviser” or “advisor” and if so, what would those names, titles, or terms be?
• Do commenters believe that names or titles are a main factor contributing to investor confusion and the potential for investors to be misled, or are there other more significant factors? For example, do particular services offered by broker-dealers contribute to, or primarily cause, investor confusion and the potential for the broker-dealer's customers to be misled into believing that the broker-dealer is an investment adviser? If so, which services specifically? For example, do commenters believe that retirement and financial planning is more often associated with investment advisers rather than broker-dealers or vice versa? Additionally, do commenters believe that monitoring is more often associated with investment advisers than broker-dealers or vice versa?
• Our proposed rule does not apply to financial professionals of a broker-dealer when acting in the capacity, for example, as an insurance broker on behalf of an insurance company or a banker on behalf of a bank. Do you believe our proposed rule is clear that such persons are excluded from the restriction? If not, how should we provide such clarification?
• As discussed above, our proposed rule would not prohibit dually registered firms from using the term “adviser” or “advisor” in their name or title. However, it would restrict the use of such names or titles by some associated natural persons and supervised persons of those firms, depending on whether they provide investment advice to retail investors on behalf of the investment adviser. Do you agree with our proposed approach? Is there investor confusion concerning what capacity a dually registered firm, a dual hatted financial professional, or an associated or supervised person of a dually registered firm is acting in when communicating with a retail investor? If such confusion exists, how should we address it, in addition to the proposed relationship summary? For example, are retail investors confused about which type of account their financial professional is referring to when he or she makes a particular recommendation? If this is a source of confusion, how should we address it (
• Given the prevalence of dually registered firms and their associated dual hatted financial professionals, do retail investors typically believe they are engaging a financial professional who is solely a broker-dealer or investment adviser, or do investors understand that such person is a dual hatted professional and therefore may be able to engage with them as a broker-dealer and an investment adviser? Or do retail investors currently not understand enough to distinguish among these options in any meaningful manner?
• Do commenters believe that retail investors will understand that there is, and will continue to be under proposed Regulation Best Interest, differences in the standards of conduct, compensation structures, and services offered (among other items) depending on the capacity in which such professional engages a retail investor?
• We are proposing to permit or restrict financial professionals associated with dually registered firms from using the term “adviser” or “advisor” in their name or title based on whether they provide investment advice on behalf of such investment advisers. Are there alternatives we should consider in implementing this portion of the rule? For example, should we only allow a supervised person to use such names or titles where “a substantial part of his or her business consists of rendering investment supervisory services” to retail investors, based upon a facts and circumstances determination?
• Our proposed rule would not prohibit dually registered firms or dually hatted financial professionals from using “adviser” or “advisor” in their names or titles, even in circumstances where the firm or financial professional provides only brokerage services to a particular retail investor. Do you agree with our approach? Why or why not? For example, should the proposed rule's application depend on the capacity in which a financial professional engages a particular retail investor? If so, should financial professionals use multiple titles that would vary based on the capacity in which they are acting, and what titles would they use? Are there compliance challenges associated with this approach? Conversely, would this discourage dually registered firms or dually hatted financial professionals from using any title with “adviser” or “advisor,” even when they are providing advisory services? Would this discourage dually hatted financial professionals from providing brokerage services? Would a firm use different names or titles for different subsets of their financial professionals?
• Do you agree that the use of the terms “adviser” or “advisor” by broker-dealers are the main sources of investor confusion? If so, what do these terms confuse investors about (
• We understand that the terms “adviser” or “advisor” are included in some professional designations earned by financial professionals.
• Do you agree with the proposed approach in Exchange Act proposed rules 15l-2 and 15l-3 and Advisers Act proposed rule 211h-1 of limiting our proposed rules to “retail investors” where such persons are defined to include all natural persons as discussed above?
• Should we conform the definition of retail investor to the definition of retail customer as proposed in Regulation Best Interest, which would include non-natural persons, provided the recommendation is primarily for personal, family, or household purposes? What kind of compliance burdens would it create to base Form CRS delivery off of a definition of retail investor that only included recommendations primarily for personal, family, or household purposes? Should the definition of retail investor include trusts or similar entities that represent natural persons, as proposed? Are there other persons or entities that should be covered? Should we expand the definition to cover plan participants in workplace retirement plans who receive services from a broker-dealer or investment adviser for their individual accounts within a plan?
• What costs would broker-dealers impacted by our proposed rule incur as a result of having to rebrand themselves and their financial professionals along with revising their communications? Are there means to mitigate such costs? Would the costs differ if we made the broker-dealer exclusion in the Advisers Act unavailable to broker-dealers that use the terms “adviser” or “advisor”?
• How would broker-dealers and associated natural persons of broker-dealers who would be impacted by our proposed rule change the way they market themselves or communicate with retail investors as a result of our proposed rule? Would this cause any other changes to their business? For example, would more broker-dealer firms also register with the Commission or the states as investment advisers as a result of our proposed rule? Will firms exit the brokerage business as a result of our proposed rule? Would more associated natural persons of broker-dealers become dual hatted?
• Would our proposed rule impact the marketing and communications of dually registered firms and their professionals in any manner? If so, how?
• Do investment advisers and their supervised persons also use names, titles, or professional designations that can lead or contribute to retail investor confusion? If so, please provide examples of these names or titles and how they can lead or contribute to confusion. Should we restrict investment advisers and their supervised persons from using these names or titles?
• What costs would our proposed restriction on certain names and titles impose? Are there greater or lower costs associated with our proposed rules as compared to alternative approaches that consider whether certain titles or marketing practices are consistent with advice being “solely incidental” to the firm's brokerage activities and thus permissible for a firm relying on the broker-dealer exclusion from the Advisers Act? If so, what are the specific cost estimates of each approach and the components of those estimates? Are there ways to mitigate their impact and if so, what methods could be taken? Are there operational and compliance challenges associated with our proposed approach as compared to the alternatives approaches, and if so, what are they?
• We request comment on the alternative approach in which a broker-dealer would not be considered to provide investment advice solely incidental to the conduct of its brokerage business if it uses the term “adviser” or “advisor” to market or promote its services and would instead treat such practices as indicating that the broker-dealer's advisory services are not “solely incidental” to its conduct of business as a broker-dealer. What would be the advantages or disadvantages of using this approach instead of the approach we have proposed? Would the alternative approach address and mitigate investor confusion about the differences between broker-dealers and investment advisers? Would the alternative approach reduce the likelihood that investors may be misled as to the type of firm they are engaging with and therefore make an uninformed decision? Would the alternative approach have other effects on the analysis of when advisory activities are or are not solely incidental to brokerage activities? How would this alternative approach impact dually registered firms and dual hatted financial professionals? Are there operational and compliance challenges associated with this approach, and if so, what are they? How would broker-dealers and associated natural persons of broker-dealers impacted by the alternative approach change the way they market themselves or communicate with retail investors as a result of our proposed rule? Would this cause any other changes to their business?
• Would the alternative approach discussed above that would preclude a broker-dealer or an associated natural person of a broker-dealer from relying on the broker-dealer exclusion of section 202(a)(11)(C) of the Advisers Act if it “held itself out” as an investment adviser address investor confusion? What would be the advantages or disadvantages of using this approach instead of the approach we have proposed? Which communications or level of advice do you think imply that a broker-dealer or its associated natural person is “holding out” as an investment adviser? How would an approach that focuses on “holding out” as an investment adviser impact access to advice from different kinds of firms, and how retail investors pay for this advice? How would this approach affect competition? Would this “holding out” approach address any confusion that may arise from broker-dealer marketing efforts focusing on the ongoing relationship between the broker and the investor? Are there operational and compliance challenges associated with this approach, and if so, what are they?
• Instead of a prohibition or restriction on the use of certain terms, should we permit such terms but require broker-dealers and their associated natural persons other than dual registrants and dual hatted financial professionals to include a disclaimer in their communications that they are
• We recognize that the term “adviser” is used differently in connection with the regulation of investment advisory services provided to workplace retirement plans and IRAs under ERISA and the prohibited transaction provisions of the Internal Revenue Code. For example, a statutory exemption for the provision of investment advice to participants of ERISA-covered workplace retirement plans and IRAs, and related DOL regulations, define the term “fiduciary adviser” broadly to include a variety of persons acting in a fiduciary capacity in providing investment advice, including investment advisers registered under the Advisers Act or under state laws, registered broker-dealers, banks or similar financial institutions providing advice through a trust department, and insurance companies, and their affiliates, employees and other agents.
• What would be the effect on competition by prohibiting broker-dealers from using these terms? What would be the effect on competition by the alternative approaches described?
We are also proposing rules under the Exchange Act and the Advisers Act to require a broker-dealer and an investment adviser registered under section 203 to prominently disclose that it is registered as a broker-dealer or investment adviser, as applicable, with the Commission in print or electronic retail investor communications.
Our proposed registration disclosure rules, like the proposed restriction on names and titles, or our proposed alternative approaches, complement our proposed requirement that broker-dealers and investment advisers deliver a relationship summary to retail investors. Even if a firm uses various titles, such as “wealth consultant” or “wealth manager,” the legal term for these firms is “investment adviser” and/or “broker-dealer.” These statutory terms have meaning because they relate to a particular regulatory framework that is designed to address the nature and scope of the firm's activities, which the firm would describe for a retail investor in the relationship summary.
For similar reasons, we preliminarily believe that because retail investors interact with a firm primarily through financial professionals, it is important that financial professionals disclose the firm type with which they are associated. We acknowledge that in the studies and the comments received, retail investors generally believe broker-dealers and investment advisers are similar, and that they did not understand differences between them.
Similarly, our proposed rules to require a firm to disclose whether it is a broker-dealer or an investment adviser in print or electronic communications to retail investors would help to facilitate investor understanding, even if investors currently may not understand the differences between investment advisers and broker-dealers.
We believe that disclosures that are as important as whether a firm is a broker-dealer or an investment adviser or whether a financial professional is associated with a broker-dealer or is a supervised person of an investment adviser, should not be inconspicuous or placed in fine print. Accordingly, we are proposing to require a firm and its financial professionals to disclose their registration statuses in print communications in a type size at least as large as and of a font style different from, but at least as prominent as, that used in the majority of the communication.
We request comment generally on our proposed requirement to disclose a firm's regulatory status and, for financial professionals, their association with such firm, and in particular on the following issues:
• Does our proposed rule requiring disclosure of a firm's registration status, either alone or in combination with the proposed relationship summary, sufficiently address the concerns addressed by our proposed restriction on certain names or titles? If not, why not?
• Would the proposed rules requiring disclosure of registration status and the financial professional's association with the firm give retail investors greater clarity about various aspects of their relationship with a financial professional (
• To what extent do firms already clearly and conspicuously disclose their federal and/or state registration as investment advisers or broker-dealers? To what extent do financial professionals already disclose their association with the broker-dealer or investment adviser? If such status is disclosed, is it typically in fine print or presented in a manner that it is not easily recognizable to investors?
• Do retail investors understand what it means for a firm to be “registered” with the Commission or a state? Additionally, do retail investors understand what it means for a financial professional to be an “associated person” of a broker-dealer or a “supervised person” of an investment adviser?
• Would our proposed rules improve clarity and consistency for investors in identifying a firm's regulatory status and a financial professional's association with a firm or will it lead to unnecessary, wordy, and possibly redundant disclosure? If the latter, how can we address this?
• Are we correct that investors would find it helpful to know whether a firm is registered as an investment adviser or a broker-dealer or a financial professional is associated with a broker-dealer or supervised by an investment adviser so that they can refer to the relationship summary to better understand the practical implications of the firm's registration and such financial professional's association with that firm?
• Should dually registered firms be required to disclose both registration statuses? Would this requirement cause more confusion or help to address it? If so, how? By requiring a financial professional to disclose whether he or she is an associated person of a broker-dealer or a supervised person of an investment adviser, would we be assisting retail investors in understanding the capacity in which their financial professional services them? For example, would retail investors serviced by dual hatted financial professionals understand that their financial professional may act in dual capacities (
• Are our proposed requirements prescribing the presentation of the disclosure appropriate? Should we consider removing any of these requirements? Alternatively, are there requirements we should add? If so, which requirements and why? Are there requirements that we should modify? For example, could the Commission's objective of ensuring prominence of disclosure be served through a more principles-based approach, or through different requirements (
• Should the account statement or other disclosure clarify whether a retail investor has an advisory or a brokerage account? If so, how?
• Should our proposed rules define “communication”? For example, should we include in the rule a definition that tracks FINRA's definition of “communication” in Rule 2210? In particular, FINRA Rule 2210 defines a “communication” as correspondence, retail communications and institutional communications. “Correspondence” means any written (including electronic) communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar day period and “Retail communication” means any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar day period. Finally, “Institutional communication” means any written (including electronic) communication that is distributed or made available only to institutional investors, but does not include a member's internal communications. Are there other definitions of “communication” we should consider? As an alternative to the word
• Should the proposed rules apply to all communications to retail investors, including oral communications? On the other hand, are there certain types of written communications that could be exempted,
• Should we permit the use of hyperlinks to the registration status disclosure statement for electronic communications rather than requiring the disclosure statement on the communication itself? Would permitting hyperlinks limit or promote the effectiveness of this disclosure requirement, and if so, how?
• Should we require broker-dealers, investment advisers and financial professionals to state that registration with the Commission does not imply a certain level of skill or training? Are there potential benefits or drawbacks to requiring this type of statement?
We are sensitive to the economic effects, including the costs and benefits that stem from the proposed rules. Whenever the Commission engages in rulemaking and is required to consider or determine whether an action is necessary or appropriate in the public interest, section 3(f) of the Exchange Act requires the Commission to consider whether the action would promote efficiency, competition, and capital formation, in addition to the protection of investors.
Section 202(c) of the Advisers Act requires the Commission, when engaging in rulemaking and required to consider or determine whether an action is necessary or appropriate in the public interest, also to consider whether the action will promote efficiency, competition, and capital formation, in addition to the protection of investors.
In the economic analysis that follows, we first examine the current regulatory and economic landscape to form a baseline for our analysis. We then analyze the likely economic effects—including benefits and costs and impact on efficiency, competition, and capital formation—arising from the proposed rules relative to the baseline discussed below.
This section discusses, as it relates to this proposal, the current state of the broker-dealer and investment adviser markets, the current regulatory environment, and the current state of retail investor perceptions in the market.
As noted above, one market that would be affected by these proposed rules
As of December 2017, there were approximately 3,841 registered broker-dealers with over 130 million customer accounts. In total, these broker-dealers have close to $4 trillion in total assets.
Panel B of Table 1 limits the broker-dealers to those that report some retail investor activity. As of December 2017, there were approximately 2,857 broker-dealers that served retail investors, with over $3.6 trillion in assets (90% of total broker-dealer assets) and 128 million (96%) customer accounts.
Table 2 reports information on brokerage commissions,
In addition to revenue generated from commissions and fees, broker-dealers may also receive revenues from other sources, including margin interest, underwriting, research services, and third-party selling concessions, such as from sales of investment company (“IC”) shares. As shown in Table 2, Panel A, these selling concessions are generally a smaller fraction of broker-dealer revenues than either commissions or fees, except for broker-dealers with total assets between $10 million and $100 million. For these broker-dealers, revenue from third-party selling concessions is the largest category of revenues and constitutes approximately 44% of total revenues earned by these firms.
Table 2, Panel B, below provides aggregate revenues by revenue type (commissions, fees, or selling concessions) for broker-dealers delineated by whether the broker-dealer is also a dual registrant. Broker-dealers dually registered as investment advisers have a significantly larger fraction of their revenues from fees compared to commissions or selling concessions, whereas broker-dealers that are not dually registered generated approximately 43% of their advice-related revenues as commissions and only 32% of their advice-related revenues from fees, although we lack granularity to determine whether advisory services, in addition to supervision and administrative services, contribute to fees at standalone broker-dealers.
Broker-dealers register with and report information to the Commission, the SROs, and other jurisdictions through Form BD. Form BD requires information about the background of the applicant, its principals, controlling persons, and employees, as well as information about the type of business the broker-dealer proposes to engage in and all control affiliates engaged in the securities or investment advisory business.
A significant amount of information concerning broker-dealers and their associated natural persons, including information from Form BD, Form BDW, and Forms U4, U5, and U6, is publicly available through FINRA's BrokerCheck system. This information includes violations of and claims of violations of the securities and other financial laws by broker-dealers and their financial professionals; criminal or civil litigation, regulatory actions, arbitration, or customer complaints against broker-dealers and their financial professionals; and the employment history and licensing information of financial professionals associated with broker-dealers, among other things.
Broker-dealers are subject to other disclosure requirements under the federal securities laws and SRO rules. For instance, under existing antifraud provisions of the Exchange Act, a broker-dealer has a duty to disclose material information to its customers conditional on the scope of the relationship with the customer.
Other parties that would be affected by the proposed rules and proposed Form CRS are SEC-registered investment advisers.
As of December 2017, there are approximately 12,700 investment advisers registered with the Commission. The majority of SEC-registered investment advisers report that they provide portfolio management services for individuals and small businesses.
Of all SEC-registered investment advisers, 366 identified themselves as dually registered broker-dealers.
Based on staff analysis of Form ADV data, approximately 60% of investment advisers (7,600) have some portion of their business dedicated to retail investors, including both high net worth and non-high net worth individual clients, as shown in Panel B of Table 3.
As an alternative to registering with the Commission, smaller investment advisers could register with state regulators.
Approximately 77% of state-registered investment advisers (13,470) have some portion of their business dedicated to retail investors,
Table 4 details the compensation structures employed by approximately 12,700 investment advisers. Approximately 95% are compensated through a fee-based arrangement, where a percentage of assets under management are remitted to the investment adviser from the investor for advisory services. As shown in the table below, most investment advisers rely on a combination of different compensation types, beyond fee-based compensation, including fixed fees, hourly charges, and performance based fees. Less than 4% of investment advisers charge commissions
As discussed above, many investment advisers participate in wrap fee programs. As of December 31, 2017, more than 5% of the SEC-registered investment advisers sponsor a wrap fee program and more than 9% act as a portfolio manager for one or more wrap fee programs.
As fiduciaries, investment advisers have a duty to provide full and fair disclosure of material facts and are subject to express disclosure requirements in Form ADV.
As noted, firms and financial professionals providing services to customers in retirement accounts, including workplace retirement plans and IRAs, are subject to certain disclosure obligations under rules and exemptions issued by the DOL under ERISA and the prohibited transaction provisions of the Code.
More recently, the DOL's BIC Exemption would require that firms seeking to rely on the exemption to receive commissions and other fees in connection with making investment recommendations to IRAs and participants of ERISA-covered plans (including advice relating to rollovers from plans or between account types)
The Commission does not currently have data on the number of firms that are subject to disclosure obligations under applicable DOL rules and exemptions.
Over time, the relative number of broker-dealers and investment advisers has changed. Figure 1 presented below shows the time series trend of growth in broker-dealers and investment advisers between 2005 and 2017. Over the last 13 years, the number of broker-dealers has declined from over 6,000 in 2005 to less than 4,000 in 2017, while the number of investment advisers has increased from approximately 9,000 in 2005 to over 12,000 in 2017. This change in the relative numbers of broker-dealers and investment advisers over time likely affects the competition for advice, and potentially alters the choices available to investors on how to receive or pay for such advice, the nature of the advice, and the attendant conflicts of interest.
Increases in the number of investment advisers and decreases in the number of broker-dealers could have occurred for a number of reasons, including anticipation of possible regulatory changes to the industry, other regulatory restrictions, technological innovation (
Further, there has been a substantial increase in the number of retail clients at investment advisers, both high net worth clients and non-high net worth clients as shown in Figure 2. Although the number of non-high net worth retail customers of investment advisers dipped between 2010 and 2012, since 2012, more than 12 million new non-
We estimate the number of associated natural persons of broker-dealers through data obtained from Form U4, which generally is filed for individuals who are engaged in the securities or investment banking business of a broker-dealer that is a member of a self-regulatory organization (“registered
We estimate the number of registered representatives and registered IARs (together “registered financial professionals”) at broker-dealers, investment advisers, and dual registrants by considering only the employees of those firms that have Series 6 or Series 7 licenses or are registered with a state as a broker-dealer agent or investment adviser representative.
In Table 6 below, we estimate the number of employees who are registered representatives, registered investment adviser representatives, or both (“dual-hatted representatives”).
In Table 6, approximately 24% of registered employees at registered broker-dealers or investment advisers are dual-hatted representatives. However, this proportion varies significantly across size categories. For example, for firms with total assets between $1 billion and $50 billion,
Approximately
With respect to disclosure made about licensed individuals, broker-dealers and investment advisers must report certain criminal, regulatory, and civil actions and complaint information and information about certain financial matters in Forms U4
Although many financial services firms are registered as broker-dealers, investment advisers, or are dually registered, both firms and financial professionals use a variety of terms to label both the firm and the professional. Approximately 103 broker-dealers that are not dually registered as investment advisers use the term “adviser,” “advisor,” or “advisory” as part of their current company name.
In addition to company names or professional titles, firms are likely to use labels or terms other than their formal company names to describe themselves in corporate descriptions, marketing material, or other communications with the public. To gauge the extent that registered broker-dealers and investment advisers use terms other than their registration status as descriptors, Commission staff conducted an analysis to evaluate the different terms that broker-dealer, investment adviser, and dually-registered firms use to describe themselves.
As shown below in Panel A of Table 7, over 50% of broker-dealers sampled use the term “broker,” “dealer,” “broker-dealer,” or “brokerage” to
Regarding the use of titles by individual financial professionals, a 2008 RAND Study,
Investors seek financial advice and services to achieve a number of different goals, such as saving for retirement or children's college education. As shown above in Figures 2 and 3, the number of retail investors and their assets under management associated with investment advisers has increased significantly, particularly since 2012. As of December 2016, nearly $24.2 trillion is invested in retirement accounts, of which $7.5 trillion is in IRAs.
One question in the SCF asks what sources of information households' financial decision-makers use when making decisions about savings and investments. Respondents can list up to fifteen possible sources from a preset list that includes “Broker” or “Financial Planner” as well as “Banker,” “Lawyer,” “Accountant,” and a list of non-professional sources.
Panel B of Table 10 below presents the breakdown of advice received for households who have an IRA. 15% (5.7 million households) relied on advice services of their broker-dealers, 48% (18.3 million households) obtained advice from financial planners. Approximately 41% (15.5 million households) sought advice from bankers, accountants, or lawyers, while the 25% (9.5 million households) used no advice or sought advice from other sources.
Although many retail investors rely on broker-dealers and investment advisers to help them achieve financial goals, evidence indicates that many retail investors do not understand, or are confused by, among other items, the different standards of conduct applicable to broker-dealers and investment advisers, and are also confused and potentially misled by the titles used by firms and financial professionals. In the subsections below, we review in greater detail five aspects of investor perceptions with respect to: (1) How investors search for financial professionals and firms and; (2) the nature of the relationship with their financial professional (investment adviser or broker-dealer) and the meaning of company names and professional titles; (3) the structure and level of fees in the industry; (4) the existing conflicts of interest; (5) and the disciplinary history of the financial professional or firm.
A number of surveys show that retail investors predominantly find their current financial firm or financial professional from personal referrals by family, friends, or colleagues.
The 917 Financial Literacy Study provides similar responses, although it allowed survey respondents to identify multiple sources from which they obtained information that facilitated the selection of the current financial firm or financial professional.
Comment letters as well as several studies provide us with information about retail investor confusion about the distinctions among different types firms and financial professionals. Several
Further findings of investor confusion about the roles and titles of financial professionals comes from studies conducted by Siegel & Gale
Similarly, the RAND Study generally concluded that investors did not understand the differences between broker-dealers and investment advisers and that common job titles contributed to investor confusion.
Similar to the Siegel and Gale Study and the RAND Study, the CFA Survey concluded that investors do not understand differences between broker-dealers and investment advisers, or the standards of conduct that apply to advice or recommendations made by these firms. For example, approximately 34% of investors surveyed believed that “offering advice” was a primary service of broker-dealers.
The 917 Financial Literacy Study showed that, prior to engaging an investment adviser,
In 2015, FINRA conducted an “Investor Survey” which included questions about investors' understanding of fees charged for investment services.
Academic evidence also indicates that retail investors exhibit limited understanding of the fees and commissions of financial products. Several academic studies show that even when disclosures are provided to investors, investors experience difficulty in accounting for and understanding how fees affect their financial choices.
Studies have found that investors consider conflicts of interest to be an important factor in the market for financial advice. For example, in the 917 Financial Literacy Study,
Approximately 70% of the participants in the 917 Financial Literacy Study indicated that they would read disclosures on conflicts of interest if made available, with 48% requesting additional information from their adviser, 41% increasing the monitoring of their adviser, and 33% proposing to limit their exposure of specific conflicts. The majority of investors (70%) also wanted to see specific examples of conflicts and how those related to the investment advice provided. Academic research also suggests that information about conflicts of interest could improve individual decisions.
Survey evidence indicates that knowledge of a firm's and financial professional's disciplinary history is among the most important items for retail investors deciding whether to receive financial services from a particular firm, according to one study.
We are proposing to require broker-dealers, investment advisers, and firms that are dually registered to deliver a relationship summary to retail investors.
Disclosure requirements provide benefits to participants in financial markets because disclosing parties may lack private incentives to voluntarily disclose or standardize relevant information.
Although the majority of the information proposed for Form CRS may be publicly available in a number of existing regulatory forms and platforms, including, for example, Form ADV (and IAPD) or BrokerCheck, or may be included in disclosures developed to meet disclosure requirements under DOL regulations or exemptions, such as the BIC Exemption, the Commission preliminary believes that all retail investors would benefit from short summary disclosure that focuses on certain aspects of a firm and its services to retail investors which could be supplemented by additional disclosure. Like other public-facing disclosures, the objective of Form CRS would be to provide relevant and reliable information to investors. The relationship summary would apply to a broad array of relationships, spanning different firms as well as both retirement and non-retirement accounts.
Given that most of the information provided by Form CRS would already have been made available by investment advisers through other regulatory disclosures, and by some broker-dealers through contracts or other voluntary disclosures, the focus of this economic analysis is on the effects of the format and structure of the proposed Form CRS disclosures. Studies have found that the format and structure of disclosure may improve (or decrease) investor understanding of the disclosures being made.
Before elaborating on the characteristics of an effective disclosure regime, we note that some studies undertaken outside the market for financial services find that sometimes certain disclosures may result in unintended consequences. In general, the structure of the disclosure may affect the choices that investors make. Every disclosed item not only presents a piece of new information to retail investors but also provides a frame within which all other items are evaluated.
Existing research has also found that conflict of interest disclosures can increase the likelihood that the disclosing party would act on the conflict of interest.
Academic research has identified a set of characteristics, including targeted and simple disclosures, salience, and standardization, that may increase the effectiveness of a disclosure regime. Adhering to these characteristics is expected to increase the benefits of a disclosure document to consumers. These characteristics, discussed below, frame our analysis of the economic impacts of the proposed rule.
First, existing research demonstrates that individuals exhibit limited ability to absorb and process information.
A second characteristic of an effective disclosure is salience, or the tendency to `stand out' or contrast with other information on a page. Salience detection is a key feature of the human cognition allowing individuals to focus their limited mental resources on a subset of the available information and causing them to over-weight this information in their decision making processes.
A third characteristic of effective disclosure is standardization. People are generally able to make more coherent and rational decisions when they have comparative information that allows them to assess relevant trade-offs.
Finally, personalization may further enhance the effectiveness of disclosure.
Current reporting and disclosure requirements for broker-dealers and registered investment advisers including Form BD and Form ADV may provide detailed information to investors. However, because these existing reports and disclosures (which serve the purposes for which they were created) are made in multiple, sometimes lengthy forms, and made available at different websites or delivery methods, it can be difficult for investors to grasp the most important features of the financial services and products they receive. In addition, the information available to retail investors about broker-dealers on BrokerCheck does not include the same information that investment advisers provide in the Form ADV brochure and brochure supplement. The relatively low financial literacy of many investors also makes it less likely that they would be able to effectively compile this information on their own and use it in their decision making. Furthermore, most financial firms and professionals could lack the incentives and resources to disclose the main aspects of their business practices to their customers in the absence of the proposed requirements.
In evaluating the broad economic issues related to disclosure, the Commission preliminarily believes that all retail investors would benefit from a short summary that focuses on certain aspects of the firm and its financial professionals and its services. By requiring both investment advisers and broker-dealers to provide a concise relationship summary that discusses both types of services and their differences, the relationship summary would help all retail investors to understand these aspects of a particular firm, to compare different types of accounts, and to compare one firm with other firms. The relationship summary would also highlight, in one place, the services, some categories of fees, specified conflicts of interest, and whether the firm or its financial professionals currently have reportable disciplinary events.
This section analyzes the anticipated economic effects from the proposed relationship summary to the directly affected parties: retail investors, and broker-dealers and investment advisers that offer brokerage or advisory services to retail investors.
As noted above, substantial evidence suggests that retail investors lack financial literacy and do not understand many basic financial concepts, such as the implications of investment costs for investment performance.
The content of the proposed relationship summary is intended to alert retail investors to information that would help them to choose a firm or a financial professional and prompt retail investors to ask informed questions. It is also intended to facilitate comparisons across firms that offer the same or substantially similar services. Specifically, the relationship summary would provide information on the relationships and services offered by investment advisers and broker-dealers, the standards of conduct applicable to those services, certain categories of fees and costs of the services offered, comparisons of brokerage and investment advisory services (for standalone broker-dealers and investment advisers),
The structure of the relationship summary is designed to facilitate retail investors' absorption of the provided information. The proposed design intentionally restricts the length of the relationship summary, whether in electronic or paper format, to four pages on 8
In addition, firms would be required to use short sentences, active voice, and plain language throughout the relationship summary. Firms would not be permitted to use legal jargon, highly technical business terms, or multiple negatives. Existing research also shows that visualization helps individuals absorb information more efficiently.
Moreover, the disclosure would involve a certain degree of standardization across firms. In particular, firms would be required to use the same headings, prescribed wording, and present the information under the headings in the same order.
The proposed Introduction of the relationship summary would highlight to retail investors the type of accounts and services the firm offers to retail investors, and the firm's SEC registration status. In addition, the introduction would require prescribed wording stating there are different ways for investors to get help with their investments, and that they should carefully consider what type of account and services would be right for them and that there are suggested questions at the end of the disclosure. An introduction designed in this manner may benefit retail investors by clarifying that there are choices available in terms of accounts and services and that the some services, firms, or financial professionals may be a better fit than others for the investor. This in turn may trigger a closer read of the relationship summary and perhaps also additional information gathering by the investor that could lead to a more informed choice of financial professional and better fit between the investor's need and the type of accounts and services they use.
In the second section of the relationship summary, firms would discuss specific information about the nature, scope, and duration of its relationships and services, including the types of accounts and services the firm offers, how often it offers investment advice, and whether the firm monitors
The third section of the relationship summary briefly describes in plain language the firm's legal standard of conduct. As noted above, studies show that many retail investors are confused about the standard of conduct that applies to firms and financial professionals,
Investor understanding of the obligations of their firms and financial professionals with respect to each type of account could help investors align their expectations with the expected conduct of their firm or financial professional. For example, depending on their preferences, some investors might find an advisory account more appropriate. Other investors could prefer the services and standards of conduct associated with a brokerage account. Thus, to the extent the proposed disclosure of obligations in the relationship summary increase investors understanding in this area, it may improve the match between investors' preferences and expectations and the type of accounts and services they select while preserving investor choice.
The Commission is also proposing that firms include an overview of specified types of fees and expenses that retail investors will pay in connection with their brokerage and investment advisory accounts.
The Commission is also proposing to require standalone investment advisers and standalone broker-dealers to provide comparisons to the other type of firm. Standalone broker-dealers would include information about the following: (i) The primary types of fees that investment advisers charge; (ii) services generally provided by investment advisers, (iii) advisers' standard of conduct; and (iv) certain incentives advisers have based on the investment adviser's asset-based fee structure. For investment advisers, this section would include parallel categories of information regarding broker-dealers.
The choice between a brokerage account and an advisory account in part may determine the types of fees and costs and standard of conduct associated with the account. Retail investors who are provided with more information would be more likely to match their choice of the type of account with their expectations; if retail investors do not understand the differences between of broker-dealers and investment advisers, they are less likely to be able to match their expectations for financial services providers with their choices. Thus, the Commission preliminary believes that having a clear explanation of differences in the fees, scope of services, standard of conduct, and incentives that are generally relevant to advisory and brokerage accounts may help retail investors who are considering one such type of relationship to compare how their preferences and expectations might be better met with the other type of relationship.
The Commission is also proposing that firms summarize their conflicts of interest related to certain financial incentives. Specifically, firms would be required to disclose conflicts relating to: (i) Financial incentives to offer to, or recommend that the retail investor invest in, certain investments because (a) such products are issued, sponsored, or managed by the firm or its affiliates, (b) third parties compensate the firm when it recommends or sells the investments, or (c) both; (ii) financial incentives to offer to, or to recommend that the retail investor invest in, certain investments because the manager or sponsor of those investments or another third party (such as an intermediary) shares revenue it earns on those products with the firm; and (iii) the firm buying investments from and selling investments to a retail investor from the firm's account (
The first category of conflicts noted above makes the promotion of own and third party products more salient for retail investors. The possibility that an investor may request an explanation of a transaction regarding a recommended investment or strategy, and associated costs thereof, could serve as an additional disciplinary device for firms and financial professionals and align better their interests with the interests of retail investors. Similarly, the disclosures in the relationship summary about revenue sharing arrangements may induce retail investors to more carefully pay attention to investments with such arrangements and request further information. Principal trading could also make retail investors vulnerable to transactions that transfer value from their accounts to the accounts of the firm, and so the disclosure of principal trading information could draw retail investors' attention to possible conflicts that could emerge from principal transactions and generate increased scrutiny of such transactions by investors.
While the Commission preliminarily believes that disclosures of conflicts of
To facilitate the layered disclosure that the relationship summary provides, we are proposing to require that firms include a separate section (“Additional Information”) in the relationship summary outlining where retail investors can find more information about the firm's legal and disciplinary events, services, fees, and conflicts.
Retail investors may benefit from information on where to find disclosures of the disciplinary events of firms and financial professionals. For some retail investors, the disciplinary history of the firm or the financial professional may affect their choices related to obtaining investment advice. By providing information on whether the firm or financial professionals have disciplinary history and where to obtain more detailed information through layered disclosure may facilitate retail investors' ability to match their expectations with their choice of financial service provider. The required disclosure would succinctly state whether or not the firm or its financial professionals have legal and disciplinary events, based on whether or not they or their financial professionals currently disclose or are currently required to disclose certain legal or disciplinary events to the Commission, self-regulatory organizations, state securities regulators or other jurisdictions, as applicable. The Additional Information section would also highlight where retail investors can find more information about the disciplinary history of the firm and its financial professionals on “
Further, by drawing attention to disciplinary histories of financial professionals for retail investors, firms could become more selective in their employment decisions, which could benefit retail investors by having a potentially more trustworthy pool of financial professionals to select from when they choose providers of investment advice, and reduce potential harm to retail investors. As such, the overall quality of financial advice provided to retail investors could increase, to the extent that legal and regulatory compliance is correlated with advice quality.
One potential cost of the increased salience of the existence of disciplinary events may be that retail investors could
This section would also include disclosure of how investors can contact the firm, the SEC, or FINRA (when applicable) if they have problems with their investments, investment accounts, or financial professionals. Highlighting this information may encourage more outreach by investors when they experience such problems, which may increase the likelihood of investors seeking resolution of their or the firm's problems. Further, to the extent investors' awareness of how to report problems is increased, it may have some incremental disciplining effect
Finally, this section would state where to find more information about the firm and its financial professionals. Broker-dealers would be required to direct retail investors to additional information about their brokers and services on BrokerCheck, their firm websites (if they have a website; if not, they would state where retail investors can find up-to-date information), and the retail investor's account agreement. Investment advisers likewise would be required to direct retail investors to additional information in the firm's Form ADV Part 2 brochure and any brochure supplement provided by a financial professional to the retail investor. If an adviser has a public website and maintains a current version of its firm brochure on the website, the firm would be required to provide the website address (if an adviser does not have a public website or does not maintain its current brochure on its public website, then the adviser would provide the IAPD website address). Making these links to websites available could be important given that low levels of financial literacy could make it less likely that investors would effectively compile information on their own to use in decision making.
The proposed relationship summary is expected to benefit retail investors either directly, by providing information about the corresponding firm and financial professional, or indirectly, by encouraging investors to acquire additional information. The relationship summary would also include suggested key questions to encourage retail investors to have conversations with their financial professionals about how the firm's services, fees, conflicts, and disciplinary events affect them.
Under the “Key Questions To Ask” heading, firms would be required to include ten questions,
The proposed list of questions in the relationship summary may alter the actions not only of retail investors but also of firms and their financial professionals. In anticipation of having to answer these key questions, firms may find it in their self-interest to train their staff and develop materials that could help them address the question in greater detail. Such a voluntary response by firms would likely benefit investors to the extent the answers given to the questions may become more informative and more accurate. However, some firms may develop standardized answers in anticipation of the key questions that become less informative to the retail investor than a back and forth conversation.
We believe the proposed set of questions cover a broad range of issues that are likely to be important to retail investors and provide benefits, such as a platform from which to begin a dialogue with their financial professional. However, potential costs may arise for some retail investors. One such potential cost of the proposed questions is that they may anchor the attention of retail investors to the list and reduce the likelihood that they would explore other potential questions that could be important to them based on their unique circumstances.
As indicated in the 917 Financial Literacy Study, retail investors consider the proposed disclosures in the relationship summary to be important pieces of information. With respect to content, disclosure items identified as absolutely essential for retail investors were: Adviser's fees (76%), disciplinary history (67%), adviser's conflicts of interest (53%), and adviser's methodology in providing advice (51%). Approximately 54% of investors also believe that disclosures that provided comparative adviser information would be useful. In light of this evidence, the Commission preliminarily believes the disclosure would provide valuable information to retail investors and potentially encourage further information gathering by retail investors that assist them in making an informed choice of what type of account matches their preferences and expectations.
By providing specified disclosures in an abbreviated and simplified format, the proposed relationship summary could also improve the effectiveness of the communication between investors and investment advisers or broker-dealers. A more effective communication may enable retail investors to more quickly reach an understanding of what type of firm and financial professional or type of account offered by the broker-dealer or the investment adviser best matches their preferences. As a result, search costs may be reduced as retail investors may need to contact fewer broker-dealers or investment advisers and financial professionals given that they have access to information about those firms or financial professionals.
The Commission preliminarily believes that the proposed relationship summary could benefit not only the existing and prospective customers and clients of broker-dealers and investment advisers but also the public more broadly. First, recipients of the relationship summary, to the extent they discuss investing in general, may discuss the topics covered in the summary with family and friends and in the process increase the degree of public awareness about the issues discussed in the disclosure. Second, some prospective retail investors could access the relationship summary independently through the company website or the Commission's website.
The proposed relationship summary may also impose some additional costs on retail investors. As described more fully in the section that follows, brokers-dealers and investment advisers will bear compliance costs associated with the production and dissemination of the relationship summary. As a result of such increased costs, some firms or financial professionals may transfer retail investors from potentially lower cost transaction-based accounts to higher cost asset-based fee advisory accounts, if the firm or the financial professional is dually registered.
In addition to these compliance burdens which may indirectly be borne by retail investors, the disclosures themselves may impose certain indirect costs on retail investors. For example, since the proposed disclosures in the relationship summary are general and contain prescribed language in many parts, they could steer retail investor attention away from some specific and potentially important characteristics of the business practices of the firm or the financial professional. This potential cost is likely to be mitigated to the extent the required Additional Information section employs layered disclosure and the Key Questions encourage more personalized information gathering on part of the retail investors.
The proposed disclosure requirements would impose direct costs on broker-dealers and investment advisers, including costs associated with delivery, filing, preparation, and firm-wide implementation of the relationship summary, as well as training and monitoring for compliance.
With respect to initial delivery, the relationship summary would need to be provided to retail investors
Regardless of the method of delivery (
Beyond costs associated with delivery of the relationship summary to retail investors, firms would be required to prepare the relationship summary. The Commission preliminarily believes, however, that these costs would be limited for several reasons. First, the relationship summary is concise (limited to four pages in length or the equivalent length for electronic disclosure), and would contain a mandated set and sequence of topic areas, with much of the language to be prescribed, thus limiting the time required to prepare the disclosure. Second, the relationship summary will be uniform across retail investors and would not be customized or personalized to potential investors. Finally, the relationship summary would contain some standardized elements across investment advisers and broker-dealers, allowing for potential economies of scale for entities that may have subsidiaries that would also be required to produce the disclosure.
Further to the costs of preparing the relationship summary, we consider the implication of the disclosure requirements attributable to the DOL rules and exemptions, including the DOL's BIC Exemption, and the potential effects of those disclosures relative to the relationship summary for broker-dealers and investment advisers. The conditions of the DOL rules and exemptions, including the BIC Exemption, discussed above in the baseline section, are limited to retirement accounts. Although some firms may have voluntarily adopted disclosure requirements of the BIC Exemption for non-retirement accounts, the proposed relationship summary would apply to a broader array of relationships, spanning both retirement and non-retirement accounts for broker-dealers and investment advisers. To the extent that the information provided by the relationship summary would be duplicative of information that would be required by the BIC Exemption (or other DOL rules and exemptions) and provided to the same group of account holders that would receive the DOL required disclosures, the overall benefits of the relationship summary could be reduced. Lastly, to the extent that some financial firms already have set up procedures and systems to comply with the DOL disclosure requirements, these firms may incur lower incremental compliance burdens. The Commission preliminarily believes, however, that the scope of the disclosure requirements under DOL rules and exemptions and the systems that firms would have put in place to accommodate such disclosures are unlikely to have a significant overlap with the relationship summary. Therefore, the Commission anticipates that any potential cost savings for firms to comply with disclosure obligations under DOL rules and exemptions and the relationship summary are likely to be minimal.
With respect to preparing and implementing the relationship summary, firms would also need to expend resources with respect to the required Key Questions in the relationship summary. Firms would bear costs of preparing responses the questions from the list and training their employees on how to respond. Financial professionals need to spend time to prepare their responses to the questions and to respond to these questions when asked. As a result, some firm employees or financial professionals could take away from the time they dedicate to investigate investment recommendations, which could inadvertently harm investors if financial professionals divert resources to answering key questions but reduce their time devoted to arriving at investment strategies. In this case, the quality of their recommendations could decline. In both cases, the possible additional costs to firms could be (partially) transferred to retail investors.
In addition to the costs associated with preparation, delivery, filing, and posting on websites of the initial relationship summary, firms would also bear costs for updating the relationship summary within 30 days whenever any information becomes materially inaccurate.
We anticipate that the compliance costs associated with producing updates of the relationship summary would be also relatively minor given that the relationship summary uses largely prescribed language and updates of the relationship summary, which are only required for material changes, are expected to be infrequent. As a result, the costs of such updates are expected to be small relative to the costs associated with the initial production of the disclosure. Further, annual costs associated with communications regarding updates to the relationship summary are anticipated to be lower than the costs of the initial delivery to existing retail investors to the extent the frequency of updates is low or the firm communicates the updates through other ways than formal delivery. The Commission anticipates that some of the costs associated with preparation, delivery, filing, website posting, and updates to the relationship summary for an average broker-dealer or average dual registrant could exceed the costs for the average investment adviser. As Table 1 and Table 3 indicate, broker-dealers maintain a larger number of accounts than investment advisers do; therefore, delivery costs for broker-dealers could exceed those of investment advisers, if the number of accounts is a good indicator of the number of retail
In addition, unlike investment advisers, which produce Part 2A of Form ADV, a broker-dealer currently is not required to prepare a narrative disclosure document for its retail investors, although under existing antifraud provisions of the Exchange Act, a broker-dealer may be liable if it does not disclose material information to its retail investors. Thus, broker-dealers could expend additional time and effort to aggregate the information required by the relationship summary relative to investment advisers. As a result, the Commission preliminarily believes that the investment advisers should be able to produce the relationship summary at a relatively lower cost than broker-dealers, given investment advisers' experience with preparing and distributing Part 2A of Form ADV.
The Commission preliminary believes that compliance costs would also be different across firms with relatively smaller or larger numbers of retail investors as customers or clients. For example, to the extent that developing the relationship summary entails a fixed cost, firms with a relatively smaller number of retail investors as customers or clients may be at a disadvantage relative to firms with a larger number of such customers or clients since the former would amortize these costs over a smaller retail investor base. Firms with a relatively larger number of existing retail investors would face higher costs of initial distribution of the relationship summary compared to firms with a relatively smaller retail investor base. Further, to the extent that certain costs associated with preparing different versions of the proposed relationship summary scale with the number of branches and associated financial professionals that a firm has, firms with a relatively larger number of branches and employees may bear higher costs than firms with a smaller number.
While the imposed four-page limit is expected to impose nominal compliance costs on market participants, it could also generate additional costs for some firms relative to others. For example, the four-page limit may be more costly for firms that have more complex business models because it will limit the information they can present within the relationship summary.
Based on the estimates provided in Section V.A for Paperwork Reduction Act purposes, the average cost burden for an investment adviser to prepare the proposed Form CRS for the first time is estimated to range between approximately $1,300 and $3,400, depending on the extent to which external help is used.
Finally, the Commission believes that the proposed relationship summary would bring tangible benefits to many broker-dealers and investment advisers. Although the possibility of mismatched expectations for retail investors and their choice of financial firm or professional generally are most costly to the retail investors, such mismatch also imposes costs on broker-dealers and investment advisers. For instance, some investors who have mismatched their
With respect to particular elements of the relationship summary, firms with relatively no currently reportable legal and disciplinary disclosures could benefit directly from the reporting in the relationship summary because the reporting would make these characteristics more salient for retail investors by prompting investors to research disciplinary history of firms with currently reportable legal and disciplinary disclosures. To the extent that including disciplinary history information in the relationship summary increases the propensity of retail investors to consider this information when selecting firms and financial professionals, it could also ultimately increase the cost of misconduct for firms and financial professionals (for example, by making it more difficult to attract retail investors), which would make it more likely that firms take disciplinary information into account when making employment choices, thereby potentially raising the overall quality of their workforce. The relationship summary could further exhibit some positive long-term effects on the markets for broker-dealers and investment advisers and we elaborate on these long-term effects in greater detail in the next subsection.
In addition to the specific benefits and costs discussed in the previous section, the Commission expects that the proposed disclosure could cause some broader long-term effects on the market for financial advice. Below, we elaborate on these possible effects, including a discussion of their impact on efficiency, competition, and capital formation.
The primary long-term effect of the disclosure on the market is that it could enhance the competitiveness of the broker-dealer and investment adviser markets. The increased transparency with respect to the nature of the relationship between broker-dealers or investment advisers and their retail investors may allow retail investors to better evaluate their firms and financial professionals as well as the options for financial services that are advertised by them, which may increase the overall level of retail investor understanding in the market. When retail investor understanding increases, the degree of competitiveness of the financial services industry may also increase because retail investors could better assess the types of services available in the market. Market competitiveness could be further enhanced by the fact that, by prompting investors to understand better and obtain more information on the services provided as well as the types of fees and costs associated with such services, the relationship summary may reduce search costs for retail investors associated with acquiring this information, thus allowing them to more readily identify less expensive services that match their preferences and expectations for financial services. The relationship summary also could cause additional competition around conflicts of interest, resulting in some firms changing their practices to decrease conflicts. Proposed Regulation Best Interest also requires broker-dealers to disclose all material facts relating to the scope and terms of the relationship, and all material conflicts of interest associated with the recommendation.
Increased competitiveness in the market for financial services could have ancillary effects as well, including reduced pricing power for firms and incentives for firms to innovate products and services. Reduced pricing power, as a result of increased competitiveness, could benefit retail investors through lower fees, effectively redistributing value from holders of financial firm equity to their retail investors.
Another potential positive effect of the relationship summary is that, by reporting whether a firm or financial professional has currently reportable legal or disciplinary events, the relationship summary could prompt retail investors to seek out disciplinary information on their current and prospective firms and financial professionals and take that information into account when considering whom to engage for financial services. In this respect, the proposed relationship summary may also enhance competition if, for example, firms and financial professionals with better disciplinary records outcompete those with worse records. We note, however, that reporting whether a firm or financial professional has currently reportable legal or disciplinary events may also bias firms toward hiring firms or financial professionals with fewer years of experience (
However, in the market for financial services between investment advisers and broker-dealers, disclosing the existence of currently reportable legal and disciplinary events in the relationship summary may confer a small competitive advantage for investment advisers because broker-dealers are more likely to have to report that they have a disciplinary history due to broader broker-dealer disclosure obligations.
Although the proposed relationship summary applies to SEC-registered broker-dealers and SEC-registered investment advisers, it could exhibit some spillover effects for other categories of firms not affected by the proposal such as investment advisers not registered with the SEC, bank trust departments, and others. In particular, the relationship summary could change the size of the broker-dealer and investment adviser markets—relative to each other, as well as relative to other markets. To the extent the relationship summary reduces retail investors' confusion and makes it easier for them to choose a relationship in line with their preferences and expectations, the Commission expects that this could attract new retail investors to these markets, coming from firms in other markets. Firms' current retail investors also may consider switching to a different type of firm if the relationship summary makes the different services provided and the fees and costs of investment advisory and brokerage services more prominent. The exact extent and direction of substitution between brokerage and advisory services is hard to predict and depends on the nature of the current mismatch between retail investor preferences and expectations and the type of services for which they have contracted.
The proposed relationship summary may also benefit financial markets more broadly. Recent survey evidence suggests that 60% of all American households have sought advice from a financial professional.
We note a possible negative effect on the trust of some retail investors due to the disclosure on the relationship summary that a firm or financial professional has currently reportable legal or disciplinary events. The decrease in the trust levels of some retail investors, however, could also benefit these investors by bringing their expectations and perceptions in line with their choice of a firm or financial professional.
Another possible long-term effect of the relationship summary is that it could decrease the prevalence of third-party selling concessions in the market by requiring broker-dealers and dual registrants to include prescribed disclosure about indirect fees associated with investments that compensate the broker-dealer, including mutual fund loads. Currently, selling concessions constitute a significant part of the compensation of broker-dealers selling mutual fund products.
Table 2, Panel A also indicates that selling concessions constitute a larger fraction of total revenue (commissions, fees, and sales of IC shares) for smaller broker-dealers—for example, selling concessions as a fraction of revenues represent around 20% for broker-dealers with total assets less than $1 million and less than 4% for broker-dealers with total assets in excess of $50 billion. To compensate for the potential loss of concession-based revenue, broker-dealers could try to switch customers to advisory accounts. As noted above, however, if the proposed disclosure also increases the competitiveness in the broker-dealer and investment adviser markets the increased competitiveness would create some downward price pressure in the market.
This section highlights alternatives to the relationship summary concerning an amendment of existing Forms BD and ADV for broker-dealers and investment advisers, respectively; the form and format of the relationship summary; extensiveness of disclosure; delivery; and communicating information about the updated relationship summary.
As proposed, the relationship summary would be a new, standalone disclosure produced by broker-dealers and investment advisers, in addition to the other required information disclosed by broker-dealers and investment advisers. As an alternative, the Commission could consider incorporating the relationship summary information into existing disclosures.
For example, Part 2A of Form ADV currently has 18 mandatory reporting elements, produced as a narrative discussion, as part of the disclosure “brochure” provided to prospective retail investors initially and to existing retail investors annually. Instead of requiring investment advisers to produce a completely new disclosure as a separate Form CRS, the Commission could instead make an amendment to Part 2A of Form ADV to require a brief summary at the beginning of the brochure in addition to the existing narrative elements, or to change certain of the disclosure requirements to reduce or eliminate redundancy. Similarly, broker-dealers could be required to deliver longer narrative disclosure to their retail investors with specified elements. Such disclosure could also be required as part of Form BD or a standalone requirement.
Although modifying existing disclosure and reporting in these ways could provide the same information to retail investors as the proposed relationship summary, the Commission believes that these approaches would be less suited for the objective of this disclosure, which is to provide a short, simple overview. The proposed relationship summary would provide disclosure in a standardized, simplified manner, that would allow retail investors not only to compare information within a category (
The Commission is proposing to require broker-dealers and investment advisers to create and deliver a short relationship summary to retail investors that would highlight specified information under prescribed headings in the same order to facilitate comparability. The relationship summary would be limited in length and would contain a mix of prescribed and firm-specific language. The proposal does not specify a single format for filing the disclosure.
The Commission could require the relationship summary be filed with the Commission in a specified format, such as an text-searchable PDF file or in some other format, for example, an unstructured PDF or HTML, structured PDF, a web-fillable form, XML, XBRL or Inline XBRL. Further to this alternative, the Commission could require that the relationship summary information be filed in a structured format to facilitate validation, aggregation and comparison of disclosures, and the Commission could then make the data available on IARD and EDGAR. Structured format, such as XML, can enable the automatic generation of unstructured formats such as PDF, HTML, and others to meet the needs of those users who would prefer a paper-oriented layout.
As an alternative to the largely prescribed language for the relationship summaries, the Commission could instead allow broker-dealers and investment advisers to construct bespoke disclosure, while providing guidance to firms on the elements of the relationship disclosure that are required to be included. Although this disclosure would allow firms to tailor the discussion of the nature of the business, fees and costs, conflicts of interest, and disciplinary history specifically to their business model, this approach would likely be more costly to retail investors, as it would likely diminish the usefulness of a concise, simplified disclosure that is capable of being used by retail investors to understand firm types. Longer firm-specific disclosures could also increase the search costs for retail investors which could ultimately result in worse choices by lowering investor ability and incentives to screen a large number of firms. Higher search costs for investors could also lower the competitiveness of the market by allowing some firms with lower-quality services to maintain customers and sustain market share, even if better choices are available to retail investors. As discussed above in Section III.B, simplification of disclosures, in terms of size, presentation, and readability, allows for ease of processing of information, while standardization of the content would facilitate identification of information most useful to a retail investor. Finally, lengthier bespoke disclosure would be also costlier for firms to produce. As another alternative, the Commission could have required the relationship summaries to include only prescribed wording. However, the Commission believes that a mix of prescribed and firm-drafted language provides both information that is useful for retail investors in comparing different firms along with some flexibility for firms to determine how best to communicate the information about their particular practices to retail investors.
As currently proposed, the relationship summary would include high-level information on (i) introduction; (ii) the relationships and services provided in the firm's advisory accounts and brokerage accounts; (iii) the standard of conduct applicable to those services; (iv) the fees and costs that retail investors will pay, (v) comparison to other account types; (vi) specified conflicts of interest; (vii) where to find additional information, including whether the firm and its financial professionals currently have reportable legal or disciplinary events and who to contact about complaints; and (viii) key questions for retail investors to ask the firm's financial professional. As an alternative, the Commission could require the inclusion of additional topics or additional disclosures on one or more topics proposed to be covered by the relationship summary. These disclosures could be required as part of the relationship summary or as separate appendices.
With respect to the additional topics to be disclosed, the Commission could request that firms disclose additional information on their performance, investment style, or other business practices. Retail investors, however, may become overwhelmed if presented with a number of very lengthy disclosures, which therefore could bury the information that is most useful to investors and reduce the effectiveness of those disclosures.
Regarding alternatives to the disclosure of fees and costs as proposed here, the relationship summary could require additional disclosures on one or more of these topics. For example, the relationship summary could include the firm's fee schedule, either as part of the body of the relationship summary or as an attachment. Alternatively, we could require each relationship summary to include a personalized fee schedule,
We could also require more comprehensive disclosures regarding conflicts of interest and disciplinary history, including requiring firms to summarize more or all of their conflicts of interest.
We could also require additional details about a firms' and its financial professionals' disciplinary history. Instead of requiring firms to disclose whether or not they have currently reportable legal or disciplinary history, as proposed, we could require firms to disclose the number of disciplinary events, expressed as a number or as a percentage of the size of the firm or the number of firm professionals. We could further differentiate the disclosures by requiring firms to disclose the existence and numbers of disciplinary histories within categories of disciplinary history.
More detailed disclosures about fees, compensation, conflicts and disciplinary history could help retail investors understand better the differences between types of accounts, and could facilitate the decision about the most appropriate account for each retail investor. As noted above, current disclosures on these topics cover only subsets of firms and relationships and could take different forms. For example, firms wishing to make investment recommendations to IRAs and participants of ERISA-covered plans may be subject to certain disclosure obligations.
In particular, the disclosures about types of fees and costs included in the relationship summary could help retail investors understand better the types of fees that they will pay and how those types of fees and costs affect their accounts. As discussed in the baseline, the 917 Financial Literacy Study highlighted that transparency and disclosure about fees charged by financial intermediaries was one of the most essential elements that investors would consider in making their decision about which financial professional to choose.
Similarly, the information provided about conflicts of interest in the relationship summary could help retail investors understand how such conflicts that might be pertinent to their account. The disclosure about whether the firm or financial professional has currently reportable legal or disciplinary events could encourage retail investors to research the extensiveness and nature of the disciplinary history of a firm, therefore allowing retail investors to further evaluate firms based on the types of disciplinary events.
Although additional disclosures on account types, fees and compensation (including a fee/compensation schedule), conflicts of interest and disciplinary history could enhance retail investors' understanding of the accounts that are available to them, there are a number of additional costs associated with these alternatives. As noted earlier in the release, extensive empirical evidence suggests that as documents get lengthier and more complex, readers either stop reading or read less carefully.
As another alternative, the Commission could require a shorter relationship summary, limited to one page (or equivalent limit for electronic format) that would highlight important topics for retail investors and/or including only key questions for retail investors to ask. This alternative relationship summary would be highly readable, with prescribed formatting,
We alternatively could require firms to create separate relationship summaries for each account type they offer to retail investors, and require firms to provide a retail investor only the relationship summary for the service being offered.
As currently proposed, firms would be required to deliver the relationship summary before or at the time an investment adviser enters into an advisory agreement with a retail investor, or, for broker-dealers, before or at the time the retail investor first engages the firm's services. Dual registrants would be required to deliver the relationship summary at the earlier of entering into an investment advisory agreement with a retail investor or the retail investor engaging the firm's services. As with other disclosure, a firm would be permitted to deliver the relationship summary (including updates) electronically, consistent with the Commission's guidance regarding electronic delivery. In addition, firms would be required to implement a one-time delivery of the relationship summary to existing retail investors as a transition requirement. We are also proposing a requirement for firms to post their relationship summaries on their websites in a way that is easy for retail investors to find, if they maintain a public website. Firms that do not maintain a website would be required to include in their relationship summaries a toll-free number for investors to call to obtain documents.
In addition, a firm would be required to provide a relationship summary to an existing client or customer who is a retail investor before or at the time a new account is opened or changes are made to the retail investor's account(s) that would materially change the nature and scope of the firm's relationship with the retail investor, as described in more detail in Section III.C.2 above. A firm would also be required to deliver the relationship summary to a retail investor within 30 days upon request. Furthermore, firms would be required to file current relationship summaries with the Commission, which would be made publicly available, and would be required to post a current version of their relationship summary on their website, if they maintain one.
As an alternative regarding delivery, the Commission could require that the relationship summary would only be available through electronic delivery, such as an email attachment, an email with the full text of the relationship summary in the body of the text, or an email with a hyperlink to the firm's website. Although alternatives relying exclusively on electronic delivery could reduce costs associated with the production of those disclosures, the proposed approach would give the potential benefits of providing information to retail investors in a timely fashion in order to help retail investors select a financial professional or firm, while recognizing the proliferation of the various means of communications, electronic or otherwise, available to firms and retail investors. Our approach also recognizes that some retail investors may not have Internet access or may prefer delivery in paper.
The Commission could have also eliminated the requirement for firms to post the relationship summary on their websites and file the disclosure with the Commission. However, we believe that the relatively minimal cost to firms for posting and filing is outweighed by the benefit of providing easily accessible information to retail investors to assist them in deciding among firms and financial professionals.
Another possibility would have been also not to require a one-time delivery of the relationship summary to existing retail investors. The Commission believes that since the information in the relationship summary is potentially valuable to new investors it would be also potentially valuable for the existing customers of broker-dealers and investment advisers. While existing retail investors would face higher costs to change from an existing financial services provider to a new one than new potential investors would, most existing investors would be still able to reevaluate their relationships with their current firm and investment professionals. Furthermore, there is an inherent cost to retail investors when the services they receive do not meet their expectations. To the extent delivery of the relationship summary to existing retail investors fosters greater understanding and decreases the mismatch, this could mitigate any costs of changing financial service providers. Distributing the relationship summary to a larger group of initial investors further increases the group of individuals that could become familiar with the disclosure indirectly through interactions with family and friends.
As another alternative, the Commission could have proposed only a delivery requirement for the relationship summary, like Form ADV Part 2B, instead of also requiring that firms file it with the Commission. As discussed also in Section III.A above, although not requiring the summaries to be filed with the Commission could reduce the costs to firms for preparing the document to be filed, the Commission believes that public access to relationship summaries benefits prospective retail investors by allowing them to compare firms when deciding whether to engage a particular firm or financial professional or open an advisory or brokerage account, particularly if the summaries can be located on a single point of access. Further, filing the relationship summary with the Commission provides public access regardless of whether a particular firm has a website with which to provide public access to the disclosure.
As currently proposed, firms would need to update their relationship summary within 30 days whenever any information in the relationship summary becomes materially inaccurate. Our proposal would also require firms to communicate the information in the amended relationship summary to retail investors who are existing clients or customers of the firm within 30 days after the updates are required to be made and without charge. The communication can be made by delivering the relationship summary or by communicating the information in another way to the retail investor.
Alternatively, the Commission could require that the relationship summary also be updated and delivered annually, which would be similar to the current requirements for investment advisers to provide an updated “brochure” derived from Part 2A of Form ADV to their existing retail investors both annually and upon any changes to the Item 9 of Part 2A (disciplinary information). The Commission preliminarily believes that the benefits of preparing and delivering an annual relationship summary, regardless of the format of that delivery, would not outweigh the costs to produce and distribute. As noted earlier, the Commission anticipates that the terms of the business relationship between most firms and their retail investors would be relatively stable over time, except when a new account is opened or a significant amount of assets is moved from one type of account to another that is different from the retail investor's existing accounts, or other changes are made that result in a material change to the nature and scope of the firm's relationship with the retail investor. As a result, every new delivery would bring relatively small amount of information to retail investors.
We believe that mere public posting of the updated summary would not itself adequately inform retail investors about material changes to the relationship summary, and that firms providing communication of information about relationship summary updates to investors as described above is therefore necessary.
Finally, instead of proposing that firms may choose to communicate information about updated relationship summaries to existing retail investors instead of delivering an updated relationship summary, the Commission could have proposed that firms must deliver the updated relationship summary to each existing retail investor regardless of whether or not it communicated the information to retail investors in another way. While delivering the summary would provide retail investors with the full scope of changes being made to the summary in the context of existing information, the Commission preliminarily believes that allowing firms to communicate information about the updates as well as making the current version of the summary publicly available, via a firm's website (if the firm has a website) and on the Commission's website, provides flexibility for firms to utilize existing communication methods and reduces the costs of delivery on firms while providing adequate notice to retail investors about the updates to the relationship summary, as well as access to the updated summaries.
The Commission requests comment on all aspects of the economic analysis, including the analysis of: (i) Potential benefits and costs and other economic effects; (ii) long-term effects of the proposed relationship summary on efficiency, competition, and capital formation; and (iii) reasonable alternatives to the proposed regulations. We also request comments identifying sources of data and that could assist us in analyzing the economic consequences of the proposed regulations.
In addition to our general request for comment on the economic analysis, we request specific comment on certain aspects of the proposal:
• Do commenters agree with the overall assessment that the relationship summary would benefit retail investors and assist them in making a choice of what type of account matches their preferences? Do commenters believe there are alternatives to the structure and content of the relationship summary that we have not considered that could make it more beneficial to retail investors? Are there any unintended costs of the relationship summary for retail investors that we have not considered?
• Do commenters believe that the proposed disclosures about relationships and services and fees are clear and effective enough? How would you recommend altering the presentation of these disclosures in order to increase their effectiveness?
• Do commenters agree the proposed disclosure of the categories of conflicts of interest would be beneficial to retail investors? How would you recommend altering the presentation of the conflicts of interest information so that costs are minimized?
• What additional costs and benefits do you envision with extending the disclosure of disciplinary history?
• Are there alternative key questions we should consider recommending that retail investors ask their financial professional? Are there questions we should exclude, and, if so, why? Do commenters agree with the concern that there could be potential costs associated with the list of proposed questions, such as anchoring the attention of retail investors to the list and thereby reducing the likelihood that they would explore other potential questions that could be important to them?
• What costs do commenters anticipate that firms and financial professionals will incur in implementing and complying with the proposed Form CRS, both initial and ongoing? Please provide estimates of the time and cost burdens for preparing, delivering and filing the proposed form. What costs do commenters expect firms and financial professionals will incur to prepare answers to the “Key Questions to Ask” in the proposed Form CRS? Please provide estimates of the time and cost burden for preparing to answer the questions.
• How do commenters anticipate that the benefits and costs of the proposed rule will be shared between broker-dealers and their clients; or between investment advisers and their clients?
• Do commenters anticipate that the benefits and costs of the proposed rule would be different across broker-dealers and investment advisers? What about dually-registered firms?
• Are retail investors likely to access and download relationship summaries of broker-dealers through EDGAR and investment advisers through IAPD?
• Are there other reasonable alternatives that the Commission should consider? If so, please provide additional alternatives and how their costs and benefits would compare to the proposal.
As discussed above, several studies suggest that retail investors may lack financial literacy and are confused about the differences between broker-
This section provides an analysis of the economic effects of the proposed rules relative to the baseline, including a discussion of the benefits and costs to the affected parties and the impact on efficiency, competition and capital formation. We also discuss reasonable alternatives to the proposed rules.
The economic tradeoffs involved in the choice of names and titles by firms and financial professionals are complex and affected by a wide range of factors. In this section, we discuss under what conditions firm names and financial professionals' titles may convey information that is important to retail investors when they are searching for a provider of financial advice, as well as factors that are likely to matter for firms and financial professionals when choosing their names and titles. We also discuss some conditions where investor confusion over the information conveyed by the names and titles chosen by firms and financial professionals may lead to investor harm.
We believe that investors fall into a spectrum of knowledge about the providers in the market for financial advice. On one end of the spectrum, there are investors who may understand and correctly distinguish the types of services and standard of conduct provided by different types of firms and financial professionals. If firms and financial professionals use names that accurately describe their regulatory type, these types of investors would understand and expect that “broker-dealers,” or close synonyms thereof, would provide the services of, and be subjected to the standard of conduct applicable to, a broker-dealer, while “investment advisers,” or similar names and titles, would provide the services of, and be subject to the standard of conduct applicable to, an investment adviser. On the other end of the spectrum there are less knowledgeable investors who do not understand that there are different types of services that can be provided by firms or financial professionals, or differing applicable standards of conduct. These investors may not be able to discern from the name or title what type of service will be provided by a firm or financial professional. As a result, these investors may bear costs associated with their confusion, such as increased time and effort (“search costs”) to identify the right type of financial professional,
In addition to confusion over firm names and professional titles, and what they may represent, some investors may also have confusion over the type of brokerage, advisory and other services and standard of conduct that best match their preferences. Retail investors, therefore, can also be categorized based on whether they know the type of advice relationship (and associated payment model) that they would prefer, regardless of whether they understand the names and titles of firms and professionals. For instance, some investors may know that they prefer to receive and pay for advice on a per transaction basis, such as that provided typically by a broker-dealer, while others know they prefer an ongoing advisory relationship with an asset-based fee model, such as that typically provided by an investment adviser. On the other hand, some other investors may only understand that they are seeking financial advice but do not understand that there are different types of advice relationships, and different ways to pay for advice, and may not correctly identify the type of advice relationship that would be most consistent with their preferences. This dimension of investor confusion could also lead to investor harm such as increased search costs, an overall mismatch in the type of advice relationship, or paying more than expected for services received.
In principle, firm names and professional titles used by financial intermediaries, to the extent that names and titles accurately reflect the financial services provided, may serve as a search tool for some investors when they initially select which financial professionals to approach. In particular, for investors that both understand and correctly interpret company or professional names and titles and also know the type of investment advice relationship that they prefer, names and titles of firms and financial professionals that are mainly associated with one type of financial services could be used as an initial sorting mechanism that may reduce search costs. For example, to the extent names and titles accurately reflect the type of firms and financial professionals, knowledgeable investors that prefer only brokerage services could lower their search costs by using names and titles to increase the likelihood they would contact broker-dealers rather than investment advisers in their search. Similarly, knowledgeable investors looking to hire an investment adviser would more easily be able to contact investment advisers and avoid contacting broker-dealers simply by observing the firm or professional names and titles. We also note that investors who understand the
Less knowledgeable investors may face confusion over either the information conveyed by firm or professional names and titles or the preferred scope of their advice relationship. To the extent that names or titles used by financial intermediaries accurately reflect services provided, any reduction in search costs or reduction of the risk of investors matching with the wrong type of firm and financial professional will depend on the nature of the investor confusion, as we discuss in more detail below.
When selecting firm or professional names and titles, financial services providers may account for the level of investor understanding (or confusion). For example, they may be aware that some investors are informed by the use of particular names and titles, and the implications for the services provided and applicable standard of conduct, while other investors may face confusion over the use of particular names and titles or the type of advice relationship they seek. The incentives of financial intermediaries are two-fold: (1) They seek to build their client/customer base; and (2) they desire to reduce the costs associated with building that client/customer base, such as the time, effort, and marketing costs incurred in the initial client acquisition process. Therefore, financial intermediaries would rationally choose titles that effectively attract the attention of potential investors, while reducing the likelihood of “false starts” with investors that are not the right match (and understand what type of advice that they seek). For example, if investors that fully understand the differences between different types of financial intermediaries are a significant majority of the potential investor pool, then profit maximizing financial intermediaries would likely choose names and titles that clearly identify the nature of services provided and applicable standard of conduct. These knowledgeable investors will then be able to identify from that choice of name or title whether the firm or financial professional will meet their preferred type of investment advice relationship, and therefore, the unambiguous choice of title by the financial professional both reduces search costs incurred by these investors and reduces the effort expended by the financial professionals to build their customer base.
Continuing the same example, the remainder of the investor pool would then consist of less knowledgeable investors, which would represent a small portion of the aggregate investor pool. These investors, in particular those who are confused about the differences among firms and financial professionals and what type of investment advice relationship they should seek, may be unlikely to understand from names or titles alone how well the financial intermediary would match their preferences, and therefore, will bear search costs and the possibility of mismatch even when names and titles provide little ambiguity for informed investors. However, we expect that when the hypothetical investor pool predominantly consists of investors who fully understand the differences between different financial intermediaries, as we assumed for this example, overall costs borne by both investors (
As the hypothetical pool of less knowledgeable investors that face confusion over company names, titles, or services increases, the choice of names and professional titles by financial intermediaries become more complex to analyze and depends on a number of factors related to investors. These factors include, among others: (i) Whether and how much these investors infer information from titles about the type of advisory or other services provided; (ii) the source of investors' confusion, such as (a) a lack of understanding about the type of service they would prefer, (b) an inability (in the absence of additional information) to understand the differences in the services offered and their associated payment models, or (c) a lack of knowledge about professional titles and information provided therein; (iii) how easily investors can learn, upon meeting with a financial professional, about whether the type of advice or other services provided by the financial professional meets their preferences; (iv) whether investors could be persuaded to choose a type of advisory service that is not consistent with the investor's preferences after meeting with a financial professional; (v) investors willingness or ability to keep searching for a financial professional until they find one that best matches their preferences; and (vi) the distribution in the investor pool of investors with different levels of knowledge and understanding as described above.
When less knowledgeable investors are confused not only about what services broker-dealers and investment advisers provide, but also are confused about the types of services that they would prefer, the factors noted above may lead firms and financial professionals of either type to rationally choose generic or common terms in names and titles. Consider the example where retail investors know they would benefit from financial advice in a general sense, but are confused about which type of investment advice relationship and associated payment model would be best for them.
In this case, and in order to maximize the number of investors that a firm or financial professional may be able to contract with, both broker-dealers and investment advisers facing these less knowledgeable investors would have incentives to pick names and titles that are the most effective at getting these investors to approach them, to the extent that names or titles alone have any impact on the choices made by these investors.
In addition to potential search costs expended by less knowledgeable investors, these investors also bear a greater risk of mismatch between the type of advice relationship that best fits their preference and the actual advisory service for which they contract. However, in this example, the mismatch arises because of investor confusion over the type of relationship that best would meet their preference, and this confusion itself may lead the investor to, by chance, seek out a type of firm or financial professional that is inconsistent with the investor's preference, rather than any confusion directly related to the firm's or financial professional's use of a common name or title. Conversely, generic names and titles may make it easier for less knowledgeable investors to identify a broader class of firms or financial professionals that can meet their perceived need for financial advice to some extent.
Other particular kinds of investor confusion, which could impose costs on some investors, may provide benefits, such as increased customer flow, to only a certain type of firm or financial professional. For example, some investors may be fully aware of the type of advice relationship that they prefer, but are confused about which firm or professional names and titles are associated with that type of advice relationship. In particular, consider a situation where investors know that they would like an advice relationship that is provided by investment advisers. In this case, some broker-dealers may have incentives to use titles such as “advisor” that suggest such an advice relationship to maximize their customer flow. As a result, some less knowledgeable investors may be misled to wrongly approach broker-dealers rather than investment advisers in their search for advice, and bear both potentially higher search costs and an increased likelihood of a mismatch between the type of advice that is received and the type of advice that is preferred. The risk of a mismatch and associated harm in this case would be especially large for any of these investors that primarily base their choice of firm and financial professional on names and titles, rather than any information they would receive from a firm or financial professional about the type of services or applicable standards of conduct.
In addition to the factors related to investors discussed above, the selection of names and titles by financial intermediaries also depend on other factors specific to the intermediary. For example, competitive concerns may cause some financial intermediaries to simply choose terms in names and titles that are commonly used by other financial intermediaries of their type. Alternatively, firms may choose names and titles that distinguish them from their competitors. Some firms or financial professionals may choose ambiguous generic titles, such as “financial consultant,” in order to capture a larger fraction of the investor pool, thinking that investors may seek information if the title does not clearly identify the kinds or levels of services provided or the applicable standard of conduct. We acknowledge that these factors could also be important determinants of the choice of names and titles.
In this section we discuss the potential economic effects from the proposed rules to the directly affected parties: Investors, standalone broker-dealers, standalone investment advisers, dually registered firms, and financial professionals. Potential economic effects on indirectly-affected parties, in particular financial intermediaries not regulated by the Commission, are discussed in the next section.
The objective of the proposed rules is to reduce retail investor confusion and limit the ability for retail investors to be misled that a firm or financial professional is an investment adviser as a result of the use of firm and financial professional names and titles that contain either “adviser” or “advisor”. Specifically, our proposed rule seeks to enable retail investors to be able to discern more fully whether a particular firm or financial professional will offer advisory or other services provided by investment advisers versus those provided by broker-dealers. In this section, we discuss the potential benefits to investors as a result of the proposed rules, while considering the potential costs that could be borne by investors. In general, we expect the benefits and costs are unlikely to be evenly distributed among investors, but will rather depend on both the differences in investors' preferences for broker-dealer or investment adviser services, and investors' individual degree of understanding what services any given firm or financial professional is providing and the standard of conduct that is applicable.
The proposed restriction on the use of the terms “adviser” and “advisor” in names and titles of broker-dealers who are not also dually registered as investment advisers and of financial professionals who are not supervised persons of investment advisers and who provide advice on behalf of such advisers, may reduce investor confusion about what type of firm or financial professional is likely to match with their preferences for a particular type of investment advice relationship. The proposed rule may also reduce corresponding search costs for some investors under certain conditions. Moreover, the proposed rule may reduce the likelihood that a mismatch between an investor's preferences and the services offered by a firm or financial professional occur.
As a result of the proposed restriction on the use of certain terms, we expect the greatest potential reduction in search costs for retail investors who know that they specifically want the services provided by investment advisers and also would use names and titles in their search. The proposed rule would potentially make it easier for such investors to distinguish firms and professionals providing investment adviser services from firms and professionals providing brokerage services. The proposed rules may also reduce search costs for investors that prefer brokerage services, if standalone registered broker-dealers and financial professionals who are not supervised persons of an investment adviser or who are supervised persons but do not provide investment advice on behalf of such investment adviser are using names or titles including “adviser” and “advisor,” would choose new names and titles due to the proposed rule that more distinctly indicate the types of services they provide, such as “broker” or “broker representative.”
However, the reduction in search costs for retail investors as a result of the proposed rule would be limited to the extent the firms and financial professionals covered by the restriction on the use of the terms “adviser” or “advisor” are not currently using the proposed terms in their names and titles. Further, the potential impact of the proposed rule on search costs is likely to be mitigated to the extent the proposed rule is limited to firm names and job titles, and would not itself affect the use of terms, such as “advisory services” in other communications or using those terms in metadata to attract internet search engines.
As discussed above in Section IV.C.1, some investors may be confused by names and titles and believe that certain names and titles are likely to specifically signal the type of advice services provided by firms and financial professionals that use those names and titles and the associated standard of conduct.
Because mismatch in investor preferences and the type of advice relationship they receive can potentially be very costly for investors by resulting in inefficient advice relationships, reducing this cost could be a potential benefit of the proposed rule for some investors. In particular, if an investor seeks an advice relationship of the type offered by investment advisers, but mismatches to a brokerage relationship, then the frequency of advice received may not be the most appropriate, or the cost for the advice may be too high if it leads to frequent trading, and could result in suboptimal investment decisions or lower investment returns net of costs. The Commission preliminarily believes this reduction in mismatch risk would mainly apply to those investors seeking a relationship similar to that provided by investment advisers, as discussed above. However, for at least some investors requiring advice on a per-transaction basis, the confusion about the use of titles or the services provided by financial professionals could potentially lead them to inadvertently select investment advisers even if they truly want a broker-dealer. To the extent the proposed rule would also help these investors more clearly distinguish between broker-dealers and investment advisers, they may avoid inadvertently hiring an investment adviser and thereby avoid paying potentially higher fees for that type of advice relationship.
At this time the Commission is unable to estimate
As discussed above with respect to search costs, any reduction in mismatch risk associated with investor confusion over names and titles would be limited to the extent that standalone registered
Another potential limitation of the proposed restriction on the use of certain titles is that a dual registrant could still call itself an “adviser” or “advisor,” but then only offer brokerage services to investors that may not be legally and financially sophisticated enough to understand the differences in types of relationships and standards of conduct available.
Although the Commission preliminarily believes that the proposed rule would decrease investor confusion, search costs, and mismatch for some segment of the investor pool that search for professionals based on names or titles, investor confusion and search costs could increase for those that would have, in the absence of the rule, selected broker-dealers and associated natural persons that would have to change their company names or titles as a result of the proposed rule.
The proposed rule may also increase investor confusion to the extent some firms and financial professionals invent new names or titles to substitute for the restricted ones. Studies already indicate that the wide variety of names and titles used by firms and financial professionals causes general investor confusion about the market for investment advice. The magnitude of such costs is hard to predict, but would likely increase search costs for less knowledgeable retail investors that use names or titles to search for financial professionals or firms, and may also increase the likelihood of a mismatch for some of these investors between the type of advice relationship they prefer and the type of firm and financial professional they hire.
Investors seeking advice from broker-dealers may also face potential harm if some broker-dealers change their business model as a result of the proposed rule. As discussed above, we believe that most broker-dealers that would be subject to the restrictions of the proposed rule have chosen names and titles to build their customer base. Given that the market for investment advice overall appears to be relatively competitive, with respect to the number of firms and financial professionals, firms and financial professionals likely have chosen names or titles that they view as effective in marketing their services to investors. Therefore, being forced to switch names or titles could reduce the potential customer flow for some broker-dealers (and registered representatives of dual registrants who are not supervised persons of an investment adviser or who are supervised persons but do not provide investment advice on behalf of such investment adviser) who currently are using name or titles which include the term “adviser” and “advisor” and who serve retail investors. In lieu of adopting a new name or title without “adviser” or “advisor,” these firms or financial professionals might respond by exiting the retail investor market, or may bypass the compliance and other costs associated with this proposed rule by also registering as investment advisers or becoming supervised persons of an investment adviser who provide investment advice on behalf of such investment adviser, which would change their incentives to market their brokerage services to investors.
The proposed rule could, however, also increase the risk of mismatch for some investors by removing standalone registered broker-dealers and registered representatives of dual registrants who are not supervised persons of an investment adviser from the pool of financial intermediaries that use the terms “adviser” or “advisor” in names and titles, while not affecting the use of these terms by other types of financial intermediaries, including banks, trust companies, insurance companies, and commodities professionals. Investors who are seeking financial services from either investment advisers or broker-dealers could instead inadvertently hire other types of financial intermediaries that would continue use these terms “adviser” or “advisor,” thereby potentially exacerbating the degree of mismatch between the type of relationship that they seek and what they receive. Further, neither this rule nor the proposed relationship summary would address the potential mismatch because these entities and natural persons are outside of the scope of the Commission rules. The Commission is not able to estimate the scope of this continuing potential for mismatch because we do not have access to information on the extent to which retail investors include these other types of financial intermediaries (deliberately or inadvertently) in their search for financial advice, nor the extent to which they see the services provided by these other financial intermediaries as substitute for the services provided by investment advisers or broker-dealers.
Another potential cost for investors is that affected broker-dealers may attempt to directly pass through any costs they would incur due to the proposed restriction on certain names and titles. A broker-dealer's incentives for such pass-through behavior would be attenuated the more competitive the broker-dealer's local market is in the sense that price sensitivity of demand is high.
Finally, we note that many of the costs and benefits to investors that we discussed above depend on the extent that titles and names affect investors' selection of their financial professional. The evidence discussed in Section IV.A.3.a suggests that between 40% and 50% of investors find their financial professionals through personal recommendations.
We anticipate the proposed requirements for broker-dealers and investment advisers and their associated natural persons and supervised persons to prominently disclose their registration (or firm association for financial professionals) status in retail investor communications would reduce investor confusion as well as search costs associated with locating and hiring a firm, which could reduce the probability of mismatch for investors seeking advice. In particular, for investors who understand the meaning of the registration status and know they want to hire either a registered broker-dealer or a SEC-registered investment adviser, we expect the search for the correct type of firm will be made both clearer and less time consuming, as these investors will more readily observe the registration status. Search costs for investors for whom the registration status has little meaning, however, are not expected to experience a decrease in either confusion or search costs due to these disclosure requirements. Disclosure may also reduce the possibility of mismatch of hiring the wrong type of firm for investors who understand the meaning of the registration status and know what type of financial intermediary they want to hire, although we note that the likelihood for such mismatch is likely lower in the first place for such investors compared to less knowledgeable investors. For the pool of investors that are confused by both the type of advice relationship that they
In general, we do not anticipate any costs to investors from the proposed rules to disclose registration status. However, it could be that firms may attempt to pass through any compliance costs to investors through higher fees, in particular those that operate in markets where the price sensitivity of demand may be lower. Given that compliance costs would be of a one-time nature, as discussed above, we believe the likelihood and magnitude of such pass-through would be low.
The proposed rule would restrict broker-dealers who are not dually registered as investment advisers and their associated natural persons who are not themselves investment advisers or supervised persons of investment advisers that provide advice on behalf of such advisers from using the terms “adviser” or “advisor” when communicating with retail investors. As described previously in Section IV.A.1, approximately 87% of retail facing broker-dealer firms and 50% of registered representatives are not dually registered as investment advisers, and therefore potentially could be affected by the proposed restriction. The fraction of standalone broker-dealer firms that are currently using the terms “adviser” or “advisor” in their firm names or titles and do not report a non-securities business, is only approximately 3.5%.
If the proposed restriction on certain names or titles would reduce potential investor confusion and prevent retail investors from potentially being misled, it could have some positive benefits for the subset of broker-dealers that would be impacted by this restriction but are not marketing advice services to attract business. In particular, these broker-dealers may be able to better attract customer flow and more efficiently target their marketing and advertising campaigns to reduce the likelihood of “false starts” associated with the potential mismatch with retail investors. Moreover, broker-dealers that are not dually registered may similarly benefit from the requirement to prominently display registration status as that may also help reduce investor confusion. Firms and financial professionals may also realize a limited benefit from this disclosure such that they can more effectively signal their type in communications, even when the firm or professional names or titles are not perfectly aligned with the registration status.
For the segment of broker-dealers that would be affected by a restriction of using the terms “adviser” or “advisor,” we anticipate potentially substantial, one-time costs associated with the proposed rule. Broker-dealer firms subject to the restrictions on the use of certain names or titles would be required to change current company names or titles (if the company name or title contains “adviser/advisor”), and marketing materials, advertisements (
To the extent that the costs discussed above have a fixed-cost component (
In addition to direct compliance costs associated with producing new materials, broker-dealers would likely bear costs associated with contacting current and prospective customers, whether by email, mass mailings, one-on-one meetings, or telephone conversations, to inform them of changes to names and titles. Such outreach on behalf of the broker-dealer or the individual representatives would inform existing and prospective investors of a name or title change, and whether or not any services have changed and may be necessary in order to minimize any confusion among current and prospective customers that could potentially lead to a loss of business during a “changeover” period.
Likewise, broker-dealers facing no constraints on their choice of names and titles may choose the names and titles that they believe are the most effective at helping attract customers, and may best describe their business model, and reduce the effort associated with building a customer base, as described above.
Although we recognize that a significant fraction of a broker-dealer's customer base is attributed to referrals, as noted in the 917 Financial Literacy Study, approximately 25% of survey respondents rely on broker-dealer or financial professional names or titles in selecting their current advisor.
One way that affected broker-dealers could potentially mitigate the costs associated with the potential loss of titles or names could be for these firms to dually register as investment advisers. However, dual registration imposes an additional layer of regulatory oversight and compliance and need for training and licensing of employees to work as investment adviser representatives, which would also be costly. A broker-dealer would likely pursue such a strategy only if it expected the costs of regulation as an investment adviser were lower than the expected costs of modifying names and titles. We do not have access to data that would allow us to estimate either the total costs for modifying names and titles for broker-dealers, or the total costs of becoming an investment adviser for these broker-dealers.
The proposed restriction on the use of the terms “adviser” and “advisor” in names and titles does not apply to registered investment advisers, whether they are solely registered as investment advisers or whether they are dually registered. Consequently, there would be no compliance costs for registered investment advisers associated with the restriction on the use of certain terms in names or titles. Some benefits could accrue to investment advisers at the expense of impacted broker-dealers. However, supervised persons of investment advisers who are dually registered but do not provide investment advice on behalf of such investment adviser would be prohibited from using the terms, which could lead to costs for those financial professionals or their firms.
Because the proposed restriction would force some standalone registered broker-dealers to change their names and titles in a way that may lead to less efficient marketing aimed at attracting potential investors, as discussed above, some customer flow that might have gone to these broker-dealers could be permanently diverted to investment advisers who will not be required to
In terms of additional potential benefits, investment advisers and dual registrants, like standalone broker-dealers, will be subject to the required disclosure of their registration status, as part of the proposed rules. As we discussed in the case of standalone registered broker-dealers above, the prominent display of registration status could help reduce investor confusion, and could be used by both firms and their financial professionals as a marketing tool. Moreover, firms may benefit from this disclosure such that they can more effectively signal their type, even if the firm or professional names or titles are not perfectly aligned with the registration status. These potential benefits may be larger for dual registrants, as the prominent display of both their registrations may help attract investors that are looking for both types of services or investors who are generally unsure about which type of services they want.
The proposed restriction on the use of certain names and titles would apply to financial professionals of dual registrant investment advisers who are not supervised persons of an investment adviser or who are supervised persons of an investment adviser but who do provide investment advice on behalf of such investment adviser, which could lead to costs for those financial professionals or their firms. Consistent with the discussion of standalone registered broker-dealer firms above, this segment of persons associated with dual registrants, and the dual registrants themselves, could bear a potentially substantial, one-time costs associated with the proposed rule to change marketing materials and other communications to remove the restricted terms and to explain the change to their customers. Further, some financial professionals using the restricted terms could experience a reduction in the efficiency of their marketing efforts. This could happen to the extent the terms were optimally chosen in the first place from a marketing perspective. This, in turn, might lead to fewer customers for the financial professional and his or her associated firm and a loss of revenue compared to the baseline. Furthermore, financial professionals that are not currently supervised persons of an investment adviser, or cannot immediately qualify to be hired in such a professional role may become less attractive to retain or hire by dual registrants, to the extent their services would be less valuable to dual registrants if they cannot use the terms “adviser” or “advisor” in their names or titles. These financial professionals could potentially mitigate the costs associated with the potential loss of names or titles by becoming a supervised person of an investment adviser and providing investment advice on behalf of such investment adviser. A financial professional would likely pursue such a strategy only if it expected the costs of becoming a supervised person of an investment adviser who provides investment advice on behalf of such investment adviser were lower than the expected costs of modifying their professional names or titles.
We expect the proposed requirements to prominently disclose registration status to impose one-time direct compliance costs associated with changes to written and electronic retail investor communications on both investment advisers and dually registered financial firms.
In addition to the specific benefits and costs discussed in the previous section, the Commission expects that the proposed disclosure could cause some broader long-term effects on the market for financial advice. Below, we elaborate on these possible effects, specifically discussing the impact on efficiency, competition and capital formation.
As discussed above, the proposed rules have the potential to reduce investor confusion about the meaning of the names and titles used by firms and their financial professionals and to improve the matching between investor preferences and types of services they receive. To the extent retail investors use titles and names in their search for firms and financial professionals, the potential reduction in search costs would improve the overall efficiency of the market for financial advice by making the search process shorter in time and more cost effective. Moreover, to the extent the proposed rules would reduce the risk of any mismatch between investor preferences and the type of relationship their financial professional provides, it could lead to potentially improved efficiency in retail investors' asset allocation as investors would be more likely to receive investment advice that is optimal for their individual situation. A reduced risk of mismatch in the relationship would also make it less likely that investors pay more than necessary for the services they receive, which could lead to higher investment returns net of cost.
Alternatively, as discussed previously, investor confusion may increase rather than decrease under certain circumstances, which would increase search costs for investors. In this case, we would instead expect a negative effect on efficiency. Moreover, there could also be negative effects on efficiency to the extent affected broker-dealers start using new names and titles that potentially convey the same information to investors as the restricted terms. Under such circumstances, the proposed rules would then only impose cost increases on broker-dealers without achieving any reduction of investor confusion. These costs may or may not be passed through to investors. In addition, some of the other potential costs outlined previously could have negative effects on efficiency. For example, this proposed rule could have a direct negative impact on efficiency in the registered broker-dealer segment of the market by making marketing less efficient for any affected broker-dealers (including any affected dual registrants with affected registered representatives). Further, any compliance costs or increased marketing costs may be passed through to investors in local markets where the competitive pressure is relatively low—for example, due to, a relatively low supply of financial professionals—and some investors may then face higher costs for broker-dealer services as a result. Finally, some affected firms and financial professionals may decide to exit the market if their costs of doing business go up substantially, which could decrease supply and increase costs of brokerage services for retail investors in some segments of the market. Any such increases in costs of broker-dealer services may also price some investors with limited ability to absorb a cost increase out of the brokerage market altogether, thereby limiting their access to advice and investment choices offered by broker-dealers and potentially hurting the efficiency of their investment allocation.
Because of the complexity associated with the use of names or titles by firms and their financial professionals, and their potential importance for investors both with respect to investor confusion and as a selection mechanism for hiring financial professionals, coupled with the lack of data on how investors could react to a restriction of the use of certain names and titles among broker-dealers and their associated natural persons, we are unable to provide estimates for the potential effects on efficiency. However, we preliminarily believe that any potential effects on the overall efficiency in the market for financial advice, or in segments of this market, are likely to be limited because of several factors that would mitigate the potential impact on investor confusion and/or the potential costs imposed on firms and financial professionals from the proposed restriction: (i) Only a fraction of standalone registered broker-dealers and their associated natural persons, as well as registered representatives working for dual registrants that are not dual-hatted are currently using the terms “adviser” and “advisor” in names and titles;
The proposed requirements to disclose a firm's regulatory status and a
The proposed rules could affect competition in the market for financial advice through potential effects on both demand and supply in the market. In terms of potential effects on demand, to the extent search costs are reduced for investors, it may raise the price elasticity of demand and consequently we would expect the competition between firms in this market to increase.
Conversely, if investor confusion and associated search costs instead are increased by the proposed rules, which as we discussed previously may happen under certain circumstances, it would likely lower price elasticity of demand among current retail investor market participants and reduce competition in the market for financial advice. However, if search costs are increased to the extent that current investors at the high end of the search cost distribution are induced to exit the market for financial advice altogether, it could instead increase average demand elasticity and increase competition among the firms in this market, as the
In terms of the effect on the supply of advice services, to the extent the proposed restriction on the use of certain names or titles would cause affected broker-dealers to register as investment advisers and start promoting that side of their business, or perhaps completely move to an investment adviser model, there would likely be a shift in the mix of supply of advice services, where the supply of broker-dealer (and associated registered representative) services could potentially decrease and the supply of investment adviser services could increase. Such a shift in the mix of the supply of advice services could potentially raise brokerage account prices, reduce choice for investors who prefer to pay for execution of trades on a transactional basis, and lower the costs of advisory accounts with investment advisers. However, to the extent some broker-dealers would exit the market for retail investors altogether, the overall supply of advice services could go down and we may see a decrease in competition not only in the market for broker-dealer services but also in the overall market for investment adviser services, assuming that retail investors view broker-dealer and investment adviser services as substitutes for one another, thereby increasing costs and limiting choices for retail investors. This potential negative effect on competition would be mitigated to the extent other firms (whether other broker-dealers or investment advisers) decide to compete for the customers of any broker-dealers exiting the market.
Further, to the extent the proposed restriction would make standalone broker-dealers services more costly and marketing less effective, non-affected standalone broker-dealers (
In addition, assuming that small broker-dealers and investment advisers select geographic areas where competition from larger firms is low, then any reduction of competition in the broker-dealer market due to a switch to an investment adviser business model would be particularly large in such geographic areas. Similarly, any reduction in competition due to exit of standalone registered broker-dealer altogether from the retail market would be particularly large in such geographic areas, where smaller investment advisers and dual registrants could especially see competitive benefits at the expense of small standalone registered broker-dealers.
We are not able to assess the magnitude of the potential demand or supply related effects as we do not have access to information that would allow us to do so, such as the distribution of search costs across the population of retail investors, estimates of the effect of the proposed rules on search costs, the internal cost functions of broker-dealers, etc. However, we preliminarily believe that the impact of any effects on the overall competitive situation in the market for financial advice is likely to be limited because of the same three mitigating factors we discussed above regarding the potential impact on efficiency.
Some aspects of the proposed rules could lead to increased capital formation, if, for example, retail investors are better able to allocate capital due to a better match with financial professionals or more retail investors enter the market for financial advice and start investing in securities. However, as discussed above, if some broker-dealers exit the market or move to an advisory business model as a result of the proposed rules, some investors may lose access to the market for advice serviced by broker-dealers, which may cause them to exit the market for financial advice altogether and reduce their (direct or indirect) investments in productive assets, thereby reducing capital formation. Alternatively, any investors who lose access to broker-dealers services may switch to an investment adviser relationship, which could reduce their investment returns net of costs to the extent the broker-dealer payment model was more optimal for their investment preferences, thereby also potentially reducing capital formation. Overall, the Commission is unable to determine how these countervailing effects could impact capital formation, and what the likely magnitude of those impacts would be. However, we preliminarily believe that the proposed rules would have a limited impact on capital formation because of the same three mitigating factors we discussed above regarding the potential impact on efficiency.
As discussed above, the proposed rule would restrict broker-dealers and their associated natural persons from using as part of a name or title the term “adviser” or “advisor,” unless such broker-dealer is dually registered as an investment adviser or the associated natural person is a supervised person of an investment adviser and provides advice on behalf of such investment adviser. Further, our proposed rules would also require both broker-dealers and investment advisers to disclose their registration status in print or electronic retail investor communications. Finally, the proposed rules would require associated natural persons of a broker-dealer and supervised persons of an investment adviser to disclose their association with a particular firm in print or electronic retail investor communications. Below, the Commission describes several alternatives to the proposed rules, including the continued ability of broker-dealers to rely on section 202(a)(11)(C) of the Advisers Act (the “Solely Incidental” exclusion), prohibitions on a broker-dealer “holding out” as an investment adviser, disclosure of the registration status only, or additional requirements for dual registrants.
As an alternative to the proposed rule restricting the use of the term “adviser” or “advisor” in names and titles, the Commission could propose a rule that stated that a broker-dealer cannot be considered to provide investment advice solely incidental to the conduct of its business as a broker-dealer under section 202(a)(11)(C) of the Advisers Act if the broker-dealer used the term “adviser” or “advisor” in names or titles, and therefore, would not be excluded from the definition of investment adviser. This alternative would rely on the assumption that a broker-dealer that uses these terms in its name to market or promote its services is doing so because its advice is significant or even instrumental to its brokerage business, and consequently, the broker-dealer's provision of advice is therefore no longer solely incidental to its brokerage business. Similarly, it would also rely on the assumption that if a broker-dealer invests its capital into marketing, branding, and creating intellectual property in using the terms “adviser” or “advisor” in its name or title, the broker-dealer is indicating that advice is an important part of its broker-dealer's business.
This alternative, like the proposed rule, would not permit an associated natural person of a dually registered firm to use the terms “adviser” or “advisor” in their names or titles unless such person was a supervised person of a registered investment adviser who provides investment advice on behalf of such investment adviser. For standalone broker-dealers, and their associated natural persons as well as associated natural person of a dually registered firm that are not supervised persons of a registered investment adviser providing advice on behalf of such investment adviser, that are currently marketing their services to retail investors using the terms “adviser” and “advisor,” in their name or title, the economic effects of this alternative would be expected to be substantially the same as under the proposed restriction on the use of the terms in names and titles.
Instead of prohibiting a broker-dealer from using certain names or titles, we could propose a rule to preclude a broker-dealer from relying on the solely incidental exclusion of section 202(a)(11)(C) if a broker-dealer “held itself out” as an investment adviser to retail investors. This approach could encompass a broker-dealer and its associated natural persons representing or implying through any communication or other sales practice (including through the use of names or titles) that they are offering investment advice subject to a fiduciary relationship with an investment adviser.
This approach would reduce the risk that by only proscribing “adviser” and “advisor,” or any other specific names and titles, new names and titles could arise with similar, confusing connotations. Moreover, this alternative could promote informed investor choices by focusing more comprehensively on broker-dealer marketing and titles that may confuse or mislead investors into believing that a brokerage relationship is an advice relationship of the type provided by investment advisers. Relative to either the baseline or the proposed rule, the “holding out” alternative could have a broader application because it could capture any communication or other sales practices that may lead to confusion by investors in believing that their firms or financial professionals provide more or different services than they provide. As a result, investor confusion and associated costs may be reduced more compared to the proposed rule.
This alternative, however, could create uncertainty for broker-dealers as to which activities (and the extent of such activities) would be permissible and not considered “holding out” as an investment adviser and therefore triggering the need to register as such. As a result of a “holding out” alternative, broker-dealers may feel compelled to avoid fully describing even the types of advisory services they are allowed to provide in their communications and marketing efforts and may also limit or reduce allowable advice provided by broker-dealers to avoid any instances where the advice provided could be misconstrued that such person is “holding out” as an investment adviser. Given that broker-dealers under the current regulatory environment are permitted to provide incidental advice related to recommendations of securities or investment strategies, investor confusion may be increased and some investors may believe that as a result of the “holding out” alternative that this advice could no longer be offered, and could face a mismatch in their preferences and expectations if they sub-optimally choose to hire investment advisers and avoid broker-dealers. Therefore, implementing a rule along these lines could have significant competitive effects for broker-dealers, and could reduce the effectiveness in how investors choose their firms and financial professionals. As a result of increased investor confusion, both search costs and costs associated with choosing the wrong type of firm and financial professional could be increased under this alternative. Moreover, if some broker-dealers avoid providing advice as a result of this alternative, some retail investors may be shut out of the advice market entirely or may have to incur higher costs that may be associated with investment advisory services.
From a compliance cost perspective, broker-dealers that could be subject to the “holding out” alternative would face costs in revising their communications and advertisements in order to eliminate any discussion about them implying they are offering investment advice subject to a fiduciary relationship with an investment adviser. To the extent such revisions have a significant fixed cost component or there are other economies of scale, such as decreasing variable costs for printed material as the number of copies increase, we would expect smaller broker-dealers to face relatively higher costs following the implementation of this alternative. There could also be increased costs under this alternative from training and monitoring of associated natural persons to ensure compliance with the rule, as the restrictions would be more principles-based than prescriptive compared to the proposed rule.
The proposed rules both prohibit certain names or titles and require disclosure of broker-dealer or investment adviser registration status in all written and electronic retail investor communications of broker-dealers and SEC-registered investment advisers, including those of individual representatives, such as business cards, social media profiles, and signature blocks on paper or electronic correspondence. As an alternative to the proposed rules, the Commission could not propose a restriction on the use of certain names or titles by standalone registered broker-dealers, and solely propose requiring disclosure of registration status in all written and electronic retail investor communications given by the firm or its representatives.
Although both broker-dealers and SEC-registered investment advisers would have to bear the cost of including a disclosure of their registration status in all written and electronic retail investor communications under this alternative, they would have to bear this cost under the proposed rules, as well.
While the costs of compliance with a disclosure of registration status only requirement would be lower than under the proposed rules, and would apply uniformly to all broker-dealers and investment advisers, this alternative could be less effective in reducing investor confusion over the titles or names used by financial professionals and firms, and the implications of the types of services provided by, or standard of conduct applicable to, these professionals to the extent the registration status is uninformative to retail investors because they do not understand the regulatory implications of a firm being registered as either a broker-dealer or an investment adviser.
Another potential, related, alternative would be to limit the disclosure of registration status only to certain marketing communications. The overall compliance costs to broker-dealers, particularly small broker-dealers that are less likely to produce advertising campaigns in either print media, television/radio broadcasts, mass mailings, or on websites, would be lower than under the requirements of the proposed rules for disclosure of registration status in all communications. This alternative, however, would likely reduce the potential benefits to retail investors, as only “advertisements” would be required to produce the disclosure of registration status, and could increase both search costs and the possibility of mismatch associated with choosing the wrong type of financial firm or professional. To the extent small broker-dealers or investment advisers are less likely to use these types of marketing communications to reach potential customers relative to larger broker-dealers and investment advisers (
Another “disclosure only” alternative to the proposed restriction on the use of the terms “adviser” and “advisor” in names and titles would be to propose a rule that would provide that when any broker-dealer not registered under the Advisers Act chooses to distribute advertisements or other communications using the term “adviser” or “advisor” as part of a name or title, each use of the term would have to include an asterisked disclaimer clarifying its registration status. Under this alternative broker-dealers and their associated natural persons could continue to use these terms in their names and titles in retail investor communications, but investors would be potentially alerted by the asterisk to the actual registration status of the broker-dealer, which may reduce investors confusion about the type of services provided the associated standard of care to the extent they understand the meaning of the registration status. One limitation of this alternative, as well as the other alternatives discussed in this section, compared to the proposed rule is that some of the evidence on investor perceptions discussed previously in Section IV.A.3 suggest that many retail investors may not fully understand the meaning of the registration status. Moreover, the asterisked declaimer may not be salient enough to attract investors' attention to the disclaimer.
We estimate that the number of dual registrants represents approximately 13% of all retail broker-dealer firms and that approximately 65% of registered representatives of retail broker-dealers work at these dual registrants.
Under this alternative, some of the investor pool may face reduced confusion in their communications with their financial professional with regard to the use of specific names and titles, because these names and titles containing the term “adviser” or “advisor” would be limited only to the accounts or the instances in which the financial professional actually serves in the capacity as an investment adviser. However, these alternatives for dual registrants would create substantial compliance challenges for dual registrants. For example, dual registrants would have to ensure the appropriate name or title is being used when the financial professional is engaging in multiple capacities with investors. Moreover, requiring financial professionals that are dual registrants to tailor their names or titles based on what capacity they are acting in could increase confusion to investors, given that some dual registrants might act in broker-dealer and investment adviser capacities for a single investor. For example, a retail investor may have both a brokerage account and an advisory account, and may receive advice related to both brokerage recommendations as well as ongoing advice in the advisory account in a single communication.
The Commission requests comment on all aspects of the economic analysis, including the analysis of: (i) Potential benefits and costs and other economic effects; (ii) long-term effects of the proposed restriction on the use of certain titles and required disclosure of registration status on efficiency, competition, and capital formation; and (iii) reasonable alternatives to the proposed regulations. We also request comments identifying sources of data and that could assist us in analyzing the economic consequences of the proposed regulations.
In addition to our general request for comment on the economic analysis, we request specific comment on certain aspects of the proposal:
• Do commenters agree with our assessment that the main potential
• Do commenters agree with our characterization of the costs? Are the assumptions that form the basis of our analysis of the costs appropriate? Are there other costs to investors of the proposed rule that have not been identified in our discussion and that warrant consideration? Can commenters provide data that supports or opposes these assumptions?
• We request additional information on how retail investors search for financial professionals. In particular, are there studies, evidence or data available on how investors use company names and titles of representatives in their search for a financial professional?
• We request comments on our characterization of the benefits and costs to broker-dealers and investment advisers of the proposed rule. Do commenters agree with our characterization of the benefits and costs? Are there other benefits or costs of the proposed rule that have not been identified in our discussion and that warrant consideration? Are the assumptions that form the basis of our analysis of the benefits and costs appropriate? Can commenters provide data that supports or opposes these assumptions?
• We specifically request comments on the costs to broker-dealers from having to change their company names as a result of the rule. How costly do commenters believe it would be for affected entities that would be required to their change current company names, including the costs of marketing materials and advertisements? Do broker-dealer company names have significant brand value? To what extent does the brand value lie in terms such as “adviser” or “advisor”?
• Do commenters believe standalone broker-dealers that would be affected by the proposed rule may decide to register as an investment advisers? Are there any specific types of standalone broker-dealers that would be more likely to respond in this way? Do you believe standalone broker-dealers registering as investment advisers would affect their supply of brokerage services? What are the compliance and indirect costs for broker-dealers who would seek to register as an investment adviser? Is there additional data to estimate such costs, either initially or on an ongoing basis?
• Are there any effects on efficiency, competition, and capital formation that are not identified or are misidentified in our economic analysis? Please be specific and provide data and analysis to support your views.
• Do commenters believe that the alternatives the Commission considered are appropriate? Are there other reasonable alternatives that the Commission should consider? If so, please provide additional alternatives and how their costs and benefits would compare to the proposal.
Above, we have described the anticipated standalone economic effects of the proposed Form CRS relationship summary and the proposed restrictions on the use of certain titles and required disclosures about a firm's regulatory status relative to the current baseline. In this section, we discuss how we anticipate these economic effects could change when considering both these proposed rules in combination.
To the extent that investors may be confused and potentially misled about what type of investment advice relationship is best for their investing situation, being provided with the proposed Form CRS, along with the proposed restriction on names and titles, could incrementally reduce some of the investor confusion and mismatch risk. In particular, if a retail investor communicates with a financial professional associated with a dual registrant and the professional has a name or title containing either of the terms “adviser” or “advisor” but solely provides brokerage services, such investor would likely receive the dually registered firm's relationship summary. Because Form CRS would include a description of both business models, without the restriction on names and titles and the requirement of disclosure of registration status, some retail investors might incorrectly match the services they would receive from this financial professional to the description in the relationship summary of
However, for those investors whose confusion about the differences between broker-dealers' and investment advisers' services and standards of conduct would be substantially reduced once receiving and reading a firm's relationship summary we expect a reduced overall incremental benefit of the proposed restriction on the use of certain names and titles. Specifically, because such investors would learn about the differences between broker-dealer and investment adviser services through the relationship summary, they may be unlikely to hire the wrong type of firm or financial professional even without the proposed restriction on the use of certain names or titles.
With respect to the initial search costs borne by investors, we do not believe that the relationship summary would alter the incremental effects the proposed restriction on certain names and titles may have on search costs, because the proposed Form CRS would generally be provided at a later stage in the search process (
We believe that the proposed Form CRS and the proposed required disclosures of registration status would complement each other because both are designed to reduce investor confusion. In particular, for less knowledgeable investors, the disclosure of registration status may raise awareness about the different forms of registration among financial intermediaries and their associated natural persons and prompt questions about the difference between registered broker-dealers and registered investment advisers. The relationship summary potentially could work in concert with the disclosure of
However, for more knowledgeable investors, there may be some overlap in function that could reduce the potential benefits to either the relationship summary or the disclosure of regulatory status without offsetting anticipated costs. As discussed previously, the disclosure of registration status may help to reduce search costs for investors who already understand the meaning of the registration status. These relatively knowledgeable investors may therefore already be familiar with some of the information in relationship summary by having encountered the disclosure of the registration status beforehand. In this case, the relationship summary may provide fewer additional benefits for these investors in either reducing search costs or the likelihood of mismatch, but would impose costs on both broker-dealers and investment advisers that must produce both the relationship summary and the disclosures of registration status.
Finally, we note that any complementarities between the proposed restrictions on the use of certain names and titles, required disclosures about a firm's regulatory status, and the proposed relationship summary would be constrained by the fact (1) the relationship summary does not need to be provided by state-registered standalone investment advisers and (2) these state-registered investment advisers (and their supervised persons) would not be required to provide registration status disclosures in retail investor communications pursuant to this proposed rule.
Certain provisions of our proposal contain “collection of information” requirements within the meaning of the Paperwork Reduction Act of 1995 (“PRA”).
Form ADV (OMB Control No. 3235-0049) is currently a two-part investment adviser registration form. Part 1 of Form ADV contains information used primarily by Commission staff, and Part 2 is the client brochure. We are not proposing amendments to Part 1 or 2. We use the information to determine eligibility for registration with us and to manage our regulatory and examination programs. Clients use certain of the information to determine whether to hire or retain an investment adviser. The collection of information is necessary to provide advisory clients, prospective clients and the Commission with information about the investment adviser and its business, conflicts of interest and personnel. Rule 203-1 under the Advisers Act requires every person applying for investment adviser registration with the Commission to file Form ADV. Rule 204-4 under the Advisers Act requires certain investment advisers exempt from registration with the Commission (“exempt reporting advisers”) to file reports with the Commission by completing a limited number of items on Form ADV. Rule 204-1 under the Advisers Act requires each registered and exempt reporting adviser to file amendments to Form ADV at least annually, and requires advisers to submit electronic filings through IARD. The paperwork burdens associated with rules 203-1, 204-1, and 204-4 are included in the approved annual burden associated with Form ADV and thus do not entail separate collections of information. These collections of information are found at 17 CFR 275.203-1, 275.204-1, 275.204-4 and 279.1 (Form ADV itself) and are mandatory. Responses are not kept confidential.
We are proposing to amend Form ADV to add a new Part 3, requiring certain registered investment advisers to prepare and file a relationship summary for retail investors. As with Form ADV Parts 1 and 2, we will use the information to determine eligibility for registration with us and to manage our regulatory and examination programs. Similarly, clients can use the information required in Part 3 to determine whether to hire or retain an investment adviser, as well as what types of accounts and services are appropriate for their needs. The collection of information is necessary to provide advisory clients, prospective clients and the Commission with information about the investment adviser and its business, conflicts of interest and personnel. The proposal requiring investment advisers to deliver the relationship summary is contained in a new collection of information under proposed new rule 204-5 under the Advisers Act, which estimates are discussed in Section V.B below. We are not proposing amendments to Part 1 or 2 of Form ADV.
The respondents to current Form ADV are investment advisers registered with the Commission or applying for registration with the Commission and
As discussed in Section II above, we propose to adopt amendments to Form ADV that would add a new Part 3, requiring certain registered investment advisers to prepare and file a relationship summary for retail investors. Only those registered investment advisers offering services to retail investors would be required to prepare and file a relationship summary. Based on IARD system data, the Commission estimates that 7,625 investment advisers provide advice to individual high net worth and individual non-high net worth clients.
This would leave 5,096 registered investment advisers that do not provide advice to retail investors
Based on the prior revision of Form ADV,
The proposed amendments to Form ADV to add Part 3 would increase the information collection burden for registered investment advisers with retail investors. As discussed above in Section II, we propose to adopt amendments to Form ADV, under Part 3, that would require certain registered investment advisers to prepare and file a relationship summary for retail investors. Only those registered investment advisers providing services to retail investors would be required to prepare and file a relationship summary. We propose to require that those investment advisers file their relationship summaries with the Commission electronically through IARD in the same manner as they currently file Form ADV Parts 1 and 2. Investment advisers also would need to amend and file an updated relationship summary within 30 days whenever any information becomes materially inaccurate.
As noted in Section V.A.1 above, not all investment advisers would be required to prepare and file the relationship summary. For those investment advisers, the per adviser annual hour burden for meeting their Form ADV requirements would remain the same, in particular, 29.22 hours per registered investment adviser without relationship summary obligations. Similarly, because exempt reporting advisers also would not have relationship summary obligations, the annual hour burden for exempt reporting advisers to meet their Form ADV obligations would remain the same, at 3.60 hours per exempt reporting adviser. However, although we are not proposing changes to Form ADV Part 1 and Part 2, and the per adviser information collection burden would not increase for those without the obligation to prepare and file the relationship summary, the information collection burden attributable to Parts 1 and 2 of Form ADV would increase due to an increase in the number of registered investment advisers and exempt reporting advisers since the last information collection burden estimate. In this section, we discuss the increase in burden for Form ADV overall attributable to the proposed amendments,
For investment advisers that provide advice to retail investors, we estimate that the initial first year burden for preparing and filing the relationship summary would be five hours per registered adviser. As discussed above, much of the language of the proposed relationship summary is prescribed. Furthermore, much of the information proposed to be required in the relationship summary overlaps with that required by Form ADV Part 2 and therefore should be readily available to registered investment advisers because of their existing disclosure obligations. Investment advisers also already file the Form ADV Part 2 brochure on IARD, and we have considered this factor in determining our estimate of the additional burden to file Form ADV Part 3: Form CRS. In addition, the narrative descriptions required in the relationship summary should be narrowly tailored and brief, and the relationship summary must be limited to four pages (or
The currently approved total annual collection of information burden estimate for Form ADV anticipates that there will be external costs, including (i) a one-time initial cost for outside legal and compliance consulting fees in connection with the initial preparation of Part 2 of Form ADV, and (ii) the cost for investment advisers to private funds to report the fair value of their private fund assets.
Most of the information proposed to be required in the relationship summary is readily available to investment advisers from Form ADV Part 2, and the narrative descriptions are narrowly tailored and brief or prescribed. As a result, we anticipate that a quarter of advisers will seek the help of outside legal services and half will seek the help of compliance consulting services in connection with the initial preparation of the relationship summary. We estimate that the initial per existing adviser cost for legal services related to the preparation of the relationship summary would be $1,416.
The current approved information collection burden for Form ADV also includes the hour burden associated with annual and other amendments to Form ADV, among other requirements. We anticipate that the proposed relationship summary would increase the annual burden associated with Form ADV by 0.5 hours
For existing and newly-registered advisers with relationship summary obligations, the additional burden attributable to amendments to Form ADV to add Part 3: Form CRS, (including the initial preparation and filing of the relationship summary and amendments thereto) totals 20,381 hours,
As discussed above, the currently approved total aggregate annual hour burden for all registered advisers completing, amending, and filing Form ADV (Part 1 and Part 2) with the Commission is 363,082 hours, or a blended average per adviser burden of 23.77 hours, with a monetized cost of $92,404,369, or $6,051 per adviser. This includes the total annual hour burden for registered advisers of 351,386 hours, or 29.22 hours per registered adviser, and 11,696 hours for exempt reporting advisers, or 3.60 hours per exempt reporting adviser. For purposes of updating the total information collection based on the proposed amendments to Form ADV, we consider three categories of respondents, as noted above: (i) Existing and newly-registered advisers preparing and filing a relationship summary, (ii) registered advisers with no obligation to prepare and file a relationship summary, and (iii) exempt reporting advisers.
For existing and newly-registered advisers preparing and filing a relationship summary, including amendments to the disclosure, the total annual collection of information burden for preparing all of Form ADV, updated to reflect the proposed amendments to Form ADV, equals 31.74 hours per adviser, with 2.52 hours attributable to the proposed amendments.
As noted above, we estimate 5,096, or approximately 40% of existing registered advisers, would not have retail investors; therefore, they would not be obligated to prepare and file relationship summaries, so their annual per adviser hour burden would remain unchanged.
In summary, factoring in the proposed amendments to Form ADV to add Part 3, the revised aggregate burden for Form ADV for all registered advisers and exempt reporting advisers would be 436,962,
The currently approved total annual collection of information burden estimate for Form ADV anticipates that there will be external costs, including (i) a one-time initial cost for outside legal and compliance consulting fees in connection with the initial preparation of Part 2 of Form ADV, and (ii) the cost for investment advisers to private funds to report the fair value of their private fund assets.
In summary, taking into account (i) a one-time initial cost for outside legal and compliance consulting fees in connection with the initial preparation of Part 2 of Form ADV, (ii) the cost for investment advisers to private funds to report the fair value of their private fund assets, and (iii) the incremental external legal or compliance costs for the preparation of the proposed relationship summary, we estimate the annual aggregate external cost burden of the Form ADV information collection would be $18,424,417, or $1,448 per registered adviser.
Under section 204 of the Advisers Act, investment advisers registered or required to register with the Commission under section 203 of the Advisers Act must make and keep for prescribed periods such records (as defined in section 3(a)(37) of the Exchange Act), furnish copies thereof, and make and disseminate such reports as the Commission, by rule, may prescribe as necessary or appropriate in the public interest or for the protection of investors. Rule 204-2 sets forth the requirements for maintaining and preserving specified books and records. We are proposing amendments to rule 204-2 that would require registered advisers to retain copies of each relationship summary. Investment advisers would also be required to maintain each amendment to the relationship summary as well as to make and preserve a record of dates that each relationship summary and each amendment was delivered to any client or to any prospective client who subsequently becomes a client, as well as to any retail investor before such retail investor opens an account. These records would be required to be maintained in the same manner, and for the same period of time, as other books and records required to be maintained under rule 204-2(a), to allow regulators to access the relationship summary during an examination. Specifically, investment advisers would be required to maintain and preserve a record of the relationship summary in an easily accessible place for not less than five years from the end of the fiscal year during which the last entry was made on such record, the first two years in an appropriate office of the investment adviser. This collection of information is found at 17 CFR 275.204-2 and is mandatory. The Commission staff uses the collection of information in its examination and oversight program. Requiring maintenance of these disclosures as part of the firm's books and records would facilitate the Commission's ability to inspect for and enforce compliance with firms' obligations with respect to Form CRS.
The likely respondents to this collection of information are all of the approximately 12,721 advisers currently registered with the Commission. We estimate that based on updated IARD data as of December 31, 2017, 7,625 existing advisers will be subject to the amended provisions of rule 204-2 to preserve the relationship summary as a result of the proposed amendments.
The approved annual aggregate burden for rule 204-2 is currently 2,199,791 hours, with a total annual aggregate monetized cost burden of approximately $130,316,112, based on an estimate of 12,024 registered advisers, or 183 hours per registered adviser.
As noted above, the approved annual aggregate burden for rule 204-2 is currently 2,199,791, hours based on an estimate of 12,024 registered advisers, or 183 hours per registered adviser.
Proposed new rule 204-5 would require an investment adviser to deliver the relationship summary to each retail investor before or at the time the adviser enters into an investment advisory agreement (even if the adviser's agreement with the retail investor is oral) as well as to existing clients one time within a specified time period after the effective date of the proposed amendments. The adviser also would deliver the relationship summary to existing clients before or at the time (i) a new account is opened that is different from the retail investor's existing account(s); or (ii) changes are made to the retail investor's existing account(s) that would materially change the nature and scope of the adviser's relationship with the retail investor, as further discussed in Section II.C.2 above. In addition, advisers would be required to post a current version of their relationship summary prominently on their public website (if they have one). Investment advisers would be required to communicate any changes in an updated relationship summary to retail investors who are existing clients or customers of the firm within 30 days after the updates are required to be made and without charge. The communication can be made by delivering the relationship summary or by communicating the information in another way to the retail investor.
Proposed new rule 204-5 contains a collection of information requirement. The collection of information is necessary to provide advisory clients, prospective clients and the Commission with information about the investment adviser and its business, conflicts of interest and personnel. Clients would use the information contained in the relationship summary to determine whether to hire or retain an investment adviser and what type of accounts and services are appropriate for their needs. The Commission would use the information to determine eligibility for registration with us and to manage our regulatory and examination programs. This collection of information would be found at 17 CFR 275.204-5 and would be mandatory. Responses would not be kept confidential.
The likely respondents to this information collection would be the approximately 7,625 investment
Under proposed new rule 204-5, advisers would be required to post a current version of their relationship summary prominently on their public website (if they have one). We estimate that each adviser would incur 0.5 hours to prepare the relationship summary, such as to ensure proper electronic formatting, and to post the disclosure to the adviser's website, if the adviser has one.
The burden for this proposed rule is based on each adviser with retail investors having, on average, an estimated 4,461 clients who are retail investors.
As noted above, investment advisers also would be required to deliver the relationship summary to existing clients before or at the time (i) a new account is opened that is different from the retail investor's existing account(s); or (ii) changes are made to the retail investor's existing account(s) that would materially change the nature and scope of the adviser's relationship with the retail investor, as further discussed in Section II.C.2. With respect to delivery of the relationship summary in the event new account types are opened or material changes occur in the nature or scope of the advisory relationship, we expect that such delivery would take place among 10% of an adviser's retail investors annually. We would therefore estimate a total annual hourly burden of 9 hours per adviser and 72,286 hours in total annual aggregate hours,
Investment advisers would be required to amend their relationship summaries within 30 days when any of the information becomes materially inaccurate. We do not expect amendments to be frequent, but based on the historical frequency of amendments made on Form ADV Parts 1 and 2, estimate that on average, each adviser preparing a relationship summary will likely amend the disclosure and average of 1.81 times per year.
Data from the IARD system indicate that of the 12,721 advisers registered with the Commission, 7,625 have retail investors, and on average, each has 4,461 clients who are retail investors.
Altogether, we estimate the total collection of information burden for proposed new rule 204-5 to be 967,044 annual aggregate hours per year,
New proposed rule 17a-14 under the Exchange Act [17 CFR 240.17a-14] and Form CRS [17 CFR 249.640] would require a broker-dealer that offer services to retail investors to prepare, file with the Commission, post to the broker-dealer's website (if it has one), and deliver to retail investors a relationship summary, as discussed in greater detail in Section II above. Broker-dealers would file the relationship summary with EDGAR and deliver the relationship summary to both existing customers and new or prospective new customers who are retail investors. New proposed rule 17a-14 under the Exchange Act [17 CFR 240.17a-14] and Form CRS [17 CFR 249.640] contain a collection of information requirement. We will use the information to manage our regulatory and examination programs. Clients can use the information required in Form CRS to determine whether to hire or retain a broker-dealer, as well as what types of accounts and services are appropriate for their needs. The collection of information is necessary to provide broker-dealer customers, prospective customers, and the Commission with information about the broker-dealer and its business, conflicts of interest and personnel. This collection of information would be found at 17 CFR 249.640 and would be mandatory. Responses would not be kept confidential.
The respondents to this information collection would be the broker-dealers registered with the Commission that would be required to deliver a relationship summary in accordance with proposed new rule 17a-14 under the Exchange Act [17 CFR 240.17a-14]. As of December 31, 2017, there were 2,857 broker-dealers registered with the Commission that reported sales to retail customer investors,
Unlike investment advisers, broker-dealers currently are not required to disclose in one place all of the information required by the relationship summary or to file a narrative disclosure document with the Commission. We estimate, therefore, that the initial first year burden for preparing and filing the relationship summary would be 15.0 hours per registered broker-dealer. The narrative descriptions required in the relationship summary should be narrowly tailored and brief, and the relationship summary must be limited to four pages (or equivalent limit if in electronic format). The relationship summary would be standardized across broker-dealers given the mandated set and sequence of topic areas, and moreover, a considerable amount of language within each topic area also would be prescribed, thereby limiting the amount of time required to prepare the disclosure. Therefore, we believe that the time needed to prepare the relationship summary should not vary significantly based on the size of the broker-dealer. However, unlike investment advisers, which already prepare Form ADV Part 2 brochures and have information readily available to prepare the relationship summary, broker-dealers would be required for the first time to prepare disclosure that contains all the information proposed to be required by the relationship summary. In addition, investment advisers already file their brochures on IARD, while broker-dealers may incur new burdens to file their relationship summaries on EDGAR. Therefore, we believe that each broker-dealer respondent would incur 15 hours on a one-time basis, instead of five hours for investment advisers, for the initial preparation and filing of the relationship summary. However, we believe that the amount of time needed to post the relationship summary on the broker-dealer's website, if it has one, would not vary significantly from the time needed by investment advisers because the time required to prepare and post disclosure that is standardized in length and content should not vary significantly across firms. As with investment advisers, we estimate that each broker-dealer would incur 0.5 hours to prepare the relationship summary for posting to its website, if it has one, such as to ensure proper electronic formatting, and to perform the actual posting.
Given these assumptions, we estimate the total one-time initial hourly burden for broker-dealers to prepare the relationship summary and file it with the Commission would be 42,855
Under proposed new rule 17a-14, broker-dealers would be required to prepare and file a relationship summary, as well as post it to their website if they have one. We do not anticipate external costs in the form of website set-up, maintenance, or licensing fees because broker-dealers would not be required to establish a website for the sole purpose of posting their relationship summary if they do not already have a website. We do anticipate that some broker-dealers may incur a one-time initial cost for outside legal and consulting fees in connection with the initial preparation of the relationship summary. Although broker-dealers subject to the relationship summary requirement may vary widely in terms of the size, complexity and nature of their businesses, the amount of disclosure required would not vary substantially among broker-dealers. Accordingly, the amount of time, and thus cost, required for outside legal and compliance review is unlikely to vary substantially among those broker-dealers who elect to obtain outside assistance.
We do not expect ongoing external legal or compliance consulting costs for the relationship summary. Although broker-dealers would be required to amend the relationship summary within 30 days whenever any information becomes materially inaccurate, given the standardized nature and prescribed language of the relationship summary, we expect that amendments would be factual and require relatively minimal wording changes. We believe that broker-dealers would be more knowledgeable about these facts than outside legal or compliance consultants and would be able to make these revisions in-house. Therefore, we do not expect that broker-dealers will need to incur ongoing external costs for the preparation and review of relationship summary amendments.
As with our estimates above for investment advisers, we do not expect broker-dealers to amend their relationship summaries frequently. Based on staff experience, we believe that many broker-dealers, as a matter of best practices, would update their relationship summary at a minimum once a year, after conducting an annual supervisory review, for example.
Proposed rule 17a-14 under the Exchange Act would require a broker-dealer to deliver the relationship summary, with respect to a retail investor that is a new or prospective customer, before or at the time the retail investor first engages the broker-dealer's services. Broker-dealers also would make a one-time, initial delivery of the relationship summary to all existing customers within a specified time period after the effective date of the proposal. Also with respect to existing customers, broker-dealers would deliver the relationship summary before or at the time (i) a new account is opened that is different from the retail investor's existing account(s); or (ii) changes are made to the retail investor's account(s) existing account(s) that would materially change the nature and scope of the broker-dealer's relationship with the retail investor, as further discussed in II.C.2 above.
We estimate the burden for broker-dealers to make a one-time initial delivery of the relationship summary to existing customers based on an estimate of the number of accounts held by these broker-dealers. 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 79%, or 101.248 million, of those accounts belong to retail customers.
Broker-dealers would be required to deliver the relationship summary to existing customers before or at the time (i) a new account is opened that is different from the retail investor's existing account(s); or (ii) changes are made to the retail investor's existing account(s) that would materially change the nature and scope of the adviser's relationship with the retail investor, as further discussed in Section II.C.2. With respect to delivery of the relationship summary in the event of material changes in the nature or scope of the brokerage relationship, as with investment advisers, we estimate that this would take place among 10% of a broker-dealer's retail investors annually. We would therefore estimate broker-dealers to incur a total annual aggregate burden of 202,496 hours, or 71 hours per broker-dealer,
As discussed above, broker-dealers must communicate any changes in an updated relationship summary to retail investors who are existing customers of the firm within 30 days after the updates are required to be made and without charge. The communication can be made by delivering the relationship summary or by communicating the information in another way to the retail investor. Consistent with our discussion on broker-dealers' amendments to the relationship summary we are assuming that the 2,857 broker-dealers with relationship summaries will amend them twice each year. We also assume that 50% will choose to deliver the relationship summary to communicate the update information. As with investment advisers, we estimate that broker-dealers would require 0.02 hours to make a delivery to each customer. Therefore, the estimated burden for those broker-dealers choosing to deliver an amended relationship summary to meet this communication requirement
To estimate the delivery burden for broker-dealers' new or prospective new customers, as discussed above, we estimate that the 2,857 standalone broker-dealers with retail activity have approximately 101.248 million retail customer accounts.
As discussed above, we estimate the total annual collection of information burden for proposed new rule 17a-14 in connection with obligations relating to the relationship summary, including (i) initial preparation, filing, and posting to a website; (ii) amendments to the relationship summary for material updates and related filing and website posting burdens; (iii) one-time initial delivery to existing customers; (iv) delivery to existing customers who are opening new accounts or materially changing the nature or scope of their relationship with the broker-dealer; (v) delivery of amended relationship summaries; and (vi) delivery to new and prospective customers. Given these proposed requirements, we estimate the total annual aggregate hourly burden to be approximately 3,084,835 hours per year, or 1,080 hours on a per broker-dealer basis.
The proposed requirement to make a record indicating the date that a relationship summary was provided to each customer and to each prospective customer who subsequently becomes a customer would contain a collection of information that would be found at 17 CFR 240.17a-3(a)(24) and would be mandatory. The Commission staff would use this collection of information in its examination and oversight program, and the information generally is kept confidential.
Exchange Act section 17(a)(1) requires registered broker-dealers to make and keep for prescribed periods such records as the Commission deems “necessary or appropriate in the public interest, for the protection of investors or otherwise in furtherance of the purposes of” the Exchange Act.”
The amendments to rule 17a-3 that we are proposing today would require SEC-registered broker-dealers to make a record indicating the date that a relationship summary was provided to each customer and to each prospective customer who subsequently becomes a customer. Commission staff has estimated that the proposed amendments to rule 17a-3(a)(24) would result in an incremental burden increase of 0.1 hours annually for each of the estimated SEC-registered broker-dealers that would be required to prepare and preserve the initial relationship summary and any amendments.
The incremental hour burden for broker-dealers to maintain the relationship summary would therefore
Exchange Act section 17(a)(1) requires registered broker-dealers to make and keep for prescribed periods such records as the Commission deems “necessary or appropriate in the public interest, for the protection of investors or otherwise in furtherance of the purposes of” the Exchange Act.”
The likely respondents to this collection of information requirement are the approximately 2,857 broker-dealers that report retail activity, as described above.
The approved annual aggregate burden for rule 17a-4 is currently 1,042,416 hours, with a total annual aggregate monetized cost burden of approximately $67.8 million, based on an estimate of 4,104 broker-dealers and 150 broker-dealers maintaining an internal broker-dealer system.
As noted above, the approved annual aggregate burden for rule 17a-4 is currently 1,042,416 hours, with a total annual aggregate monetized cost burden of approximately $67.8 million, based on an estimate of 4,104 broker-dealers and 150 broker-dealers maintaining an internal broker-dealer system. The revised annual aggregate hourly burden for rule 17a-4 would be 976,350
Proposed new rule 151-3 would require broker-dealers and their associated natural persons to prominently disclose that it is, or in the case of a natural person that such person is associated with a broker-
Rule 151-3 contains a collection of information requirement. This collection of information would be found at [17 CFR 240.15l-3] and would be mandatory. The likely respondents to this information collection would be all broker-dealers and their associated natural persons that distribute print or electronic retail investor communications.
The Commission believes that the collection of information is necessary to provide retail investors and the Commission with information to better determine whether a communication is from a broker-dealer or investment adviser, and, for retail investors specifically, to allow them to better identify which type of firm is more appropriate for their specific investment needs. Additionally, by requiring an affirmative identification, retail investors would also be better informed whether a financial professional is an associated person of a broker-dealer rather than a supervised person of an investment adviser, allowing them to make a more informed choice as to which type of professional is appropriate for their financial goals.
Currently, there are 3,841 registered broker-dealers and 435,071 associated natural persons licensed with FINRA.
We assume for the purposes of this rule that all 435,071 registered representatives engage retail investors. This estimate is based on the following calculation: (494,399 total licensed registered representatives) × (12% (the percentage of pure investment adviser representatives)) = 59,328 representatives at standalone investment advisers. Then, to isolate the number of representatives at standalone broker-dealers and dually registered firms, subtract 59,328 from 494,399 = 435,071 retail-facing, licensed registered representatives at standalone broker-dealers or dually registered firms.
We estimate that the initial one time burden for complying with the disclosure requirements would be 72 hours per large broker-dealer
Aside from certain anticipated outside legal costs, as discussed below, we preliminary estimate that to comply with our proposed rule with respect to print communications,
To compute the 8 hours internal initial burden we assume 2 hours by compliance personnel and 6 hours by business operations personnel of the broker-dealer.
With respect to electronic communications,
With respect to smaller broker-dealers, we preliminarily anticipate that it would take approximately 10 hours
To compute the 10 hours internal initial burden, we assume 2 hours by compliance personnel and 8 hours by business operations and information technology personnel of the broker-dealer.
We preliminarily estimate that the total initial burden for broker-dealers is 121,971 hours.
(5 hours for print communications per small broker-dealer + 10 hours for electronic communications per small broker-dealer) = 15 hours per small broker-dealer. (15 hours × 1,469 small broker-dealers) = 22,035 total initial burden for small broker-dealers.
(99,936 total initial burden large broker-dealers + 22,035 total initial burden small broker-dealers) = 121,971 total broker-dealer initial burden.
This figure was calculated as follows: (6 compliance hours × $298 compliance rate) + (66 technology/business hours × $269 averaged technology/business rate) × 1,388 large broker-dealers = $27,124,296 total initial costs for large broker-dealers.
(3 compliance hours × $298 compliance rate) + (12 technology/business hours × $269 averaged technology/business rate) × 1,469 small broker-dealers = $6,055,218 total initial costs for small broker-dealers.
$27,124,296 total initial cost for large broker-dealers + $6,055,218 total initial cost for small broker-dealers = $33,179,514 total initial costs for all broker-dealers.
(5 hours for print communications per small broker-dealer + 10 hours for electronic communications per small broker-dealer) = 15 hours per small broker-dealer. (15 hours × 1,469 small broker-dealers) = 22,035 total initial burden for small broker-dealers.
99,936 total initial burden large broker-dealers + 22,035 total initial burden small broker-dealers = 121,971 total broker-dealer initial burden/2,857 total broker-dealers = 43 total initial burden per broker-dealer.
This figure was calculated as follows: (6 compliance hours × $298 compliance rate) + (66 technology/business hours × $269 averaged technology/business rate) × 1,388 large broker-dealers = $27,124,296 total initial costs for large broker-dealers.
(3 compliance hours × $298 compliance rate) + (12 technology/business hours × $269 averaged technology/business rate) × 1,469 small broker-dealers = $6,055,218 total initial costs for small broker-dealers.
$27,124,296 total initial cost for large broker-dealers + $6,055,218 total initial cost for small broker-dealers = $33,179,514 total initial costs for all broker-dealers/2,857 total number of broker-dealers = $11,613 total initial cost per broker-dealer.
We further preliminarily anticipate that associated natural persons would have an initial one-time burden of 0.5 hours for each associated natural person respondent to review, identify, and make changes to their individual communications, both print and electronic.
This figure was calculated as follows: 0.5 hours/3 firm staff categories (
($298 compliance/hour × 0.17) = $51 per 0.17 of an hour.
($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour.
($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour.
$51 + $46 + $46 = $143 total cost per associated natural person.
(0.5 × $143 total cost per associated natural person × 435,071 associated natural persons) = $31,107,576.50 total initial cost for associated natural persons.
(217,536 total initial burden/435,071 total associated natural persons) = 0.5 total initial burden per associated natural person.
This figure was calculated as follows: 0.5 hours/3 firm staff categories (
($298 compliance/hour × 0.17) = $51 per 0.17 of an hour.
($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour.
($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour.
$51 + $46 + $46 = $143 total cost per associated natural person.
(0.5 × $143 total cost per associated natural person × 435,071 associated natural persons) = $31,107,576.50 total initial cost for associated natural persons.
($31,107,576.50 total initial cost for associated natural persons/435,071 total number of associated natural persons) = $71.50 total initial cost per associated natural person.
Aside from the internal initial burden, we anticipate that there will be certain associated outside costs as well. We believe that broker-dealers and their associated natural persons may engage outside counsel to assist them in understanding our proposed rule should it be adopted.
($472 × 8 legal hours = $3,776 × 1,388 large broker-dealers = $5,241,088) + ($472 × 4 legal hours = $1,888 × 1,469 small broker-dealers = $2,773,472).
($5,241,088 large broker-dealers + $2,773,472 small broker-dealers) = $8,014,560 total cost.
($472 × 8 legal hours = $3,776 × 1,388 large broker-dealers = $5,241,088) + ($472 × 4 legal hours = $1,888 × 1,469 small broker-dealers = $2,773,472).
$5,241,088 large broker-dealers + $2,773,472 small broker-dealers = $8,014,560 total cost/2,857 broker-dealers = $2,805 total cost per broker-dealer.
Additionally, we anticipate that firms will also have one-time outside cost associated with the cost of printing new communications including new business cards, envelopes, pitch books, and letterheads. As part of these costs, we anticipate that both large and small broker-dealers will have to work with printers to set the disclosure on, for example, business cards. We estimate initial costs to amend certain communications associated with the proposed rule of $617,848,307 for broker-dealers
($445,121 × 1,388 large broker-dealers = $617,827,948) + ($20,359 × 1,469 small broker-dealers = $29,907,371) = $617,848,307 total broker-dealer outside costs.
For the ongoing burden of new communications for broker-dealers, we preliminarily estimate that the burden for legal, compliance, business operations, and technology services for adding a registration status statement would be 0.5 hours annual hours per broker-dealer.
In this estimate we are not calculating the print and technological associated burdens of updating communications which we analyzed earlier as we are assuming those burdens to be a one-time initial burden for a firm seeking compliance with the proposed rule.
This figure was calculated as follows: 0.5 hours/3 firm staff categories (
($298 compliance/hour × 0.17) = $51 per 0.17 of an hour.
($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour.
($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour.
$51 + $46 + $46 = $143 total cost per broker-dealer.
(0.5 hours × $143 total cost per broker-dealer × 2,857 broker-dealers) = $204,275.50 total ongoing cost for broker-dealers.
(1,429 total ongoing burden for broker-dealers/2,857 total broker-dealers) = 0.5 total initial burden per broker-dealer.
This figure was calculated as follows: 0.5 hours/3 firm staff categories (
($298 compliance/hour × 0.17) = $51 per 0.17 of an hour.
($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour.
($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour.
$51 + $46 + $46 = $143 total cost per broker-dealer.
(0.5 hours × $143 total cost per broker-dealer × 2,857 broker-dealers) = $204,275.50 total ongoing cost for broker-dealers/2,857 total number of broker-dealers = $71.50 total ongoing cost per broker-dealer.
For the ongoing burden of new communications for associated natural persons of a broker-dealer, we preliminarily estimate that the burden for compliance, business operations, and technology services for adding a registration status statement would be 0.5 hours.
In this estimate we are not calculating the print and technological associated burdens of updating communications which we analyzed earlier as we are assuming those burdens to be a one-time initial burden for an associated natural person of a broker-dealer seeking compliance with the proposed rule.
This figure was calculated as follows: 0.5 hours/3 firm staff categories (
($298 compliance/hour × 0.17) = $51 per 0.17 of an hour.
($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour.
($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour.
$51 + $46 + $46 = $143 total cost per associated natural person.
(0.5 hours × $143 total cost per associated natural person × 435,071 associated natural person) = $31,107,576.50 total ongoing cost for associated natural persons.
(217,536 total ongoing burden/435,071 total associated natural persons) = 0.5 total ongoing annual burden per associated natural person.
This figure was calculated as follows: 0.5 hours/3 firm staff categories (
($298 compliance/hour × 0.17) = $51 per 0.17 of an hour.
($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour.
($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour.
$51 + $46 + $46 = $143 total cost per associated natural person.
(0.5 hours × $143 total cost per associated natural person × 435,071 associated natural person) = $31,107,576.50 total ongoing cost for associated natural persons/435,071 total number of associated natural persons) = $71.50 total ongoing annual cost per associated natural person.
Proposed rule 211h-1 would require investment advisers registered under section 203 and their supervised persons to prominently disclose that it is, or in the case of supervised persons that such persons are supervised by an investment adviser that is, registered with the Commission as an investment adviser in print or electronic retail investor communications. For print communications, we propose to require that such registration status be displayed in a type size at least as large as and of a font style different from, but at least as prominent as, that used in the majority of the communication. In addition, such disclosure must be presented in the body of the communication and not in a footnote. For electronic communications, or in any publication by radio or television, we propose to require that such disclosure be presented in a manner reasonably calculated to draw retail investor attention to it. This collection of information would be found at [17 CFR 240.15l-3] and would be mandatory. The likely respondents to this information collection would be all investment advisers and their supervised persons that distribute print or electronic retail investor communications.
The Commission believes that the collection of information is necessary to provide retail investors and the Commission with information to better determine whether a communication is from a broker-dealer or investment adviser, and, for retail investors specifically, to allow them to better identify which type of firm is more appropriate for their specific investment needs. Additionally, by requiring an affirmative identification, retail investors would also be better informed whether a financial professional is a supervised person of an investment adviser rather than an associated person of a broker-dealer. For similar reasons, we believe that because retail investors interact with a firm primarily through financial professionals, it is important that financial professionals disclose the firm type with which they are associated.
Currently, there are 12,721 registered investment advisers and approximately 942,215 supervised persons.
The number of new supervised persons is calculated by looking at the difference in the number of supervised persons in 2017 as compared to 2016 at firms which service retail investors.
We estimate that the initial one-time burden for complying with the disclosure requirements would be 72 hours per large investment adviser
Aside from certain anticipated outside legal costs, as discussed below, we preliminary estimate that to comply with our proposed rule with respect to print communications,
For existing print communications for large investment advisers we preliminarily estimate that the total burden for investment advisers would be 8 hours for compliance and business operations personnel to review, identify, and make changes across all print communications.
To compute the 8 hours internal initial burden we assume 2 hours by compliance personnel and 6 hours by business operations personnel of the broker-dealer.
With respect to electronic communications
With respect to small investment advisers, we preliminarily anticipate that it would take approximately 10 hours
To compute the 10 hours internal initial burden, we assume 2 hours by compliance personnel and 8 hours by business operations and information technology personnel of the investment adviser.
We preliminarily estimate that the total initial burden for investment advisers is 270,441 hours.
(72 hours × 2,738 large investment advisers) = 197,136 total initial burden for large investment advisers.
(5 hours for print communications per small investment adviser + 10 hours for electronic communications per small investment adviser) = 15 hours per small investment adviser. (15 hours × 4887 small investment advisers) = 73,305 total initial burden for small investment advisers.
(197,136 total burden large investment advisers + 73,305 total burden small investment advisers) = 270,441 hours.
This figure was calculated as follows: (6 compliance hours × $298 compliance rate) + (66 technology/business hours × $269 averaged technology/business rate) × 2,738 large investment advisers = $53,505,996 total initial costs for large investment advisers.
(3 compliance hours × $298 compliance rate) + (12 technology/business hours × $269 averaged technology/business rate) × 4,887 small investment advisers = $20,144,214 total initial costs for small investment advisers.
($53,505,996 total initial costs for large investment advisers + $20,144,214 total initial costs for small investment advisers) = $73,650,210 total initial costs for investment advisers.
(72 hours × 2,738 large investment advisers) = 197,136 total initial burden for large investment advisers.
(5 hours for print communications per small investment advisers + 10 hours for electronic communications per small investment adviser) = 15 hours per small investment adviser. (15 hours × 4887 small investment advisers) = 73,305 total initial burden for small investment advisers.
197,136 total burden large investment advisers + 73,305 total burden small investment advisers = 270,441 hours/7,625 total investment advisers = 35 hours average initial burden per investment adviser.
This figure was calculated as follows: (6 compliance hours × $298 compliance rate) + (66 technology/business hours × $269 averaged technology/business rate) × 2,738 large investment advisers = $53,505,996 total initial costs for large investment advisers.
(3 compliance hours × $298 compliance rate) + (12 technology/business hours × $269 averaged technology/business rate) × 4,887 small investment advisers = $20,144,214 total initial costs for small investment advisers.
$53,505,996 total initial cost large investment advisers + $20,144,214 total initial costs small investment advisers = $73,650,210 total initial cost investment advisers/7,625 total number of investment advisers = $9,659 average initial cost per investment adviser.
We further preliminarily anticipate that supervised persons would have an initial burden of 0.5 hours for each supervised person respondent to review, identify, and make changes to their individual communications, both print and electronic.
This figure was calculated as follows: 0.5 hours/3 firm staff categories (
($298 compliance/hour × 0.17) = $51 per 0.17 of an hour.
($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour.
($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour.
$51 + $46 + $46 = $143 total cost per supervised person.
(0.5 hours × $143 total cost per supervised person × 245,408 supervised persons) = $17,546,672 total initial cost for supervised persons.
(122,704 total initial burden for supervised persons/245,408 total supervised persons) = 0.5 hours average initial burden per investment adviser.
This figure was calculated as follows: 0.5 hours/3 firm staff categories (
($298 compliance/hour × 0.17) = $51 per 0.17 of an hour.
($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour.
($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour.
$51 + $46 + $46 = $143 total cost per supervised person.
(0.5 hours × $143 total cost per supervised person × 245,408 supervised persons) = $17,546,672 total initial cost for supervised persons/245,408 total number of supervised persons) = $71.50 average initial cost per supervised person.
Aside from the internal initial burden, we anticipate that there would be certain associated outside costs as well. We believe that investment advisers and their supervised persons may engage outside counsel to assist them in understanding our proposed rule should it be adopted.
($472 × 8 legal hours) = $3,776 × 2,738 large investment advisers = $10,338,688.
($472 × 4 legal hours) = $1,888 × 4,887 small investment advisers = $9,226,656.
($10,338,688 total large investment advisers costs + $9,226,656 total small investment advisers costs) = $19,565,344.
($472 × 8 legal hours) = $3,776 × 2,738 large investment advisers = $10,338,688.
($472 × 4 legal hours) = $1,888 × 4,887 small investment advisers = $9,226,656.
$10,338,688 total large investment advisers costs + $9,226,656 total small investment advisers costs = $19,565,344/7625 total investment advisers = $2,566 total cost per investment adviser.
Additionally, we anticipate that firms will also have one-time outside costs associated with the cost of printing new communications including new business cards, envelopes, pitch books, and letterheads. As part of these costs, we anticipate that both large and small investment advisers will have to work with printers to set the disclosure on, for example, business cards. We
($65,973 × 2,738 large investment advisers = $180,634,074) + ($33,999 × 4,887 small investment advisers = $166,153,113) = $346,787,187 total investment adviser outside costs.
For the ongoing burden of new communications for investment advisers, we preliminarily estimate that the burden for compliance, business operations, and technology services for adding a registration status statement would be 0.5 hours annual hours per investment adviser.
In this estimate we are not calculating the print and technological associated burdens of updating communications which we analyzed earlier as we are assuming those burdens to be a one-time initial burden for a firm seeking compliance with the proposed rule.
This figure was calculated as follows: 0.5 hours/3 firm staff categories (
($298 compliance/hour × 0.17) = $51 per 0.17 of an hour.
($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour.
($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour.
$51 + $46 + $46 = $143 total cost per investment adviser.
(0.5 hours × $143 total cost per investment adviser × 7,625 investment advisers) = $545,187.50 total ongoing cost for investment advisers.
(3,812.5/7,625 total investment advisers) = 0.5 hours average initial burden per investment adviser.
This figure was calculated as follows: 0.5 hours/3 firm staff categories (
($298 compliance/hour × 0.17) = $51 per 0.17 of an hour.
($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour.
($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour.
$51 + $46 + $46 = $143 total cost per investment adviser.
(0.5 hours × $143 total cost per investment adviser × 7,625 investment advisers) = $545,187.50 total ongoing cost for investment advisers/7,625 total number of investment advisers = $71.50 average annual ongoing cost per investment adviser.
For the ongoing burden of new communications for supervised persons of an investment adviser, we preliminarily estimate that the burden for compliance, business operations, and technology services for adding a registration status statement would be 0.5 hours.
In this estimate we are not calculating the print and technological associated burdens of updating communications which we analyzed earlier as we are assuming those burdens to be a one-time initial burden for a supervised person of an investment adviser seeking compliance with the proposed rule.
This figure was calculated as follows: 0.5 hours/3 firm staff categories (
($298 compliance/hour × 0.17) = $51 per 0.17 of an hour.
($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour.
($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour.
$51 + $46 + $46 = $143 total cost per supervised person.
(0.5 hours × $143 total cost per supervised person × 245,408 supervised persons) = $17,546,672 total ongoing cost for supervised persons.
(122,704 total initial burden for supervised persons/245,408 total supervised persons) = 0.5 hours average ongoing annual burden per supervised person.
This figure was calculated as follows: 0.5 hours/3 firm staff categories (
($298 compliance/hour × 0.17) = $51 per 0.17 of an hour.
($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour.
($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour.
$51 + $46 + $46 = $143 total cost per supervised person.
(0.5 hours × $143 total cost per supervised person × 245,408 supervised persons) = $17,546,672 total ongoing cost for supervised persons/245,408 total number of supervised persons = $71.50 average ongoing annual cost per supervised person.
Additionally, we believe that any new investment advisers and their supervised persons would likely only incur the same ongoing annual burden estimate rather than the initial burden because they would incorporate the proposed registration status in all communications at their inception and not have to conduct a review and identification of outstanding communications nor make changes to their already existing communications. We do anticipate that such persons would also incur similar outside legal
This figure was calculated as follows: 0.5 hours/3 firm staff categories (
($298 compliance/hour × 0.17) = $51 per 0.17 of an hour.
($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour.
($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour.
$51 + $46 + $46 = $143 total cost per investment adviser.
(0.5 hours × $143 total cost per investment adviser × 477 new investment advisers) = $34,105.50 total initial cost for new investment advisers.
(238.50 total initial burden for new investment advisers/477 total new investment advisers) = 0.5 hours average initial burden per investment adviser.
This figure was calculated as follows: 0.5 hours/3 firm staff categories (
($298 compliance/hour × 0.17) = $51 per 0.17 of an hour.
($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour.
($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour.
$51 + $46 + $46 = $143 total cost per investment adviser.
(0.5 hours × $143 total cost per investment adviser × 477 new investment advisers) = $34,105.50 total cost for new investment advisers/477 total number of new investment advisers = $71.50 average initial cost per new investment adviser.
This figure was calculated as follows: 0.5 hours/3 firm staff categories (
($298 compliance/hour × 0.17) = $51 per 0.17 of an hour.
($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour.
($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour.
$51 + $46 + $46 = $143 total cost per supervised person.
(0.5 hours × $143 total cost per supervised person × 3,000 new supervised persons) = $214,500 total cost for new supervised persons.
(1,500 total initial burden for new supervised persons/3000 total new supervised persons) = 0.5 hours average initial burden per new supervised person.
This figure was calculated as follows: 0.5 hours/3 firm staff categories (
($298 compliance/hour × 0.17) = $51 per 0.17 of an hour.
($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour.
($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour.
$51 + $46 + $46 = $143 total cost per supervised person.
(0.5 hours × $143 total cost per supervised person × 3,000 new supervised persons) = $214,500 total cost for new supervised persons/3,000 total number of new supervised persons = $71.50 average initial cost per new supervised person.
We request comment on our estimates for the new estimated burden hours and change in current burden hours, and their associated costs described above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments in order to: (i) Evaluate whether the proposed collections of information are necessary for the proper performance of the functions of the Commission, including whether the information will have practical utility; (ii) evaluate the accuracy of the Commission's estimate of the burden of the proposed collections of information; (iii) determine whether there are ways to enhance the quality, utility, and clarity of the information to be collected; and (iv) determine whether there are ways to minimize the burden of the collections of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology.
The agency has submitted the proposed collections of information to OMB for approval. Persons wishing to submit comments on the collection of information requirements of the proposed amendments should direct them to the Office of Management and Budget, Attention Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Washington, DC 20503, and should send a copy to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549, with reference to File No. S7-08-18. As OMB is required to make a decision concerning the collections of information between 30 and 60 days after publication of the proposal, a comment to OMB is best assured of having its full effect if OMB receives it within 30 days of publication. Requests for materials submitted to OMB by the Commission with regard to these collections of information should be in writing, refer to File No. S7-08-18, and be submitted to the Securities and Exchange Commission, Office of FOIA Services, 100 F Street NE, Washington, DC 20549.
The Commission has prepared the following Initial Regulatory Flexibility Analysis (“IRFA”) in accordance with section 3(a) of the Regulatory Flexibility Act (“RFA”).
Individual investors rely on the services of broker-dealers and investment advisers when making and implementing investment decisions. Such “retail investors” can receive investment advice from a broker-dealer, an investment adviser, or both, or decide to make their own investment decisions. Broker-dealers, investment advisers and dually registered firms all provide important services for individuals who invest in the markets. Studies show that retail investors are confused about the differences among them.
We recognize the benefits of retail investors having access to diverse business models and of preserving investor choice among brokerage services, advisory services, or both. However, we believe that retail investors need clear information in order to understand the differences and key characteristics of each type of service. Providing this clarity is intended to assist investors in making an informed choice when choosing an investment firm and professional and type of account to help to ensure they receive services that meet their needs and expectations. We also believe it is important to mitigate the risk that certain names or titles could result in retail investors being misled, including believing that the financial professional is a fiduciary, leading to uninformed decisions regarding which firm or financial professional to engage, which may in turn result in investors being harmed.
The Commission considered ways to address investor confusion and preserve investor choice, including reviewing studies, comment letters, and committee recommendations.
We are proposing new rules and rule amendments to require broker-dealers and investment advisers to deliver a Form CRS (or relationship summary) to retail investors that would include general information about each of these topics, including where to find additional information. We preliminarily believe that providing this information before or at the time a retail investor enters into an investment advisory agreement or first engages a brokerage firm's services, as well as at certain points during the relationship (
As discussed above in Section II.A, the relationship summary would be short, with a mix of tabular and narrative information, and contain sections covering: (i) Introduction; (ii) the principal relationships and services the firm offers to retail investors; (iii) the standard of conduct applicable to those services; (iv) the fees and costs that retail investors will pay; (v) comparisons of brokerage and investment advisory services (for standalone broker-dealers and investment advisers); (vi) conflicts of interest; (vii) where to find additional information, including whether the firm or its financial professionals currently have reportable legal or disciplinary events and who to contact about complaints; and (viii) key questions for retail investors to ask the firm's financial professional.
The proposed rules and rule amendments would require advisers and broker-dealers to deliver their relationship summaries to retail investors, to file them electronically with the Commission, and to post them electronically on their public websites (if they have a public website). If they do not have a public website, they would be required to include in their relationship summary a toll-free number that retail investors may call to request documents. We are also proposing to require firms to update their relationship summaries within 30 days whenever any information in the relationship summary becomes materially inaccurate. Firms would be required to file the updated version electronically with the Commission, and post them on their firms' websites (if they have a public website). Firms would be required to communicate any changes in an updated relationship summary to retail investors who are existing clients or customers of the firm within 30 days after the updates are required to be made and without charge. The communication could be made by delivering the relationship summary or by communicating the information in another way to the retail investor. The proposal would require a firm to maintain a copy of the relationship summary and each amendment or revision as part of its books and records and make them available to Commission staff upon request, as discussed in Section II.E above. All of these requirements are discussed in detail above in Sections I through IV. The burdens of these requirements on small advisers and broker-dealers are discussed below as well as above in our Economic Analysis and Paperwork Reduction Act Analysis, which discuss the burdens on all advisers and broker-dealers.
As discussed in Section II above, the relationship summary would be in addition to, and not in lieu of, current disclosure and reporting requirements for broker-dealers and investment
We are also proposing a rule under the Exchange Act that would restrict broker-dealers and their associated natural persons, when communicating with a retail investor, from using as part of a name or title the term “adviser” or “advisor” unless any such (1) broker or dealer is an investment adviser registered under section 203 of the Advisers Act or with a state, or (2) natural person who is an associated person of a broker or dealer is a supervised person of an investment adviser registered under section 203 of the Advisers Act or with a state, and such person provides investment advice on behalf of such investment adviser. We are also proposing rules under the Exchange Act and Advisers Act that would require broker-dealers and investment advisers and their associated natural persons and supervised persons, respectively, to prominently disclose the firm's registration status with the Commission and the financial professional's association with such firm in print and electronic retail investor communications. As discussed above in Section III, the proposed restriction is designed to address the risk that retail investors could be misled by the term “adviser” or “advisor” and, as a result, make an uninformed decision regarding which firm or financial professional they are engaging or seeking to engage, resulting in investors being harmed. Additionally, as discussed above in Section III, we believe that requiring firms and their associated natural persons or supervised persons, respectively, to disclose whether a firm is a broker-dealer or investment adviser and requiring a financial professional to disclose his or her association with such firm would assist retail investors in determining which type of firm is more appropriate for their specific investment needs. Similarly, our proposed rules to require a firm to disclose whether it is a broker-dealer or an investment adviser in print or electronic communications to retail investors would help to facilitate investor understanding, even if investors currently may not understand the differences between investment advisers and broker-dealers. For similar reasons, we preliminarily believe that because retail investors interact with a firm primarily through financial professionals, it is important that financial professionals disclose the firm type with which they are associated.
The Commission is proposing the following new rule and rule amendments under the authority set forth in section 19(a) of the Securities Act of 1933 [15 U.S.C. 77s(a)], sections 23(a) and 28(e)(2) of the Securities Exchange Act of 1934 [15 U.S.C. 78w(a) and 78bb(e)(2)], section 319(a) of the Trust Indenture Act of 1939 [15 U.S.C. 7sss(a)], section 38(a) of the Investment Company Act of 1940 [15 U.S.C. 80a-37(a)], and sections 203(c)(1), 204, 206A, 206(4), 211(a) and 211(h), and of the Investment Advisers Act of 1940 [15 U.S.C. 80b-3(c)(1), 80b-4, 80b-6a, 80b-6(4), 80b-11(a) and 80b-11(h)], and section 913(f) of Title IX of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”): (i) Proposed new rule 204-5 under the Advisers Act ; (ii) amendments to rule 279.1, Form ADV, to create Form CRS for investment advisers; (iii) amendments to rule 203-1 under the Advisers Act; (iv) amendments to rule 204-1 under the Advisers Act; and (v) amendments to rule 204-2 under the Advisers Act. The Commission is proposing the following rule amendments under the authority set forth in section 913(f) of Title IX of the Dodd-Frank Act, sections 3, 10, 15, 23 and 36 of the Exchange Act [15 U.S.C. 78c, 78j, 78o, 78q, 78w and 78mm]: (i) Proposed new rule 17a-14 under the Exchange Act; (ii) proposed Form CRS (17 CFR 249.640) under the Exchange Act; and (iii) amendments to rule 17a-3 and 17a-4 under the Exchange Act. The Commission is also proposing the following new rules under the authority set forth in sections 15(l), 23(a), and 36 of the Securities Exchange Act of 1934 (78o(l), 78w(a), and 78mm), sections 211(h), 206A, 211(a) of the Investment Advisers Act of 1940, 15 U.S.C. 80b-1 et seq., (80b-11(h), 80b-6a, 80b-11(a), sections 913(f) and 913(g)(2) of Title IX of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; (i) proposed new rule 15l-2 under the Exchange Act; (ii) proposed new rule 15l-3 under the Exchange Act; and (iii) proposed new rule 211h-1 under the Advisers Act.
In developing these proposals, we have considered their potential impact on small entities that would be subject to the proposed amendments. The proposed amendments would affect many, but not all, broker-dealers and investment advisers registered with the Commission, including some small entities.
Under Commission rules, for the purposes of the Advisers Act and the RFA, an investment adviser generally is a small entity if it: (1) Has assets under management having a total value of less than $25 million; (2) did not have total assets of $5 million or more on the last day of the most recent fiscal year; and (3) does not control, is not controlled by, and is not under common control with another investment adviser that has assets under management of $25 million or more, or any person (other than a natural person) that had total assets of $5 million or more on the last day of its most recent fiscal year.
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 17a-5(d) under the Exchange Act,
As discussed in Sections IV and V, above, the Commission estimates that as of December 31, 2017, approximately 2,857 retail broker-dealers would be subject to the proposed Form CRS requirements and new rule 17a-14 under the Exchange Act, and proposed amendments to rule 17a-3 and 17a-4 under the Exchange Act, and proposed new rules 15l-2 and 15l-3 under the Exchange Act.
Proposed Form CRS and the proposed rules and rule amendments would impose certain reporting and compliance requirements on certain advisers and broker-dealers, including those that are small entities, requiring them to create and update relationship summaries containing specified information regarding their advisory and brokerage businesses, as applicable. The proposed rules and rule amendments, including new recordkeeping requirements, are summarized in this RFA (Section VI.A., above). All of these proposed requirements are also discussed in detail, above, in Sections II.A-E., and these requirements and the burdens on advisers and broker-dealers, including those that are small entities, are discussed above in Sections IV and V (the Economic Analysis and Paperwork Reduction Act Analysis) and below.
The proposed amendments to Form ADV that would require each registered investment adviser that offers advisory services to retail investors to prepare, file and deliver Form CRS would impose additional costs on many registered advisers, including some small advisers. Our Economic Analysis, discussed in Section IV, above, discusses these costs and burdens for investment advisers, which include small advisers.
Similarly, requiring each broker-dealer that offers brokerage services to retail investors to prepare, file and deliver Form CRS would impose additional costs on many broker-dealers, including some small broker-dealers. Our Economic Analysis, discussed in Section IV, above, discusses these costs and burdens for broker-dealers, which include small broker-dealers.
The costs associated with preparing the new relationship summaries will be limited for investment advisers and broker-dealers, including small entities, for several reasons. First, the disclosure document is concise (no more than four pages in length or equivalent limit if in electronic format), and much of the information is already provided by the broker-dealers and investment advisers as part of current disclosure practices. Second, the disclosure will be uniform across retail investors and would not be customized or personalized to potential investors. Third, the disclosure would involve a certain degree of standardization across firms. In particular, firms would be required to use the same headings, prescribed wording, and present the information under the headings in the same order. Additionally, firms would be prohibited from adding any items to those prescribed by the Commission and any information other than what the Instructions require or permit. These standardized elements allow for potential economies of scale for entities that may have subsidiaries that would also be required to produce the disclosure. The compliance costs could, however, be different across firms with relatively smaller or larger numbers of retail investors as customers or clients.
As discussed above, firms would be required to update the relationship summary within 30 days whenever any information in the relationship summary becomes materially inaccurate.
In addition, firms would be permitted to deliver the relationship summary, as well as updates, electronically consistent with the Commission's prior guidance regarding electronic delivery. We believe that this would further minimize the burden of delivery for all firms, including small advisers and broker-dealers. To the extent that small advisers and broker-dealers are more likely to have fewer retail investors than larger advisers and broker-dealers, the proposed delivery requirements should impose lower variable costs on small advisers and broker-dealers than on larger firms. The additional hours per adviser and broker-dealer, the monetized cost per adviser and broker-dealer, and the incremental external legal and compliance cost for small entity investment advisers and broker-dealers, attributable to the initial preparation, filing, posting, delivery, and recordkeeping related to Form CRS, are estimated above and in the Paperwork Reduction Analysis.
These proposed changes are designed to update the books and records rules in light of proposed Form CRS, and they mirror the current recordkeeping requirements for the Form ADV brochure and brochure supplement. The records for investment advisers would be required to be maintained in the same manner, and for the same period of time, as other books and records required to be maintained under rule 204-2(a) under the Advisers Act, and the records for broker-dealers would be required to maintained for six years after the record was created in accordance with rule 17a-4(e)(10) under the Exchange Act.
As discussed above in Section III, we are proposing to restrict broker-dealers and associated natural persons of broker-dealers, when communicating with a retail investor, from using as part of a name or title the term “adviser” or “advisor” unless any such (1) broker or dealer is an investment adviser registered under section 203 of the Advisers Act or with a state, or (2) natural person who is an associated person of a broker or dealer is a supervised person of an investment adviser registered under section 203 of the Advisers Act or with a state, and such person provides investment advice on behalf of such investment adviser.
This would include such names or titles as, for example, financial advisor (or adviser), wealth advisor (or adviser), and trusted advisor (or adviser), and advisory (
The proposed rule would permit firms that are registered both as investment advisers and broker-dealers to use the term “adviser” or “advisor” in their name or title. The proposed rule would, however, only permit an associated natural person of a dually registered firm
Proposed rule 15l-2 would impose certain compliance requirements on broker-dealers, including small broker-dealers, but would not impose reporting or recordkeeping requirements on broker-dealers. The compliance burdens on broker-dealers, including small broker-dealers, are described above in our Economic Analysis in Section IV. They would need to change their names or titles where their names or titles include “adviser” or “advisor” in violation of the proposed rule. As
In addition, as discussed in Section IV, as a result of the proposed rule 151-2, broker-dealers would need to assess whether their associated natural persons use as part of a name or title the term “adviser” or “advisor.” As discussed in Section IV, financial professionals providing brokerage services use a large variety of names or titles to describe their business and the services that they offer, including “financial advisor,” “financial consultant,” “banker,” and “broker.”
The proposed restriction on the use of the term “adviser” and “advisor” in a name or title does not apply to registered investment advisers, whether they are solely registered as investment advisers or whether they are dually registered as broker-dealers. Consequently, there would be no compliance costs for registered investment advisers associated with the restriction on certain terms in names or titles. However, as discussed in Sections III and IV, supervised persons of dually registered investment advisers who do not provide investment advice on behalf of such investment adviser would be restricted from using these terms when communicating with a retail investor, which could lead to costs for those financial professionals or their firms.
As discussed above, we are proposing rule 15l-3 under Exchange Act and rule 211h-1 under the Advisers Act that would require broker-dealers and investment advisers and their associated natural persons and supervised persons, respectively, to disclose the firm's registration status with the Commission and such financial professional's relationship with the firm in print or electronic retail investor communications. These rules would impose certain compliance requirements on many broker-dealers and investment advisers but would not impose separate reporting or recordkeeping requirements on investment advisers and broker-dealers. The compliance burdens on broker-dealers and investment advisers, including small broker-dealers and investment advisers, are described above in our Economic Analysis in Section IV and the Paperwork Reduction Act discussion in Section V. These include the requirement for investment advisers and broker-dealers that would be subject to the proposed rule to prominently disclose their registration status in print or electronic retail investor communications. In addition, associated natural persons would need to prominently disclose that they are associated persons of a broker-dealer registered with the Commission, and supervised persons would need to prominently disclose that they are supervised persons of an investment adviser registered with the Commission.
As discussed in Sections IV and V above, the Commission estimates that as of December 31, 2017, approximately 2,857 broker-dealers would be subject to the proposed rule 15l-3 under the Exchange Act. As discussed above, of these, approximately 802 are small entities. These broker-dealers would be subject to the rule's requirements described in the previous paragraph. As discussed above, the Commission estimates that as of December 31, 2017, approximately 7,625 investment advisers would be subject to the proposed rule 211h-1 under the Advisers Act. Based on IARD data, we estimate that as of December 31, 2017, approximately 618 advisers are small entities under the RFA. Of these, approximately 179 advise retail investors, and would therefore be subject to the proposed rule 211h-1 under the Advisers Act.
Compliance with these proposed rules would require changes to retail investor communications, which would have to be modified to incorporate the registration status in the manner the rule prescribes. As discussed above in Sections IV and V, to comply with our proposed rule with respect to print communications, broker-dealers and investment advisers would need to review their print and electronic retail investor communications, identify which would need to be amended, make the changes, and verify that all firm retail investor communications comply with the rule's requirements including its technical specifications such as the type size, font, and prominence. As discussed above in Section V, we preliminarily anticipate that the costs associated with complying with the proposed rule with respect to print communications would be larger for large broker-dealers than for small broker-dealers, because we assume large broker-dealers will have to review, identify and change more print communications and in turn have their compliance staff verify more print communications as being compliant with our proposed rule as compared to small broker-dealers which will have fewer print communications. With respect to electronic communications, broker-dealers would need to review, identify and make the required updates coupled with verifying that such retail investor communications (present and future) would be compliant with the proposed rule.
The Commission also preliminarily estimates that the costs associated with complying with the proposed rules' disclosure requirements for broker-dealers, investment advisers, and their associated natural persons and supervised persons, respectively, would also be smaller for small firms than for large firms. With respect to broker-dealers, we estimate that the costs would increase with the size of the broker-dealer, such as costs associated with revisions to each individual representative's communication and advertising materials.
As noted above, broker-dealers and investment advisers have other disclosure obligations under the federal securities laws and other federal laws.
Under our proposed rules, firms would be required to file their relationship summary with the Commission, and the relationship summary will be available on the Commission's public disclosure website. Dual registrants would be required to file Form CRS on both IARD and EDGAR. We are proposing IARD and EDGAR because they are familiar filing systems for investment advisers and broker-dealers.
The RFA directs the Commission to consider significant alternatives that would accomplish our stated objectives, while minimizing any significant adverse impact on small entities. We considered the following alternatives for small entities in relation to the proposed Form CRS required by Part 3 of Form ADV, the proposed amendments to Form ADV (17 CFR 279.1) and rules 203-1, 204-1, and 204-2 under the Advisers Act, the proposed new rule 204-5 under the Advisers Act, the proposed amendments to rules 17a-3 and 17a-4 under the Exchange Act, the proposed new rule 17a-14 and new Form CRS (17 CFR 249.640) under the Exchange Act, the proposed new rules 15l-2 and 15l-3 under the Exchange Act, and the proposed new rule 211h-1 under the Advisers Act: (i) The establishment of differing compliance or reporting requirements that take into account the resources available to small entities; (ii) the clarification, consolidation, or simplification of compliance and reporting requirements under the proposed Form CRS, and proposed new rules and rule amendments for such small entities; (iii) the use of performance rather than design standards; and (iv) an exemption from coverage of the proposed Form CRS, and proposed rules and rule amendments, or any part thereof, for such small entities.
Regarding the first alternative, the Commission believes that establishing different compliance or reporting requirements for small advisers and broker-dealers would be inappropriate under these circumstances. Because the protections of the Advisers Act and Exchange Act are intended to apply equally to retail investor clients and customers of both large and small firms, it would be inconsistent with the purposes of the Advisers Act and the Exchange Act to specify differences for small entities under the proposed rules and rule amendments. As discussed above, we believe that the proposed new Form CRS, and the proposed rules and rule amendments would result in multiple benefits to all retail investors, including alerting retail investors to certain information to consider when choosing a firm and a financial professional and prompting retail investors to ask informed questions. In addition, the content of the relationship summary would facilitate comparisons across firms. We believe that these benefits should apply to retail investors of smaller firms as well as retail
It would also be inappropriate to establish different recordkeeping requirements for small entities, because requiring maintenance of Form CRS and related records as part of the firm's books and records would facilitate the Commission's ability to inspect for and enforce compliance with firms' obligations with respect to Form CRS, which is important for retail investors clients of both large and small firms.
In addition, as discussed above in Section II, we are proposing to require that investment advisers and dual registrants file their relationship summaries with the Commission electronically through IARD in the same manner as they currently file Form ADV Parts 1 and 2. We are proposing to require that broker-dealers file their relationship summaries with the Commission electronically on EDGAR. As discussed above, there are several reasons we propose having the relationship summaries filed with the Commission, including that the public would benefit by being able to use a central location to find any firm's relationship summary, and that easy access to various relationship summaries through one source may facilitate simpler comparison across firms.
Finally, the proposal to require investment advisers and broker-dealers post their relationship summary on their public websites, if they have a public website, in a way that is easy for retail investors to find, already incorporates the flexibility to permit different compliance and reporting requirements for small entities, if applicable. To the extent that broker-dealers and investment advisers that are small entities are less likely to have public websites and do not have them, they would not be required under our proposal to post the relationship summary on their websites.
Regarding the second alternative, we believe the current proposal is clear and that further clarification, consolidation, or simplification of the compliance requirements is not necessary. The proposed Instructions are designed to present requirements for advisers' and broker-dealers' relationship summaries clearly and simply to all such firms, including small entities. In addition, to aid firms in understanding the type of disclosures we propose to require, we have created mock-ups of a relationship summary for an investment advisory firm, a brokerage firm, and a dual registrant, and have included them as appendices to this release. These mock-ups examples are designed to illustrate the application of the proposed requirements. We also believe that the delivery and filing requirements are clear. As further discussed above, our proposal would require: Delivery of the relationship summary to each retail investor before or at the time of beginning a relationship with a firm,
Regarding the third alternative, the Commission believes that proposed Form CRS and the related new rules and amendments appropriately use a combination of performance and design standards. We are proposing to standardize the relationship summaries among firms by specifying the headings, sequence, and content of the topics; prescribing language for firms to use as applicable; and limiting the length of the relationship summary. We believe that the standardization will provide comparative information in a user-friendly format that helps retail investors with informed decision making. For example, we are prescribing the use of graphical formats in specified circumstances, based on studies that indicate the effectiveness of graphical presentation for retail investors.
Within the framework of standardization, we are proposing that for certain disclosure Items in Form CRS, firms would have some flexibility in how they include the required information.
We believe that this approach of using both performance and design standards balances the need to provide firms flexibility in making the presentation of information consistent with their particular business model while ensuring that all investors receive certain information regardless of the firm in a manner that promotes comparability. In the sections above, we request comment on whether the proposed mix of design and performance standards would work for investment advisers and broker-dealers, including small entities, and what the impact of such standards would be on firms.
Regarding the fourth alternative, we believe that, similar to the first alternative, it would be inconsistent with the purposes of the Advisers Act and the Exchange Act to exempt small advisers and broker-dealers from the proposed rule and form amendments, or any part thereof. Because the protections of the Advisers Act and Exchange Act are intended to apply equally to retail investors that are clients and customers of both large and small advisers and broker-dealers, it would be inconsistent with the purposes of the Advisers Act and Exchange Act to specify differences for small entities under the proposed amendments. As discussed above, the information in the relationship summary would alert retail investors to important information for them to consider when choosing a firm and a financial professional, and would prompt retail investors to ask informed questions. In addition, the content of the relationship summary would facilitate comparisons across firms that offer the same or substantially similar services. We preliminarily believe that providing this information before or at the time a retail investor enters into an investment advisory agreement or first engages a brokerage firm's services, as well as at certain points during the relationship (
Regarding the first alternative, the Commission preliminarily believes that establishing different compliance or reporting requirements for small broker-dealers would be inappropriate under these circumstances. We believe it is important to address the risk that retail investors are confused and potentially misled based on the names or titles of their firms and financial professionals and as a result, make uninformed decisions regarding which firm or financial professional they are engaging or seeking to engage. Because the protections of the Exchange Act are intended to apply equally to retail investor clients of both large and small firms, the Commission preliminarily believes it would be inconsistent with the purposes of the Exchange Act to specify differences for small entities under the proposed rule.
Regarding the second alternative, we believe that the current proposal is clear and that further clarification, consolidation, or simplification is not necessary. As discussed in Section III above, the restriction is limited to use of the terms “adviser” and “advisor.” As discussed above in Section III, we considered whether we should restrict broker-dealers from using additional terms, such as, for example, “financial consultant.” We believe, however, that the term “adviser” or “advisor” is more closely related to the statutory term “investment adviser,” which makes it more likely than these other terms that retail investors would associate such terms with an investment adviser and its advisory activities than with a broker-dealer and its brokerage activities. We preliminarily believe that the use of the terms “adviser” and “advisor” by broker-dealers and their associated natural persons has particularly contributed to investor confusion about the typical services, fee structures, conflicts of broker-dealers and investment advisers, and legal standards of conduct to which broker-dealers and investment advisers are subject. Therefore, we believe that the current proposal is clear in its limited scope of restricted terms.
Regarding the third alternative, we believe that using performance rather than our proposed design standards would be less effective in addressing the issue of investor confusion based on the names or titles of their firms and financial professionals. As discussed in Section III, the proposed rule would restrict broker-dealers' or its associated natural persons' use of the term “adviser” or “advisor” as part of a name or title when communicating with a retail investor. We believe that the use of the terms “adviser” and “advisor” has particularly contributed to investor confusion about the typical services, fee structures, conflicts of interest, and legal standards of conduct to which broker-dealers and investment advisers are subject and as a result has potentially misled retail investors as to the type of firm or financial professional they are engaging or seeking to engage. Accordingly, we believe that restricting these terms appropriately addresses these issues based on a broker-dealer's or its associated natural persons' use of the term “adviser” or “advisor” as part of a name or title. As discussed above in Section III, we preliminarily believe that without restricting a broker-dealer or its associated natural person(s) from using “adviser” or “advisor” in a name or title, a retail investor may be misled into believing and expecting that their “financial advisor,” who may, for example, solely provide brokerage services at a broker-dealer, is an
Additionally, we considered two performance-based standards, as discussed above in Section III.C.
Regarding the fourth alternative, we preliminarily believe that, similar to the first alternative, it would be inconsistent with the purposes of the Exchange Act to exempt small broker-dealers from the proposed rule, or any part thereof.
Regarding the first alternative, the Commission believes that establishing different compliance or reporting requirements for small advisers and broker-dealers would be inappropriate under these circumstances. We believe it is important to assist retail investors in determining which type of firm is more appropriate for their specific investment needs and promote better informed decisions regarding which firm or financial professional they are engaging or seeking to engage. Because the protections of the Advisers Act and Exchange Act are intended to apply equally to retail investor clients of both large and small firms, we preliminarily believe it would be inconsistent with the purposes of the Exchange Act and the Advisers Act to specify differences for small entities under the proposed rule.
Regarding the second alternative, we believe that the current proposal is clear and that further clarification, consolidation, or simplification of the compliance requirements is not necessary. As discussed in Section III.D, we are proposing rules under the Exchange Act and Advisers Act that would require broker-dealers and investment advisers and their associated natural persons and supervised persons, respectively, to prominently disclose the firm's registration status with the Commission and the associated natural persons and supervised person's relationship with the firm in print and electronic retail investor communications. As discussed above in Section III, our proposal would subject broker-dealers and investment advisers to the same requirements, adding to the clarity and consolidation of the compliance requirements. Finally, we note that our proposed rules contain specific presentation and prominence requirements, as discussed above in Section III, for both print and electronic communications.
Regarding the third alternative, we believe that using performance rather than design standards would be less effective in assisting retail investors in determining which type of firm is more appropriate for their specific investment needs. Specifically, we are concerned that in the absence of the specific prominence and formatting requirements, firms and financial professionals may disclose their registration status in a footnote or at the bottom of a website and in small print as they do today with other regulatory mandated disclosures (
Regarding the fourth alternative, we preliminarily believe that, similar to the first alternative, it would be inconsistent with the purposes of the Advisers Act and the Exchange Act to exempt small advisers and broker-dealers from the proposed rule, or any part thereof.
We encourage written comments on the matters discussed in this IRFA. We solicit comment on the number of small entities subject to the proposed Form CRS, and the proposed rules and rule amendments as well as the potential impacts discussed in this analysis; and whether the proposal could have an effect on small entities that has not been considered. We request that commenters describe the nature of any impact on small entities and provide empirical data to support the extent of such impact.
For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996, or “SBREFA,”
We request comment on the potential effect of the proposed amendments on the U.S. economy on an annual basis; any potential increase in costs or prices for consumers or individual industries; and any potential effect on competition, investment or innovation. Commenters are requested to provide empirical data and other factual support for their views to the extent possible.
The Commission is proposing amendments to rule 203-1 under the Advisers Act pursuant to authority set forth in sections 203(c)(1), 204, and 211(a) of the Investment Advisers Act of 1940 [15 U.S.C. 80b-3(c)(1), 80b-4, and 80b-11(a)].
The Commission is proposing amendments to rule 204-1 under the Advisers Act pursuant to authority set forth in sections 203(c)(1) and 204 of the Investment Advisers Act of 1940 [15 U.S.C. 80b-3(c)(1) and 80b-4].
The Commission is proposing new rule 204-5 under the Advisers Act pursuant to authority set forth in sections 204, 206A, 206(4), 211(a), and 211(h) of the Investment Advisers Act of 1940 [15 U.S.C. 80b-4, 80b-6a, 80b-6(4), 80b-11(a), 80b-11(h)], and section 913(f) of Title IX of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”).
The Commission is proposing amendments to rule 279.1, Form ADV, under section 19(a) of the Securities Act of 1933 [15 U.S.C. 77s(a)], sections 23(a) and 28(e)(2) of the Securities Exchange Act of 1934 [15 U.S.C. 78w(a) and 78bb(e)(2)], section 319(a) of the Trust Indenture Act of 1939 [15 U.S.C. 7sss(a)], section 38(a) of the Investment Company Act of 1940 [15 U.S.C. 80a-37(a)], and sections 203(c)(1), 204, 206A, 211(a) and 211(h), and of the Investment Advisers Act of 1940 [15 U.S.C. 80b-3(c)(1), 80b-4, 80b-6a, 80b-11(a) and 80b-11(h)], and section 913(f) of Title IX of the Dodd-Frank Act.
The Commission is proposing to amend rule 204-2 under the Advisers Act pursuant to authority set forth in sections 204 and 211 of the Advisers Act [15 U.S.C. 80b-4 and 80b-11].
The Commission is proposing new rule 17a-14 under the Exchange Act, Form CRS, and amendments to rules 17a-3 and 17a-4 under the Exchange Act pursuant to the authority set forth in the Exchange Act and particularly sections 3, 10, 15, 17, 23 and 36 thereof 15 U.S.C. 78c, 78j, 78o, 78q, 78w and 78mm, and section 913(f) of Title IX of the Dodd-Frank Act.
The Commission is proposing new rules 15
Brokers, Reporting and recordkeeping requirements, Sales practice and disclosure requirements, Securities.
Investment advisers, Reporting and recordkeeping requirements, Securities.
For the reasons set out in the preamble, title 17, chapter II of the Code of Federal Regulations is proposed to be amended as follows:
15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 78g, 78i, 78j, 78j-1, 78k, 78k-1, 78
Section 240.15
Section 240.15
Section 240.17a-14 is also issued under Public Law 111-203, sec. 913, 124 Stat. 1376 (2010).
(a) A broker or dealer, or a natural person who is an associated person of a broker or dealer shall be restricted, when communicating with a retail investor, from using as part of a name or title the term “adviser” or “advisor” unless any such:
(1) Broker or dealer is an investment adviser registered under Section 203 of the Investment Advisers Act of 1940 or with a State, or
(2) Natural person who is an associated person of a broker or dealer is a supervised person of an investment adviser registered under Section 203 of the Investment Advisers Act of 1940 or with a State, and such person provides investment advice on behalf of such investment adviser.
(b) The term
(a) A broker or dealer shall prominently disclose that it is registered with the Commission as a broker-dealer in print or electronic retail investor communications.
(b) A natural person who is an associated person of a broker or dealer shall prominently disclose that he or she is an associated person of a broker-dealer registered with the Commission in print or electronic retail investor communications.
(c) Such disclosures in paragraphs (a) and (b) shall be provided in the following manner:
(1) For print communications, such status must be displayed in a type size at least as large as and of a font style different from, but at least as prominent as, that used in the majority of the communication. In addition, such disclosure must be presented in the body of the communication and not in a footnote.
(2) For electronic communications, or in any publication by radio or television, such disclosure must be presented in a manner reasonably calculated to draw retail investor attention to it.
(d) The term
(a) * * *
(24) A record of the date that each Form CRS was provided to each retail investor, including any Form CRS provided before such retail investor opens an account.
(e) * * *
(10) All records required pursuant to § 240.17a-3(a)(24), as well as a copy of each Form CRS, until at least six years after such record or Form CRS is created.
(a)
(b)
(1) Prepare Form CRS 17 CFR 249.640, by following the instructions in the form.
(2) File your current Form CRS electronically with the Commission through the Commission's EDGAR system, and thereafter, file an amended Form CRS in accordance with the instructions in the form.
(3) Amend your Form CRS as required by the instructions in the form.
(c)
(1) Deliver to each retail investor your current Form CRS before or at the time the retail investor
(2) Deliver to each retail investor who is an existing customer your current Form CRS before or at the time (i) a new account is opened that is different from the retail investor's existing account(s); or (ii) changes are made to the retail investor's existing account(s) that would materially change the nature and scope of the relationship with the retail investor, including before or at the time you recommend that the retail investor transfers from an advisory account to a brokerage account, transfers from a brokerage account to an advisory account, or moves assets from one type of account to another in a transaction not in the normal, customary or already agreed course of dealing. Whether a change would require delivery of the Form CRS would depend on the specific facts and circumstances.
(3) Post the current Form CRS prominently on your website, if you have one, in a location and format that is easily accessible for retail investors.
(4) Communicate any changes made to Form CRS to each retail investor who is an existing customer within 30 days after the amendments are required to be made and without charge. The communication can be made by delivering the current Form CRS or by communicating the information in another way to the retail investor.
(5) Deliver a current Form CRS to each retail investor within 30 days upon request.
(d)
(e)
(1)
(2)
(f)
(2) Within 30 days after the date by which you are first required by paragraph (f)(1) of this section to electronically file your Form CRS with the Commission, you must deliver to each of your existing customers who is a retail investor your current Form CRS.
(3) After [INSERT DATE SIX MONTHS AFTER EFFECTIVE DATE OF RULES/FORM], if you are a newly registered broker or dealer that is subject to this section, you must begin to comply with this section by the date on which your registration with the Commission becomes effective pursuant to Section 15(b) of the Act, including by filing your Form CRS in accordance with paragraph (b)(2) of this section by that date.
For
15 U.S.C. 78a
Section 249.640 is also issued under Public Law 111-203, sec. 913, 124 Stat. 1376 (2010).
This form shall be prepared and filed by broker-dealers registered with the Securities and Exchange Commission pursuant to Section 15 of the Act that offer services to a retail investor pursuant to § 240.17a-14 of this chapter.
15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(11)(H), 80b-2(a)(17), 80b-3, 80b-4, 80b-4a, 80b-6(4), 80b-6a, and 80b-11, unless otherwise noted.
Section 275.204-5 is also issued under sec. 913, Public Law 111-203, sec. 124 Stat. 1827-28 (2010).
Section 275.211h-1 is also issued under sec. 913, Public Law 111-203, sec. 124 Stat. 1827-28 (2010).
(a)
(2) After [INSERT DATE SIX MONTHS AFTER EFFECTIVE DATE OF RULES/FORM] the Commission will not accept any initial application for registration as an investment adviser that does not include a Form CRS that satisfies the requirements of Part 3 of Form ADV.
Information on how to file with the IARD is available on the Commission's Web site at
(a)
(1) Parts 1 and 2:
(i) At least annually, within 90 days of the end of your fiscal year; and
(ii) More frequently, if required by the instructions to Form ADV.
(2) Part 3 at the frequency required by the instructions to Form ADV.
(b)
(2) If you have received a continuing hardship exemption under § 275.203-3, you must, when you are required to amend your Form ADV, file a completed Part 1A, Part 2A and Part 3 of Form ADV on paper with the SEC by mailing it to FINRA.
(3) Transition to filing Form CRS. You must amend your Form ADV by electronically filing with the IARD Form CRS that satisfies the requirements of Part 3 of Form ADV (as amended effective [INSERT EFFECTIVE DATE OF RULES/FORM]) as part of the next annual updating amendment you are required to file after [INSERT DATE SIX MONTHS AFTER EFFECTIVE DATE OF RULES/FORM].
Information on how to file with the IARD is available on our Web site at
(a) * * *
(14)
(i) A copy of each brochure, brochure supplement and Form CRS, and each amendment or revision to the brochure, brochure supplement and Form CRS, that satisfies the requirements of Part 2 or Part 3 of Form ADV, as applicable [17 CFR 279.1]; any summary of material changes that satisfies the requirements of Part 2 of Form ADV but is not contained in the brochure; and a record of the dates that each brochure, brochure supplement and Form CRS, each amendment or revision thereto, and each summary of material changes not contained in a brochure was given to any client or to any prospective client who subsequently becomes a client.
(a)
(b)
(1) Deliver to each retail investor your current Form CRS before or at the time you enter into an investment advisory contract with that retail investor.
(2) Deliver to each retail investor who is an existing client your current Form CRS before or at the time (i) a new account is opened that is different from the retail investor's existing account(s); or (ii) changes are made to the retail investor's existing account(s) that would materially change the nature and scope of the relationship with the retail investor, including before or at the time you recommend that the retail investor transfers from an advisory account to a brokerage account, transfers from a brokerage account to an advisory account, or moves assets from one type of account to another in a transaction not in the normal, customary or already agreed course of dealing. Whether a change would require delivery of the Form CRS would depend on the specific facts and circumstances.
(3) Post the current Form CRS prominently on your website, if you have one, in a location and format that is easily accessible for retail investors.
(4) Communicate any changes made to Form CRS to each retail investor who is an existing client within 30 days after the amendments are required to be made and without charge. The communication can be made by delivering the amended Form CRS or by communicating the information in another way to the retail investor.
(5) Deliver a current Form CRS to each retail investor within 30 days upon request.
(c)
(d)
(1)
(2)
(3)
(e)
(1) Within 30 days after the date by which you are first required by § 275.204-1(b)(3) to electronically file your Form CRS with the Commission, you must deliver to each of your existing clients who is a retail investor your current Form CRS as required by Part 3 of Form ADV.
(2) As of the date by which you are first required to electronically file your Form CRS with the Commission, you must begin using your Form CRS as required by Part 3 of Form ADV to
(a) An investment adviser registered under section 203 of the Act shall prominently disclose that it is registered with the Commission as an investment adviser in print or electronic retail investor communications.
(b) A supervised person of an investment adviser registered under section 203 of the Act shall prominently disclose that he or she is a supervised person of an investment adviser registered with the Commission in print or electronic retail investor communications.
(c) Such disclosures in paragraphs (a) and (b) of this section shall be provided in the following manner:
(1) For print communications, such status must be displayed in a type size at least as large as and of a font style different from, but at least as prominent as, that used in the majority of the communication. In addition, such disclosure must be presented in the body of the communication and not in a footnote.
(2) For electronic communications, or in any publication by radio or television, such disclosure must be presented in a manner reasonably calculated to draw retail investor attention to it.
(d) The term
The Investment Advisers Act of 1940, 15 U.S.C. 80b-1, et seq., Pub. L. 111-203, 124 Stat. 1376.
By the Commission.
The text of Form ADV does not and the amendments will not appear in the Code of Federal Regulations.
Read these instructions carefully before filing Form ADV. Failure to follow these instructions, properly complete the form, or pay all required fees may result in your application or report being delayed or rejected.
In these instructions and in Form ADV, “you” means the investment adviser (
If you are a “separately identifiable department or division” (SID) of a bank, “you” means the SID, rather than your bank, unless the instructions or the form provide otherwise.
If you are a
Terms that appear in
The SEC provides information about its rules and the Advisers Act on its website: <http://www.sec.gov/iard>.
NASAA provides information about state investment adviser laws and state rules, and how to contact a
FINRA provides information about the IARD and electronic filing on the IARD website: <http://www.iard.com>.
Investment advisers use Form ADV to:
Form ADV contains five parts:
An
i. The
ii. The
iii. Each
iv. The advisory activities of each
v. The
To satisfy the requirements of Form ADV while using
Unless otherwise specified, references to “you” in Form ADV refer to both the
A
Note:
You must sign the appropriate Execution Page. There are three Execution Pages at the end of the form. Your initial application, your initial report (in the case of an
The individual who signs the form depends upon your form of organization:
The signature does not have to be notarized, and in the case of an electronic filing, should be a typed name.
Complete Form ADV electronically using the Investment Adviser Registration Depository (IARD) if:
To file electronically, go to the IARD website (
Complete Form ADV (Paper Version) on paper if:
First, obtain a copy of the IARD Entitlement Package from the following website: http://www.iard.com/GetStarted.asp. Second, request access to the IARD system for your firm by completing and submitting the IARD Entitlement Package. The IARD Entitlement Package explains how the form may be submitted. Mail the forms to: FINRA Entitlement Group, 9509 Key West Avenue, Rockville, MD 20850.
When FINRA receives your Entitlement Package, they will assign a
Once you receive your
Questions regarding the Entitlement Process should be addressed to FINRA at 240.386.4848.
If you are applying for registration with the SEC or are amending your SEC registration, one or more
If you are granted a continuing hardship exemption to file Form ADV on paper, FINRA will enter your filing into the IARD and your
If at the time of your
If you check box 13 in Item 2.A. of Part 1A to report on your
Yes, you may be required to register with or submit a report to one or more
If you are relying on SEC rule 203(m)-1 and you accept a
The 90-day transition period described above also applies to investment advisers with their
Yes. These fees go to support and maintain the IARD. The IARD filing fees are in addition to any registration or other fee that may be required by state law. You must pay an IARD filing fee for your initial application, your initial report, and each
If you are submitting a paper filing under a continuing hardship exemption (see Instruction 17), you are required to pay an additional fee. The amount of the additional fee depends on whether you are filing Form ADV or Form ADV-W. (There is no additional fee for filings made on Form ADV-W.) The hardship filing fee schedule is available by contacting FINRA at 240.386.4848.
If you are required to file electronically but cannot do so, you may be eligible for one of two types of hardship exemptions from the electronic filing requirements.
If you have been granted a continuing hardship exemption, you must complete and submit the paper version of Form ADV to FINRA. FINRA will enter your responses into the IARD. As discussed in General Instruction 16, FINRA will charge you a fee to reimburse it for the expense of data entry.
When filing on paper, you must:
Where you submit your paper filing depends on why you are eligible to file on paper:
Every
Submit Form ADV-NR to the SEC at the following address:
Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549; Attn: OCIE Registrations Branch.
Sections 203 and 204 of the Advisers Act [15 U.S.C. §§ 80b-3 and 80b-4] authorize the SEC to collect the information required by Form ADV. The SEC collects the information for regulatory purposes, such as deciding whether to grant registration. Filing Form ADV is mandatory for advisers who are required to register with the SEC and for
An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number. The Advisers Act authorizes the SEC to collect the information on Form ADV from investment advisers. See 15 U.S.C. §§ 80b-3 and 80b-4. Filing the form is mandatory.
The form enables the SEC to register investment advisers and to obtain information from and about
Anyone may send the SEC comments on the accuracy of the burden estimate on page 1 of the form, as well as suggestions for reducing the burden. The Office of Management and Budget has reviewed this collection of information under 44 U.S.C. § 3507.
The information contained in the form is part of a system of records subject to the Privacy Act of 1974, as amended. The SEC has published in the
Under rule 17a-14 under the Securities Exchange Act of 1934 and rule 204-5 under the Investment Advisers Act of 1940, broker-dealers registered under section 15 of the Exchange Act and investment advisers registered under section 203 of the Advisers Act are required to deliver to
1.
2.
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Broker-dealers and investment advisers have disclosure and reporting obligations under state and federal law, including, but not limited to, obligations under the Exchange Act, the Advisers Act, and the respective rules thereunder. Broker-dealers are also subject to disclosure obligations under the rules of self-regulatory organizations. Delivery of this document will not necessarily satisfy the additional disclosure requirements that you have under the federal securities laws and regulations or other laws.
4.
5.
a.
If you do not have any
Note to instruction 5(a): If you are a
Information for investment advisers on how to file with IARD is available on the Commission's website at
6.
7.
8.
9.
For purposes of this Form CRS, the following terms have the meanings ascribed to them below:
Under the heading “Key Questions to Ask,” include the key questions below and the following: “Ask our financial professionals these key questions about our investment services and accounts.”
Use formatting to make the questions more noticeable and prominent (for example, by using larger font, a text box around the heading or questions, different font, or lines to offset the questions from the other sections). You may modify or omit portions of any questions that you determine are inapplicable to your business. If you are a
Advisers that provide automated advice or broker-dealers that provide services only online without a particular individual with whom a
In addition to the abovementioned questions, you may also include any other frequently asked questions you receive following these questions. You may not, however, exceed fourteen questions in total.
There are different ways you can get help with your investments. You should carefully consider which types of accounts and services are right for you.
There are different ways you can get help with your investments. You should carefully consider which types of accounts and services are right for you.
There are different ways you can get help with your investments. You should carefully consider which types of accounts and services are right for you.
We would like to know what you think about a proposed Relationship Summary that describes your relationship with your investment adviser or your broker-dealer (your firm) and your financial professionals. This document summarizes:
It is important to us at the SEC to understand what you, the investor, think so that we can make it easier for you to choose the type of investment services relationship that is right for you. We prepared sample Relationship Summaries to illustrate what they may look like.
➢ Sample Relationship Summary for a broker-dealer
➢ Sample Relationship Summary for an investment adviser
➢ Sample Relationship Summary for firms that are both an investment adviser and broker-dealer
Please take a few minutes to review one or more of the samples and answer any or all of these questions. Please provide your comments by August 7, 2018 - and thank you for your feedback!
If you are interested in background information on the proposed Relationship Summary, or want to provide feedback on additional questions, click here (
You can send us feedback in the following ways (include the file number S7-08-18 in your response):
We will post your feedback on our website. Your submission will be posted without change; we do not redact or edit personal identifying information from submissions. You should only make submissions that you wish to make available publicly.
Securities and Exchange Commission.
Proposed rule.
We are proposing a new rule 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 when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer.
Comments should be received on or before August 7, 2018.
Comments may be submitted by any of the following methods:
• Use the Commission's internet comment form (
• Send an email to
• Send paper comments to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
Studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the Commission's website. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at
Lourdes Gonzalez, Assistant Chief Counsel—Office of Sales Practices; Emily Westerberg Russell, Senior Special Counsel; Alicia Goldin, Senior Special Counsel; Bradford Bartels, Special Counsel; Geeta Dhingra, Special Counsel; and Stacy Puente, Special Counsel, Office of Chief Counsel, Division of Trading and Markets, at (202) 551-5550, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-8549.
Broker-dealers play an important role in helping Americans organize their financial lives, accumulate and manage retirement savings, and invest toward other important long-term goals, such as buying a house or funding a child's college education. Broker-dealers may offer a wide variety of brokerage (
The rule we are proposing today addresses the question of whether changes should be made to the standard of conduct that applies to broker-dealers when making recommendations about securities to retail customers. As discussed below, broker-dealers are subject to regulation under the Exchange Act and the rules of each self-regulatory organization (“SRO”) of which the broker-dealer is a member,
After extensive consideration of these issues, we believe it is appropriate to make enhancements to the obligations that apply when broker-dealers make recommendations to retail customers. Accordingly, we are proposing a new rule under the Exchange Act that would establish an express best interest obligation: That all 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, 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 (“Regulation Best Interest”). The proposed rule would provide that the best interest obligation shall be satisfied if:
• The broker-dealer or natural person who is an associated person of a broker or dealer, prior to or at the time of the recommendation, reasonably discloses to the retail customer, in writing, the material facts relating to the scope and terms of the relationship with the retail customer and all material conflicts of interest that are associated with the recommendation;
• The broker-dealer or natural person who is an associated person of a broker or dealer, in making the recommendation, exercises reasonable diligence, care, skill, and prudence to: (1) Understand the potential risks and rewards associated with the recommendation, and have a reasonable basis to believe that the recommendation could be in the best interest of at least some retail customers; (2) have a reasonable basis to believe that the recommendation is in the best interest of a particular retail customer based on that retail customer's investment profile and the potential risks and rewards associated with the recommendation; and (3) have a reasonable basis to believe that a series of recommended transactions, even if in the retail customer's best interest when viewed in isolation, is not excessive and is in the retail customer's best interest when taken together in light of the retail customer's investment profile;
• The broker or dealer establishes, maintains, and enforces written policies and procedures reasonably designed to identify and at a minimum disclose, or eliminate, all material conflicts of interest that are associated with such recommendations; and
• The broker or dealer establishes, maintains, and enforces 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.
Regulation Best Interest is designed to make it clear that a broker-dealer may not put her or her firm's financial interests ahead of the interests of her retail customer in making investment recommendations. Our goal in designing proposed Regulation Best Interest is to enhance investor protection, while preserving, to the extent possible, access and choice for investors who prefer the “pay as you go” model for advice from broker-dealers, as well as preserve retail customer choice of the level and types of advice provided and the products available. We believe that the proposed best interest obligation for broker-
Specifically, we believe that proposed Regulation Best Interest will improve investor protection by enhancing the professional standards of conduct that currently apply to broker-dealers when they make recommendations to retail customers, in four key respects.
• First, it would enhance the quality of recommendations provided by requiring broker-dealers make recommendations in the retail customer's “best interest,” which incorporates and goes beyond a broker-dealer's existing suitability obligations under the federal securities laws, and could not be satisfied through disclosure alone.
• Second, it would establish obligations under the Exchange Act that do not rely on disclosure alone as the solution to conflicts arising from financial incentives—including conflicts associated with broker-dealer compensation incentives, the sale of proprietary products, and effecting transactions in a principal capacity.
• Third, it would improve disclosure about the scope and terms of the broker-dealer's relationship with the retail customer, which would foster retail customer awareness and understanding of their relationship with the broker-dealer, which aligns with our broader effort to address retail investor confusion through our separate concurrent rulemaking.
• Finally, it would enhance the disclosure of material conflicts of interest and thereby help retail customers evaluate recommendations received from broker-dealers.
Through these enhancements, we preliminarily believe that the best interest obligation will reduce the potential harm to retail customers from recommendations provided in circumstances where conflicts of interest, including those arising from financial incentives, exist while preserving investor access to advice and choice with regard to advice relationships and compensation methods, and is workable for the transaction-based relationship offered by broker-dealers. Specifically, proposed Regulation Best Interest is designed to achieve these enhancements by building upon, and being tailored to, the unique structure and characteristics of the broker-dealer relationship with retail customers and existing regulatory obligations, while taking into consideration and drawing on (to the extent appropriate) the principles of the obligations that apply to investment advice in other contexts. In drawing from these underlying principles, as opposed to adopting identical or uniform obligations, we seek to apply consistent principles across the spectrum of investment advice, and thereby enhance investor protection while preserving investor choice across products and advice models.
We further believe that, through the establishment of a standard of conduct for broker-dealers under the Exchange Act, this proposed approach would foster greater clarity, certainty, and efficiency with respect to broker-dealer standards of conduct. In addition, by drawing from principles that have developed under other regulatory regimes, we seek to establish greater consistency in the level of protection provided across the spectrum of registered investment advice and ease compliance with Regulation Best Interest where these other overlapping regulatory regimes are also applicable.
Before describing proposed Regulation Best Interest, we provide a brief background on this subject, including recent Commission and other regulators' considerations of the issues involved, the evolution of our perspective on this subject, and our general objectives in proposing Regulation Best Interest.
As noted, broker-dealers are subject to comprehensive regulation under the Exchange Act and SRO rules, and a number of obligations attach when a broker-dealer makes a recommendation to a customer. Under the federal securities laws and SRO rules, broker-dealers have a duty of fair dealing,
Despite the breadth of a broker-dealer's existing conduct obligations, broker-dealers are not explicitly required to make recommendations that are in a customer's “best interest.”
In addition, 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.
For the staff's discussion of relevant case law see 913 Study, at 54-55.
In this regard, it has been asserted that (1) retail customers do not sufficiently understand the broker-dealer relationship, and in particular the conflicts presented by broker-dealer compensation arrangements and practices when making a recommendation, and (2) regardless of the sufficiency of the retail customer's understanding of the broker-dealer structure, broker-dealer regulatory requirements do not require a broker-dealer's recommendations to be in a customer's best interest and require limited disclosure that may not appropriately address the conflicts of interest presented.
These concerns are not new. The Commission has previously expressed long-held concerns about the incentives that commission-based compensation provides to churn accounts, recommend unsuitable securities, and engage in aggressive marketing of brokerage services.
FINRA has similarly focused on the potential risks to broker-dealers and to retail customers presented by broker-dealer conflicts, and impact on brokerage recommendations, as reflected in guidance addressing and highlighting circumstances in which various broker-dealer conflicts of interest may create incentives that are contrary to the interest of retail customers.
These concerns about the potential harms that may result from broker-dealer conflicts of interest have been echoed by commenters over the years. Recent commenters' analyses suggest that retail customers have been harmed by conflicted advice, such as the incentives created by broker-dealer compensation arrangements, due to the lack of an explicit “best interest” obligation applying to such advice.
At the same time, many retail customers generally and reasonably expect that their investment firms and professionals, including broker-dealers, will—and rely on them to—provide advice that is in their best interest by placing investors' interest before their own. Studies have documented 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 their associated persons, and the differing duties that flow from them.
There is broad acknowledgement of the benefits of, and support for, the continuing existence of the broker-dealer model as an option for retail customers seeking investment advice, notwithstanding the concerns regarding broker-dealer conflicts (including the transaction-based compensation model) and retail customer confusion regarding these conflicts and the limits of the applicable regulations.
The Commission and its staff have been evaluating the standards applicable to investment advice for some time. In the past, the Commission observed that the lines between full-service broker-dealers and investment advisers have blurred, and expressed concern when specific regulatory obligations depend on the statute under which a financial intermediary is registered instead of the services provided.
In 2011, the Commission staff issued the 913 Study, which was mandated by Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), in which they made recommendations to the Commission 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 intermediary provided them personalized investment advice.
The staff made a number of specific recommendations for implementing the uniform fiduciary standard of conduct, including that the Commission should: (1) Require firms to eliminate or disclose conflicts of interest; (2) 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; and (3) consider specifying uniform standards for the duty of care owed to retail customers, such as specifying what basis a broker-dealer or investment adviser should have in making a recommendation to a retail customer by referring to and expanding upon broker-dealers' existing suitability requirements.
The staff explained that the recommendations were intended to, among other things, heighten investor protection, address retail customer confusion about the obligations broker-dealers and investment advisers owe to those customers, and preserve retail customer choice without decreasing retail customers' access to existing products, services, service providers, or compensation structures.
Following the 913 Study, in 2013 the Commission issued a request for information (“Request”) seeking additional information from the public to assist the Commission in evaluating whether and how to address certain standards of conduct for, and regulatory obligations of, broker-dealers and investment advisers.
The Commission received more than 250 comment letters from industry groups, individual market participants, and other interested persons in response to the Request.
In November 2013, the Commission's Investor Advisory Committee (“IAC”) adopted a recommendation on implementing a uniform fiduciary standard (as proposed by the Investor as Purchaser Subcommittee).
The Department of Labor (“DOL”) has also engaged in rulemaking to broaden the definition of “fiduciary” in connection with providing investment advice under the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Internal Revenue Code of 1986 (“Code”).
On April 8, 2016, DOL adopted a new, expanded definition of “fiduciary” that treats persons who provide investment advice or recommendations for a fee or other compensation with respect to assets of an ERISA plan or IRA as fiduciaries in a wider array of advice relationships than under the previous regulation (“DOL Fiduciary Rule”).
We understand that the DOL Fiduciary Rule would broadly expand the circumstances in which broker-dealers making recommendations to ERISA plans and ERISA plan participants may be fiduciaries under ERISA, and thus subject to ERISA's prohibited transaction provisions. Similarly, it would expand the circumstances in which broker-dealers providing recommendations to IRAs would be subject to the prohibited transaction provisions of the Code.
To avoid this result, in connection with the DOL Fiduciary Rule, DOL published two new administrative class exemptions from the prohibited transaction provisions of ERISA and the Code—the Best Interest Contract Exemption (“BIC Exemption”) and the Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (“Principal Transactions Exemption”)—as well as amendments to previously granted prohibited transaction exemptions (collectively referred to as “PTEs”).
Specifically, the BIC Exemption would provide conditional relief for an “adviser,” as that term is used in the context of the BIC Exemption,
Generally, the Principal Transactions Exemption would (1) permit certain principal transactions involving the
The revised definition of “fiduciary,” as well as the Impartial Conduct Standards, became effective on June 9, 2017.
In light of the DOL Fiduciary Rule and related PTEs, and in recognition of the significant developments in the marketplace that have occurred since the Commission last solicited information from the public in 2013, Chairman Clayton issued a statement on June 1, 2017 containing a number of questions regarding standards of conduct for investment advisers and broker-dealers.
To date, over 250 comments have been received from the public in response to the Chairman Clayton Statement. While some commenters opposed any changes to the standard of conduct
In addition to this statement, Chairman Clayton and the staff have continually engaged in other outreach, including meetings with retail investors, investor advocacy groups, and industry participants, to better understand these issues.
Commenters have also expressed their views on the effects of the DOL Fiduciary Rule and the related PTEs—both in terms of benefits and drawbacks—on brokerage advice relationships, at least with respect to retirement advice. Among other things, some commenters asserted that, because of complex and burdensome requirements imposed as part of the BIC Exemption, and the associated litigation risk, broker-dealers are changing the types of products and accounts offered to retirement investors, and focusing on products or accounts with compliance-friendly fee structures, such as level fees or lower-cost products (
In developing this proposal, we considered the variety of products and services, including the types of advice, that broker-dealers provide to investors; the characteristics of investors who utilize brokerage services; the associated cost and relative affordability of such services; the embedded compensation conflicts associated with these products and services; and the potential impact of such conflicts on investor outcomes (such as evidence suggestive that the failure to apply a “best interest” obligation to conflicted advice has resulted in investor harm).
We also considered retail customer confusion about the obligations broker-dealers owe when making recommendations and how that confusion may ultimately translate into or exacerbate the potential for investor harm (such as through a misalignment of investor expectations regarding the level of protection received and the level of protection actually provided).
At the same time, we are sensitive to the potential risk that any additional regulatory burdens may cause investors to lose choice and access to products, services, service providers, and payment options.
After extensive consideration of these issues, we are proposing to enhance existing broker-dealer conduct obligations when they make recommendations to a retail customer. For such recommendations, the proposed rule would require a broker-dealer “to act in the best interest of the retail customer . . . without placing the financial or other interest of the [broker-dealer] making the recommendation ahead of the interest of the retail customer.”
The proposed best interest obligation for broker-dealers set forth in Regulation Best Interest builds upon, and is tailored to, existing broker-dealer relationships and regulatory obligations under the federal securities laws and SRO rules. In particular, the existing rules of various SROs served as an important point of reference for our proposal. However, we tailored and enhanced these requirements to the specific proposed best interest obligation we are seeking to establish. Our proposal also takes into consideration and draws on (to the extent appropriate) the principles of the obligations that apply to investment advice in other contexts, including those described above. We preliminarily believe it makes more sense to build upon this regulatory regime, rather than to create a completely new standard or simply adopt obligations and duties that have developed under a separate regulatory regime to address a different type of advice relationship.
We believe this approach would have several benefits. First, it would enhance the quality of recommendations provided by broker-dealers to retail customers. Second, it would enhance disclosure, helping retail customers evaluate recommendations received from broker-dealers, and reducing confusion regarding the nature of the broker-dealer relationship. Third, it would facilitate more consistent regulation of similar activity, drawing from key principles underlying the fiduciary obligations that apply to investment advice in other contexts. Fourth, it would better align the legal obligations of broker-dealers with investors' expectations.
We also believe that the best interest obligation we are proposing today would help preserve investor choice and access to affordable investment advice and products that investors currently use. As discussed below, Regulation Best Interest would only apply when a broker-dealer is making a recommendation to a retail customer about a securities transaction or an investment strategy involving securities. The regulation would not apply to the provision of services that do not involve or are distinct from such a recommendation, including, but not limited to, executing an unsolicited transaction for a retail customer, or to a broker-dealer that is dually-registered as an investment adviser (a “dual-registrant”) when making a recommendation in its investment adviser capacity.
We recognize that as a result of the enhanced obligations that would apply, some broker-dealers may determine that it is not cost-effective to continue to recommend certain products or services to retail customers (because, for example, of the difficulty in mitigating certain compensation related conflicts). Others may pass along the costs to retail customers. Some retail customers may seek out a different advice relationship that better suits their preferences after receiving the required disclosures. As discussed in more detail in Section IV, we preliminarily believe that any such impacts that the proposed regulatory changes may have on retail customer access to and availability of investment advice, and the costs to broker-dealers, would be justified by the benefits of the enhancements to investor protection. We also believe that for both retail customers and broker-dealers the potential costs would be less—and the benefits would be greater—than under the potential regulatory alternatives we considered.
In proposing Regulation Best Interest, we are not proposing to amend or eliminate existing broker-dealer obligations, and compliance with Regulation Best Interest would not alter a broker-dealer's obligations under the general antifraud provisions of the federal securities laws. Regulation Best Interest applies in addition to any obligations under the Exchange Act, along with any rules the Commission may adopt thereunder, and any other applicable provisions of the federal securities laws and related rules and regulations.
Scienter would not be required to establish a violation of Regulation Best Interest. One key difference and enhancement resulting from the obligations imposed by Regulation Best Interest as compared to a broker-dealer's existing suitability obligations under the antifraud provisions of the federal securities laws, is that a broker-dealer would not be able to satisfy its Care Obligation discussed in Section D.2 through disclosure alone.
Similarly, the existing rules of various SROs served as an important point of reference for our proposal. However, we tailored and enhanced these existing
We wish to underscore that proposed Regulation Best Interest focuses on specific enhancements to the broker-dealer regulatory regime, in light of the unique characteristics of the brokerage advice relationship and associated services that may be provided, and therefore would be separate and distinct from the fiduciary duty that has developed under the Advisers Act. Further, we do not intend that Regulation Best Interest, including the associated obligations, have any impact on the Commission's or its staff's interpretations of the scope or nature of an investment adviser's fiduciary obligations.
The Commission is proposing a new rule, referred to as Regulation Best Interest, to establish an express best interest obligation that would apply to broker-dealers when making a recommendation of any securities transaction or investment strategy to a retail customer. The proposed best interest obligation, which is set forth in proposed paragraph (a)(1), would require a broker-dealer, when making a recommendation, “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 a natural person who is an associated person of a broker or dealer making the recommendation ahead of the interest of the retail customer.” Regulation Best Interest would specifically provide that this best interest obligation shall be satisfied if:
• The broker, dealer or natural person who is an associated person of a broker or dealer, prior to or at the time of the recommendation, reasonably discloses to the retail customer, in writing, the material facts relating to the scope and terms of the relationship with the retail customer and all material conflicts of interest that are associated with the recommendation (the “Disclosure Obligation”);
• The broker, dealer or natural person who is an associated person of a broker or dealer, in making the recommendation, exercises reasonable diligence, care, skill, and prudence to: (1) Understand the potential risks and rewards associated with the recommendation, and have a reasonable basis to believe that the recommendation could be in the best interest of at least some retail customers; (2) have a reasonable basis to believe that the recommendation is in the best interest of a particular retail customer based on the retail customer's investment profile and the potential risks and rewards associated with the recommendation; and (3) have a reasonable basis to believe that a series of recommended transactions, even if in the retail customer's best interest when viewed in isolation, is not excessive and is in the retail customer's best interest when taken together in light of the retail customer's investment profile (herein, “Care Obligation”);
• The broker or dealer establishes, maintains, and enforces written policies and procedures reasonably designed to identify and at a minimum disclose, or eliminate, all material conflicts of interest that are associated with recommendations; and
• The broker or dealer establishes, maintains, and enforces 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 (the last two together, the “Conflict of Interest Obligations”).
We preliminarily believe that establishing an express best interest obligation and defining it in this manner would enhance the quality of recommendations provided, and would align broker-dealers' obligations more closely with retail customers' reasonable expectations.
First, it fosters retail customer awareness and understanding by requiring disclosure of the material facts relating to the scope and terms of the relationship with the retail customer.
Second, it is designed to enhance provisions under the federal securities laws relating to the quality of broker-dealer recommendations by establishing an express Care Obligation that sets forth minimum professional standards that encompass and go beyond existing suitability obligations under the federal securities laws, and could not be satisfied through disclosure alone.
Third, it enhances the disclosure of material conflicts of interest. This would help educate retail customers about those conflicts, and help them evaluate recommendations received from broker-dealers.
Fourth, it establishes obligations that require mitigation, and not just disclosure, of conflicts of interest arising from financial incentives associated with the recommendation (such as compensation incentives, incentives to recommend proprietary products, and incentives to effect transactions in a principal capacity).
Taken together, we preliminarily believe these enhancements will improve investor protection by minimizing the potential harmful impacts that broker-dealer conflicts of interest may have on recommendations provided to retail customers. Furthermore, it is our understanding that many broker-dealers support the establishment of a best interest standard.
As discussed in more detail below, in developing proposed Regulation Best Interest, the Commission has drawn from principles that apply to investment advice under other regulatory regimes—most notably SRO rules, state common law, the Advisers Act, and any duties that would apply to broker-dealers as a
In particular, as a threshold matter, it is worth noting that, in determining how to frame proposed best interest obligation, we considered the “best interest” standards outlined in other contexts, in particular the standard set forth in Section 913(g) of the Dodd-Frank Act
Other commenters, however, expressed support for a “best interest” obligation that included that the “without regard to phrase.”
We understand that, like other investment firms, broker-dealers have conflicts of interest, in particular financial interests, when recommending transactions to retail customers. Certain conflicts of interest are inherent in any principal-agent relationship. We do not intend for our standard to prohibit a broker-dealer from having conflicts when making a recommendation. Nor do we believe that is the intent behind the “without regard to” phrase, as included in Section 913 of the Dodd-Frank Act or recommended in the 913 Study, as is evident both from other provisions of Section 913 that acknowledge and permit the existence of financial interests under that standard, and how our staff articulated the recommended uniform fiduciary standard.
In lieu of adopting wording that embodies apparent tensions, we are proposing to resolve those tensions through another formulation that appropriately reflects what we believe is the underlying intent of Section 913: That a broker-dealer should not put its interests ahead of the retail customer's interests when making a recommendation to a retail customer. In other words, the broker-dealer's financial interest can and will inevitably exist, but these interests cannot be the predominant motivating factor behind the recommendation. Our proposed language makes this intention clear by stating a broker-dealer and its associated persons are not to put their interests ahead of the retail customer's interests. We request comment below, however, on whether our proposed rule should instead incorporate the “without regard to” language set forth in Section 913 and the 913 Study recommendation, which we believe would also generally correspond to the DOL's language in the BIC Exemption, but interpret that phrase in the same manner as the “without placing the financial or other interest . . . ahead of the interest of the retail customer” approach set forth above.
We also appreciate the desire for clarity regarding the interpretation of our proposed best interest obligation. In the discussion that follows, we are addressing these concerns by providing clarity about the requirements imposed by the proposed best interest obligation, and offering guidance on how a broker-dealer could comply with these requirements.
Specifically, to provide assistance to broker-dealers complying with the requirements of Regulation Best Interest, the Commission's proposal: (1) Provides guidance setting forth our preliminary views of what the best interest obligation would require, generally; (2) defines the key terms and scope of the proposed best interest obligation; and (3) specifies by rule the specific components with which a broker-dealer
Proposed Regulation Best Interest uses the term “best interest” in several places. Under proposed paragraph (a)(1), broker-dealers would be required to “act in the best interest of the retail customer . . . without placing the financial or other interest of” the broker-dealer making the recommendation “ahead of the interest of the retail customer.” This general requirement would be satisfied through compliance with the four specific components of Regulation Best Interest set forth in paragraph (a)(2): The Disclosure Obligation described in Section II.D.1, the Care Obligation described in Section II.D.2 and the two prongs of the Conflict of Interest Obligations discussed in Section II.D.3. In addition, the term “best interest” is included in the Care Obligation, which would require, among other things, a broker-dealer to “have a reasonable basis to believe that the recommendation could be in the best interest of at least some retail customers,” to “have a reasonable basis to believe that the recommendation is in the best interest of a particular retail customer based on that retail customer's investment profile and the potential risks and rewards associated with the recommendation,” and “have a reasonable basis to believe that a series of recommended transactions, even if in the retail customer's best interest when viewed in isolation, is not excessive and is in the retail customer's best interest.”
The proposed best interest obligation, as defined by the Disclosure, Care, and Conflict of Interest Obligations below, encompasses and goes beyond a broker-dealer's existing suitability obligations.
We are not proposing to define “best interest” at this time. Instead, we preliminarily believe that whether a broker-dealer acted in the best interest of the retail customer when making a recommendation will turn on the facts and circumstances of the particular recommendation and the particular retail customer, along with the facts and circumstances of how the four specific components of Regulation Best Interest are satisfied. Furthermore, in the discussion below and in our discussion of each of these specific obligations, we provide further guidance regarding our views of how a broker-dealer could act in the best interest of the retail customer, including how a broker-dealer could make a recommendation in the “best interest,” and how it compares to existing broker-dealer obligations.
As a threshold matter, we recognize that it may be in a retail customer's best interest to allocate investments across a variety of investment products, or to invest in riskier or more costly products. We do not intend to limit through proposed Regulation Best Interest the diversity of products available, the higher cost or risks that may be presented by certain products, or the diversity in retail customers' portfolios. This proposal is not meant to effectively eliminate recommendations that encourage diversity in a retail customer's portfolio through investment in a wide range of products, such as actively managed mutual funds, variable annuities, and structured products. We recognize that these and other products that may involve higher risks or cost to the retail customer may be suitable under existing broker-dealer obligations. We believe these products could likewise continue to be recommended under Regulation Best Interest, if the broker-dealer satisfied its obligations under proposed Regulation Best Interest.
Rather, proposed Regulation Best Interest is designed to address the harm associated with broker-dealer incentives to recommend products for reasons that put the broker-dealer's interest ahead of the customer's interest (
Specifically, as further clarification, proposed Regulation Best Interest would not
• Charging commissions or other transaction-based fees;
• Receiving or providing differential compensation based on the product sold;
• Receiving third-party compensation;
• Recommending proprietary products, products of affiliates or a limited range of products;
• Recommending a security underwritten by the broker-dealer or a broker-dealer affiliate, including initial public offerings (“IPOs”);
• Recommending a transaction to be executed in a principal capacity;
• Recommending complex products;
• Allocating trades and research, including allocating investment opportunities (
• Considering cost to the broker-dealer of effecting the transaction or strategy on behalf of the customer (for example, the effort or cost of buying or selling an illiquid security); or
• Accepting a retail customer's order that is contrary to the broker-dealer's recommendations.
While these practices would not be
While to satisfy proposed Regulation Best Interest, a broker-dealer would not
As discussed in the Care Obligation below, we believe that the cost (including fees, compensation and other financial incentives) associated with a recommendation would generally be an important factor. However, there are also other factors that a broker-dealer should consider in determining whether a recommendation is in the best interest of a retail customer, as required by the Care Obligation. Other factors that would also be important to this determination include, among others, the product's or strategy's investment objectives, characteristics (including any special or unusual features), liquidity, risks and potential benefits, volatility and likely performance in a variety of market and economic conditions.
We preliminarily believe that, in order to meet its Care Obligation, when a broker-dealer recommends
We preliminarily believe that under the Care Obligation, a broker-dealer could not have a reasonable basis to believe that a recommended security is in the best interest of a retail customer if it is more costly than a reasonably available alternative offered by the broker-dealer and the characteristics of the securities are otherwise identical, including any special or unusual features, liquidity, risks and potential benefits, volatility and likely performance.
We believe that a broker-dealer would violate proposed Regulation Best Interest's Care Obligation and Conflict of Interest Obligations, if any recommendation was predominantly motivated by the broker-dealer's self-interest (
On the other hand, the best interest obligation would allow a broker-dealer to recommend products that may entail higher costs or risks for the retail customer, or that may result in greater compensation to the broker-dealer than other products, or that may be more expensive, provided that the broker-dealer complies with the specific Disclosure, Care, and Conflict of Interest Obligations described in Section II.D.
We believe that the principles underlying our proposed best interest obligation as discussed above, and the specific Disclosure, Care, and Conflict of Interest Obligations described in more detail below, generally draw from underlying principles similar to the principles underlying the DOL's best interest standard, as described by the DOL in the BIC Exemption.
Under the DOL's standard, we understand that a recommendation could not be based on a broker-dealer's own financial interest in the transaction, nor could a broker-dealer recommend the investment unless it meets the objective prudent person standard of care.
Further, the proposed Disclosure Obligation, Care Obligation and Conflict of Interest Obligations described in more detail below, establish standards of professional conduct that, among other things, would require the broker-dealer to employ reasonable care when making a recommendation. According to the DOL, the BIC Exemption's best interest standard incorporates “objective standards of care and undivided loyalty” that would require adherence to a professional standard of care in making investment recommendations that are in the investor's best interest, and not basing recommendations on the advice-giver's own financial interest in the transaction, nor recommending an investment unless it meets the objective prudent person standard of care.
Like our proposed best interest obligation, we understand that the DOL best interest standard as set forth in the BIC Exemption and in related PTEs, among other things, does not: Prohibit a broker-dealer from being paid, or receiving commissions or other transaction-based payments;
We understand that our proposed Regulation Best Interest does not reflect the other Impartial Conduct Standards that the broker-dealer: (1) Make no misleading statements; and (2) receive no more than reasonable compensation. We are not proposing standards similar to these Impartial Conduct Standards because existing broker-dealer obligations under the federal securities laws and SRO rules already prohibit misleading statements and require broker-dealers to receive only fair and reasonable compensation. Specifically, the antifraud provisions of the federal securities laws prohibit broker-dealers from making misleading statements.
Our proposed Regulation Best Interest diverges from the recommendation of the 913 Study, in that it does not propose to establish a uniform fiduciary standard of conduct for both investment advisers and broker-dealers, but rather focuses on establishing a best interest obligation for broker-dealers.
We have given extensive consideration to the 913 Study recommendation related to a uniform fiduciary standard of conduct, the information that the public has submitted over the years following the 913 Study, and our extensive experience regulating broker-dealers and investment advisers. Based on our evaluation, we have determined at this time to propose a more tailored approach focusing on enhancements to broker-dealer regulation to address our current concerns. We preliminarily believe it makes more sense to build upon this regulatory regime and the underlying expertise, and in this way reflect the unique characteristics of the relationship (
Nevertheless, the recommendations of the 913 Study were useful to us in evaluating how to specifically enhance investor protection and improve the obligations that apply to broker-dealers when making recommendations to retail customers. While we are not proposing a uniform fiduciary standard, as recommended in the 913 Study, we nevertheless preliminarily believe that the proposed best interest obligation draws from principles underlying and reflects the underlying intent of many of the recommendations of the 913 Study. As a consequence, we also believe the rule draws upon the duties of loyalty and care as interpreted under Section 206(1) and (2) of Advisers Act, even if not the same as the 913 Study recommendations or the duties interpreted under the Advisers Act.
As discussed above, our proposed best interest obligation would generally track key elements of both the language of Section 913 of the Dodd-Frank Act and the 913 Study recommendation for the wording of a uniform fiduciary standard (with the exception of the proposed replacement of “without regard to” language), and would reflect the principles underlying the 913 Study recommendations related to a uniform fiduciary standard of conduct.
Specifically, as noted, the 913 Study recommended that the Commission engage in rulemaking and/or issue interpretive guidance addressing the components of the uniform fiduciary standard: The duties of loyalty (
Further, taking into consideration the express provisions of Section 913(g) of the Dodd-Frank Act, the 913 Study explains that the recommended uniform standard would neither require the absolute elimination of any particular conflicts (in the absence of another requirement to do so) nor impose on broker-dealers a continuing duty of loyalty or care; nor would the receipt of commissions or other standard compensation, sale of proprietary products, or engaging in transactions on a principal basis, in and of themselves, violate the fiduciary standard.
We believe the proposed best interest obligation reflects many of these same principles of what would be required or prohibited under the uniform standard recommended by the 913 Study, as discussed above. In addition, as discussed in Section II.D, consistent with the 913 Study recommendation, to satisfy our proposed best interest obligation, we are proposing that broker-dealers must comply with specific requirements: Namely, the Disclosure, Care and Conflict of Interest Obligations. This specificity is intended to both: (1) Provide clarity to broker-dealers about their obligations under Regulation Best Interest generally and how they relate to existing obligations when making recommendations (
The Commission requests comment on defining the proposed best interest obligation to require broker-dealers “to act in the best interest of the retail customer . . . without placing the financial or other interest of the [broker-dealer] making the recommendation ahead of the interest of the retail customer,” as well as comment on the application of this standard and the types of practices that would be consistent or inconsistent with this standard.
• Do commenters believe that we should adopt a best interest obligation for broker-dealers?
• Do commenters agree with the general approach of the best interest obligation of building on existing requirements? Are there alternative approaches or additional steps that the Commission should take? If so, what?
• Would the Best Interest Obligation cause a broker-dealer to act in a manner that is consistent with what a retail customer would reasonably expect from someone who is required to act in their best interest? If so, how? If not, what further steps should the Commission take? Why or why not?
• Does the obligation enhance retail customer protection? If so, how? If not, what further steps should the Commission take? Why or why not?
• Do commenters agree with our assessment of how the Best Interest Obligation compares with the DOL's best interest Impartial Conduct Standard, as incorporated in the BIC Exemption? Do commenters believe that proposed Regulation Best Interest provides similar protections to the DOL's best interest Impartial Conduct Standard, as incorporated in the BIC Exemption? If not, what are the differences and what impact would those differences have on retail customers? Do commenters believe it would be desirable to maintain consistency with the DOL requirements and guidance in this area, as set forth in the BIC exemption?
• As discussed herein, we propose that the best interest obligation would require a broker-dealer, when making a recommendation, not to put the interests of a broker-dealer or its associated persons ahead of the retail customer's interest. Does this formulation meet the Commission's goal of protecting retail customers and clarifying the standards that apply when broker-dealers are providing advice?
• It is our intent that our proposal would make it clear that, insofar as existing broker-dealer obligations have been interpreted to stand for the principle that broker-dealers may put their own interests ahead of their retail customers' when making a recommendation, those interpretations would be inconsistent with Regulation Best Interest. Does the rule text achieve this objective? To the extent that it does not, or it does not do so with appropriate clarity and certainty, what changes could be made to the proposed rule? Should we provide a clarifying note?
• To best capture this obligation, we are proposing that a broker-dealer must act in the best interest of the retail customer “without placing the financial or other interest of the [broker-dealer] making the recommendation ahead of the interest of the retail customer.” Do commenters agree with our proposed approach, or should the Commission take an alternative approach, such as provide that to act in the best interest, a broker-dealer must act in the best interest of the retail customer “without regard to the financial or other interest of the [broker-dealer] making the recommendation” or “by placing the interest of the retail customer ahead of the broker-dealer”? Why or why not? What practical impact would the inclusion or exclusion of the Commission's proposed approach or the potential alternative approach have on the obligations of the proposed best interest obligation as described? Will it lead to retail customer confusion? Would courts interpret the standard differently? Is there different language that the Commission should consider?
• Should the Commission provide further guidance on the proposed best interest obligation? Should the guidance be with respect to particular transactions or relationships? If so, please provide examples of scenarios that should be deemed to meet or not meet this standard.
• Are the guidance and interpretations provided by the Commission appropriate? Should any of it be included in the rule text? Please be specific.
• Should the Commission define the term “best interest” in the rule text? Should the Commission define “best interest” with respect to particular transactions or relationships? If so, what definitions should the Commission consider and why? What are the advantages and disadvantages of any proposed alternatives in this context? Please explain with specificity what duties any suggested definitions would entail.
• Do commenters agree with the Commission's guidance on what practices should not be
• Do commenters agree with our view that recommending a more expensive or more remunerative alternative for identical securities would be inconsistent with Regulation Best Interest? Are there any additional practices that the Commission should specifically identify as consistent or inconsistent with Regulation Best Interest? Please identify any such practices and why they should be viewed as consistent or inconsistent with this obligation.
• Are any changes in Regulation Best Interest necessary to make it clear that broker-dealers who offered a limited scope of products nevertheless can satisfy the standard?
• Do commenters believe that proposed Regulation Best Interest would result in broker-dealers limiting access to or eliminating certain products in a
• Do commenters believe that our proposed rule is sufficiently clear that a broker-dealer is not required to monitor a retail customer's account as part of its obligations unless specifically contracted for? If not, what modifications should be made to Regulation Best Interest? Do commenters believe that retail customers understand that a broker-dealer is not required to monitor retail customers' accounts? If so, what is the basis for that understanding (
• Should Regulation Best Interest apply when broker-dealers agree to provide ongoing monitoring of the retail customer's investment for purposes of recommending changes in investments? Why or why not? Alternatively, should broker-dealers who provide ongoing monitoring be considered investment advisers?
• Do commenters agree with the Commission's assessment that no new private right of action or right of rescission is created by Regulation Best Interest?
• Despite the Commission's assertion that Regulation Best Interest is limited to broker-dealers and is not intended to impact the fiduciary obligations under the Advisers Act, do commenters have concerns regarding the potential impact of this best interest obligation on the legal obligations under other standards? If so, what are these concerns? Do commenters have any suggestions on how to provide further clarification on this issue?
• In defining a broker-dealer's obligation when making a recommendation to a retail customer, the Commission is not proposing to impose additional requirements, such as requirements related to the receipt of fair and reasonable compensation or the prohibition against misleading statements that are part of DOL's Impartial Conduct Standards, because broker-dealers already have these obligations. Should the Commission consider incorporating these or other requirements into the proposed rule? If so, what requirements should be added and why? How should those requirements be defined? How would the suggested requirements be different from current broker-dealer obligations and enhance investor protection? To the extent broker-dealers already have existing obligations related to suggested additional requirements, should the Commission consider modifying the existing broker-dealer regulatory obligations, and if so, how?
• Do commenters agree with our proposed approach of a tailored standard for broker-dealers as opposed to a uniform standard of conduct for both broker-dealers and investment advisers?
• Do commenters believe that we should explicitly adopt FINRA's suitability standard, and then add any desired changed or enhancements to that standard, in order to simplify the best interest obligation? Are there specific benefits or problems with that approach?
The Commission proposes to define “natural person who is an associated person” as a natural person who is an associated person as defined under Section 3(a)(18) of the Exchange Act: “any partner, officer, director or branch manager of such broker or dealer (or any person occupying a similar status or performing similar functions), any person directly or indirectly controlling, controlled by, or under common control with such broker or dealer, or any employee of such broker or dealer, except that any person associated with a broker or dealer whose functions are solely clerical or ministerial shall not be included in the meaning of such term for purposes of section 15(b) of this title (other than paragraph 6 thereof).”
In defining in this manner, we intend to require not only the broker-dealer entity, but also individuals that are associated persons of a broker-dealer (
The Commission proposes that Regulation Best Interest would apply when a broker-dealer is making a recommendation about any securities transaction or investment strategy to a retail customer (as defined and discussed below). We believe that by applying Regulation Best Interest to a “recommendation,” as that term is currently interpreted under broker-dealer regulation, we would provide clarity to broker-dealers and their retail customers as to when Regulation Best Interest applies and maintain efficiencies for broker-dealers that have already established infrastructures to comply with suitability obligations. Moreover, we believe that taking an approach that is driven by each recommendation would appropriately capture and reflect the various types of advice broker-dealers provide to retail customers, whether on an episodic, periodic, or more frequent basis and help ensure that customers receive the protections that Regulation Best Interest is intended to provide.
The proposed rule relies in part on the statutory authority provided in Section 913(f) of the Dodd-Frank Act, which provides the Commission rulemaking authority to address the standards of care “for providing personalized investment advice about securities to such retail customers.”
The Commission believes that the determination of whether a recommendation has been made to a retail customer that triggers the best interest obligation should be interpreted consistent with existing broker-dealer regulation under the federal securities laws and SRO rules, which would provide clarity to broker-dealers and maintain efficiencies for broker-dealers with established infrastructures that already rely on this term.
In determining whether a broker-dealer has made a recommendation, factors that have historically been considered in the context of broker-dealer suitability obligations include whether the communication “reasonably could be viewed as a `call to action' ” and “reasonably would influence an investor to trade a particular security or group of securities.”
The DOL Fiduciary Rule follows a consistent approach in defining a “recommendation” as a “communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the [advice] recipient engage in or refrain from taking a particular course of action.”
We understand concerns have been expressed that the DOL Fiduciary Rule covers a broader range of communications as “fiduciary investment advice.” We are mindful of such concerns and therefore, propose to interpret what is a recommendation consistent with existing guidance under the federal securities laws and SRO rules.
Consistent with existing broker-dealer suitability obligations, certain communications under this approach would generally be excluded from the meaning of “recommendation” as long as they do not include (standing alone or in combination with other communications), a recommendation of a particular security or securities. For example, as recognized under existing broker-dealer regulation, excluded communications would include providing general investor education (
Consistent with existing interpretations and guidance of what constitutes a recommendation, the obligation would apply to activity that has been interpreted as “implicit
Regulation Best Interest would be triggered “when making” a recommendation and a broker-dealer would be required to act in the best interest “at the time the recommendation is made.” The proposed rule is intended to focus the obligation to each particular instance when a recommendation is made to a retail customer and whether the broker-dealer satisfied its best interest obligation (
Accordingly, the best interest obligation would not, for example: (1) Extend beyond a particular recommendation or generally require a broker-dealer to have a continuous duty to a retail customer or impose a duty to monitor the performance of the account;
We recognize, however, that a broker-dealer may agree with a retail customer by contract to take on additional obligations beyond those imposed by Regulation Best Interest, for example, by agreeing with a retail customer to hold itself to fiduciary duties, or to provide periodic or ongoing services (such as ongoing monitoring of the retail customer's investments for purposes of recommending changes in investments).
In addition, under Section 29(a) of the Exchange Act, a broker-dealer would not be able to waive compliance with the rule's obligation to act in the best interest of the retail customer at the time a recommendation is made and the specific obligations thereunder, nor can a retail customer agree to waive her protection under Regulation Best Interest. Thus, the scope of Regulation Best Interest cannot be reduced by contract.
Furthermore, in addition to furthering our goal of enhancing investor protection while preserving retail customer access to and choice of advice relationships, we believe that applying the best interest obligation to when a broker-dealer is making a recommendation generally would be consistent with the DOL's approach under the DOL Fiduciary Rule and the BIC Exemption. The DOL states that the BIC Exemption “does not mandate an ongoing or long-term advisory relationship, but rather leaves the duration of the relationship to the parties.”
The Commission proposes to apply Regulation Best Interest to recommendations of any securities transaction (sale, purchase, and exchange)
We are not proposing at this time that the duty extend to recommendations of account types generally, unless the recommendation is tied to a securities transaction (
The Commission proposes to define “retail customer” as: “a person, or the legal representative of such person, who: (1) Receives a recommendation of any securities transaction or investment strategy involving securities from a broker, dealer or a natural person who is an associated person of a broker or dealer, and (2) uses the recommendation primarily for personal, family, or household purposes.”
The Commission preliminarily believes this proposed definition is appropriate, and in particular, the limitation to recommendations that are “primarily for personal, family or household purposes,” as we believe it excludes recommendations that are related to business or commercial purposes, but remains sufficiently broad and flexible to capture recommendations related to the various reasons retail customers may invest (including, for example, for retirement, education, and other savings purposes). As discussed in more detail above, the Commission and studies have historically been, and continue to be, focused on the potential investor harm that conflicted advice can have on investors investing for present and future financial goals.
As noted, this definition differs from the definition of “retail customer” under Section 913 in three relevant aspects. First, for the reasons discussed above,
Second, the Commission proposes to extend the Section 913 definition beyond natural persons to
Under the FINRA rules, a broker-dealer's suitability obligations are different for certain institutional customers than for non-institutional customers. A broker-dealer is exempt from its customer-specific suitability obligation for an institutional account, if the broker-dealer: (1) Has a reasonable basis to believe that the institutional customer is capable of evaluating the risks independently, both in general and with regard to particular transactions and investment strategies, and (2) the institutional customer affirmatively indicates that it is exercising independent judgment in evaluating the broker-dealer's recommendations. FINRA 2111(b).
Third, the proposed definition would only apply to a person who “receives a recommendation . . . from a broker or dealer or a natural person who is an associated person of a broker or dealer,” and does not include a person who receives a recommendation from an investment adviser acting as such. This definition is appropriate as Regulation Best Interest only applies in the context of a brokerage relationship with a brokerage customer, and in particular, when a broker-dealer is making such a recommendation in the capacity of a broker-dealer.
In some instances, a brokerage relationship with a brokerage customer can exist without a formal brokerage account (
Regulation Best Interest and its specific obligations, including the Disclosure Obligation, Care Obligation, and Conflicts Obligations, would not apply to advice provided by a dual-registrant when acting in the capacity of an investment adviser, even if the person to whom the recommendation is made also has a brokerage relationship with the dual-registrant or even if the dual-registrant executes the transaction. Similarly, when an investment adviser provides advice, the rule would not apply to an affiliated broker-dealer or to a third-party broker-dealer with which a natural associated person of the investment advisers is associated if such broker-dealer executes the transaction in the capacity of a broker or dealer. For example, in the case of a dual-registrant that provides advice with respect to an advisory account and subsequently executes the transaction, Regulation Best Interest would not apply to the advice and transaction because the firm acted in the capacity of a broker-dealer solely when executing the transaction and not when providing advice about a securities transaction. In this case, when the advice is provided in the capacity of an investment adviser, the firm would be required to comply with the obligations prescribed under an investment adviser's fiduciary duty, as described in more detail in the Fiduciary Duty Interpretive Release.
The Commission recognizes that making the determination of whether a dual-registrant is acting in the capacity of a broker-dealer or an investment adviser is not free from doubt, and this issue has existed for dual-registrants prior to the proposal of Regulation Best Interest. Generally, determining whether a recommendation made by a dual-registrant is in its capacity as broker-dealer requires a facts and circumstances analysis, with no one factor being determinative. When evaluating this issue, the Commission considers, among other factors, the type of account (advisory or brokerage), how the account is described, the type of compensation, and the extent to which the dual-registrant made clear the capacity in which it was acting to the customer or client. We also have held the view that a dual-registrant is an investment adviser solely with respect to those accounts for which it provides advice or receives compensation that subjects it to the Advisers Act.
By proposing Regulation Best Interest, we are not intending to change the analysis regarding whether an investor is a brokerage customer or an advisory client, as we believe this issue is outside the scope of this rulemaking.
The proposed definition of “retail customer” also differs from the definition of “retail investor” proposed in the Relationship Summary Proposal, which is a prospective or existing client or customer who is a natural person (an individual), regardless of the individual's net worth (thus including,
Furthermore, consistent with the definition of “retail customer” in Section 913 of the Dodd-Frank Act, except as noted above, and the 913 Study recommendation, the Commission is proposing to limit the application of Regulation Best Interest to any person, or the legal representative of such person, receiving and using a recommendation primarily for personal, family, or household purposes, such as trusts that represent natural persons. Given that our proposed definition applies to “any person” and not “natural persons” as used in the Relationship Summary Proposal, we believe it is appropriate to limit the definition to persons who receive recommendations primarily for these specified purposes, consistent with the Commission's historical focus,
The Commission requests comment generally on the key terms and scope of the best interest obligation.
• Do commenters agree with the general approach of the best interest obligation of building on existing requirements?
• Should retail customers be permitted to amend their contracts with broker-dealers to modify the terms of Regulation Best Interest?
The Commission also requests comment specifically on the proposed definition of “natural person who is an associated person.”
• Do commenters agree that proposed Regulation Best Interest should apply to natural persons that are associated persons of a broker-dealer? Why or why not?
• Are there alternative definitions that the Commission should consider?
• Is the proposed rule's limitation of applicability to “a natural person who is an associated person” appropriate? Why or why not?
• Should the Commission broaden or limit the scope of individuals to whom Regulation Best Interest applies? For example, should it apply to small business entities such as a sole proprietorship? Why or why not?
The Commission also requests comment specifically on the scope of the term “recommendation.”
• Should the Commission define the term “recommendation”? If so, should we define “recommendation” as described above?
• Does the term “recommendation” capture all of the actions to which Regulation Best Interest should apply? Why or why not?
• Should the Commission limit the application of Regulation Best Interest to when a recommendation is made? Why or why not?
• Is sufficient clarity provided regarding what “at the time the recommendation is made” means? Should the Commission define this phrase? Why or why not?
• Should Regulation Best Interest also cover broker-dealers that only offer a limited range of products, or that are engaging in other activities, even when not making a “recommendation” as discussed above? Why or why not?
• Instead, should Regulation Best Interest apply when a broker-dealer is providing “personalized investment advice”? Why or why not? If so, how should the Commission define “personalized investment advice”? Should the Commission definition follow the 913 Study, which recommended that such a definition should
• As noted above, the term “recommendation” has been interpreted in the context of Commission rules, the FINRA suitability requirement, and the DOL Fiduciary Rule. Should the Commission define or describe more fully what is a “recommendation” in this context? Should the Commission interpret the term “recommendation” differently than it has been interpreted by the Commission and FINRA to date? If so, what should the interpretation be and why? In what specific circumstances, if any, would additional guidance as to the meaning of “recommendation” be useful? Does the description of what would be a recommendation provide sufficient clarity in this regard? Why or why not?
• Has the Commission appropriately distinguished a recommendation from investor education? Why or why not? If not, what communications should be considered a recommendation or alternatively, investor education? How would these situations differ from the current standards with respect to what is a recommendation versus investor education?
• Regulation Best Interest would apply to both discretionary and non-discretionary recommendations made by a broker-dealer. Do commenters agree
The Commission requests comment on the scope of “any securities transaction or investment strategy involving securities.”
• Do commenters agree that proposed Regulation Best Interest should apply to recommendations of “any securities transaction or investment strategy involving securities”? Do commenters agree with our proposed interpretation of the scope of these terms? Why or why not?
• Do commenters have alternative suggestions on the types of recommendations to which Regulation Best Interest would apply? Please specifically identify any recommendations that should be covered by the proposed rule and explain why they should be covered.
• Are there other broker-dealer recommendations that are not captured by these terms that should be covered by Regulation Best Interest? Please specify any recommendations that would not be covered by the proposed rule and why they should or should not be covered.
• Should the Commission provide additional guidance as to what is or is not an “investment strategy involving securities”? Please identify where further guidance is needed and why recommendations should or should not be viewed as an “investment strategy involving securities.”
• Should the Commission extend Regulation Best Interest to recommendations of account types even if the recommendation is not tied to a securities transaction? If so, what factors should a broker-dealer consider in making a recommendation of an account type? Should the factors differ if the account type recommended is discretionary versus non-discretionary? Should they differ for dual-registrants versus standalone broker-dealers?
• Should the rule include an obligation to perform ongoing or periodic evaluation of whether an account type initially recommended remains appropriate? If so, how frequently and what factors should that evaluation take into consideration?
• What factors do firms consider in determining the appropriateness of an account for a particular investor, if any, and what weight is given to the factors considered (
• What policies and procedures do firms currently use, if any, to supervise recommendations by their associated persons of account types?
• How do firms mitigate incentives for associated persons to recommend inappropriate account types?
The Commission requests comment on the definition of “retail customer.”
• Do commenters agree with the proposed definition of “retail customer”? Why or why not? Should the definition be narrowed or expanded in any way? For example, should it apply to small business entities such as a sole proprietorship? Why or why not?
• Are there are other definitions of “retail customer” that the Commission should consider? If so, please provide any alternative definition and the reasons why it is being suggested. For example, should the Commission instead use the definition of “retail investor” that is being proposed in the Relationship Summary or that is used in the 913 Study?
• Regulation Best Interest would apply to recommendations to retail customers, while FINRA's general suitability requirements apply to recommendations to all customers (although a broker-dealer is exempt from its customer-specific suitability obligation for an institutional account, if certain conditions are met).
• Do commenters believe that the definition of “retail customer” should instead only include all natural persons as under Section 913? Why or why not?
• Do commenters believe the limitation of the proposed definition of “retail customer” to recommendations primarily for “personal, family or household purposes” is appropriate and clear? Why or why not? As proposed, the definition of “retail customer,” including the limitation, would cover, for example, participants in ERISA-covered plans and IRAs. Should participants in these types of plans be covered? Why or why not? Do firms require more guidance regarding the current application of the law to specific scenarios? Should the limitation be omitted? Why or why not?
• The Commission requests comment on the proposed approach with respect to dual-registrants. How do firms currently make the determination of what capacity a dual-registrant is acting in when making a recommendation or otherwise? Do commenters require more guidance regarding the current application of the law to specific scenarios? Do commenters agree with the Commission's interpretations of when a dual-registrant is acting as an investment adviser? Why or why not? Do commenters agree with the Commission's interpretations of when a dual-registrant is acting as a broker-dealer? Why or why not?
As part of Regulation Best Interest, we are proposing specifying that the obligation to “act in the best interest of the retail customer . . . . without placing the financial or other interest of the [broker-dealer] ahead of the retail customer” shall be satisfied if the broker-dealer complies with four component requirements: A Disclosure Obligation, a Care Obligation, and two Conflict of Interest Obligations. Each of these components is discussed below. Failure to comply with any of these requirements when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer would violate Regulation Best Interest.
In specifying by rule these obligations, we intend to provide clarity to broker-dealers on the requirements of the best interest obligation. To that end, the best interest obligation does not impose any obligations other than those specified by the rule: Namely, to act in the best interest of the retail customer without placing the financial or other interest of the broker-dealer ahead of the retail customer's interest, by complying with each of the components as set forth in paragraph (a)(2) of the rule.
We wish to reemphasize that we recognize that components of these obligations draw from obligations that have been interpreted under the antifraud provisions of the federal securities laws, or may be specifically addressed by the Exchange Act or the rules thereunder or SRO rules. In proposing these obligations, we are not
The Commission is proposing the Disclosure Obligation, which would require a broker-dealer, or natural person who is an associated person of a broker or dealer “to, prior to or at the time of such recommendation, 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 all material conflicts of interest associated with the recommendation.” We believe that an important aspect of the broker-dealer's best interest obligation is to facilitate its retail customers' awareness of certain key information regarding their relationship with the broker-dealer.
We understand that broker-dealers typically provide information about their services and accounts, which may include disclosure concerning the broker-dealer's capacity, fees, services, and conflicts,
Generally, under the antifraud provisions, a broker-dealer's duty to disclose material information to its customer is based upon the scope of the relationship with the customer, which is fact intensive.
For example, where a broker-dealer processes its customers' orders, but does not recommend securities or solicit customers, then the material information that the broker-dealer is required to disclose is generally narrow, encompassing only the information related to the consummation of the transaction.
This Disclosure Obligation also forms an important part of a broader effort to address retail investor confusion, as further discussed in a separate concurrent rulemaking.
These proposed obligations reflect common goals and touch on issues that are also contemplated under the proposed Disclosure Obligation under Regulation Best Interest, notably clarifying the capacity in which a firm or financial professional is acting, minimizing investor confusion, and facilitating greater awareness of key aspects of a relationship with a firm or financial professional, such as the applicable standard of conduct, fees, and material conflicts of interest. We believe these obligations complement each other and, consistent with our layered approach to disclosure, are designed to build upon each other to provide different levels of key information that we preliminarily believe are appropriate at different points of the relationship with a broker-dealer.
The Relationship Summary highlights certain features of an investment advisory or brokerage relationship, which is designed to alert retail investors to information for them to consider when choosing a firm and a financial professional. This would be achieved by requiring that the Relationship Summary be initially delivered to a retail investor before or at the time a retail investor enters into an investment advisory agreement or first engages a brokerage firm's services.
By virtue of the high level nature of the disclosures in the Relationship Summary, constituting a mix of prescribed language and more firm-specific disclosures, and the space constraints (no more than four pages or equivalent limit if in electronic format), the Relationship Summary would form just one part of a broker-dealer's broader set of disclosures. Firms would include information retail investors need to understand the services, fees, conflicts, and disciplinary history of firms and financial professionals they are considering, along with references and links to other disclosure where interested investors can find more detailed information. In this way, the Relationship Summary is intended to foster a layered approach to disclosure, as described above. It is also designed to facilitate comparisons across firms that offer the same or substantially similar services.
The Disclosure Obligation under Regulation Best Interest further builds on and complements these obligations as it would require a broker-dealer or natural person who is an associated person of a broker-dealer to, prior to or at the time of the recommendation, reasonably disclose, in writing, the material facts relating to the scope and terms of the relationship with the retail customer and all material conflicts of interest associated with the recommendation. The Disclosure Obligation under Regulation Best Interest would apply specifically to the broker-dealer or natural person who is an associated person of the broker-dealer and the specific recommendation triggering Regulation Best Interest.
For example, whereas the Relationship Summary would require a brief and general description of the types of fees and expenses that retail investors will pay, under the Disclosure Obligation we would generally expect broker-dealers to build upon the Relationship Summary to provide more specific fee disclosures relevant to the recommendation to the retail customer and the particular brokerage account for which recommendations are made. In addition, while the Relationship Summary would require a high-level description of specified conflicts of interest, the Disclosure Obligation would require more comprehensive disclosure of all material conflicts of interest related to the recommendation to the retail customer.
Thus, as a general matter, the Regulatory Status Disclosure and the Relationship Summary reflect initial layers of disclosure, with the Disclosure Obligation reflecting more specific and additional, detailed layers of disclosure.
As noted above, to meet this Disclosure Obligation, we would generally consider the following to be examples of material facts relating to the scope and terms of the relationship with the retail customer: (i) That the broker-dealer is acting in a broker-dealer capacity with respect to the recommendation; (ii) fees and charges that apply to the retail customer's transactions, holdings, and accounts; and (iii) type and scope of services provided by the broker-dealer, including, for example, monitoring the performance of the retail customer's account. This Disclosure Obligation
We have identified the capacity in which a broker-dealer is acting as a likely material fact relating to the scope and terms of the relationship that would be subject to the Disclosure Obligation. In doing so, we hope to achieve greater awareness among retail customers of the capacity in which their financial professional or firm acts when it makes recommendations
For a broker-dealer that is not a dual-registrant (a “standalone broker-dealer”), or a natural person that is an associated person of a standalone broker-dealer (and that natural person is not also a supervised person of a registered investment adviser), the broker-dealer or associated person would disclose that it is acting in a broker-dealer capacity by complying with the Relationship Summary and the Regulatory Status Disclosure requirements of the Relationship Summary Proposal, described above. Because the Disclosure Obligation would require disclosure “prior to, or at the time of” the recommendation, the broker-dealer generally would not be expected to repeat the disclosure each time it makes a recommendation. Rather, we would consider the broker-dealer to have reasonably disclosed the capacity in which it is acting at the time of the recommendation, if the broker-dealer had already—“prior to . . . the time of” the recommendation—delivered the Relationship Summary to the retail customer in accordance with the requirements of proposed Exchange Act Rule 17a-14 and had complied with the Regulatory Status Disclosure. We believe that delivery of the Relationship Summary would clearly articulate to the retail customer that he/she has a relationship with a broker-dealer, and that the broker-dealer must act in his/her best interest when providing advice in the form of a recommendation in the capacity of a broker or dealer, in addition to other specified information concerning the broker-dealer. Moreover, the Regulatory Status Disclosure would help ensure that each written or electronic investor communication clearly alerts the retail customer to the capacity in which the firm or financial professional acts.
Retail customers of dual-registrants or of financial professionals who are dually-registered may be more susceptible to confusion regarding the capacity in which their firms or financial professionals are acting with respect to any particular recommendation. For that reason, delivery of the Relationship Summary and compliance with the Regulatory Status Disclosure would not be considered reasonable disclosure of the capacity in which a dually-registered broker-dealer or dually-registered individual is acting at the time of the recommendation. Pursuant to the Relationship Summary Proposal, a dual-registrant would deliver to the retail customer a Relationship Summary that describes both the brokerage and advisory services offered by the firm, and as such, would not provide clarity regarding the capacity in which the dual-registrant is acting in the context of any particular recommendation. Similarly, the Regulatory Status Disclosure would require disclosure of both capacities in which firms and financial professionals act. Therefore, the Commission would expect a broker-dealer that is a dual-registrant to do more to meet the Disclosure Obligation.
As discussed below in our guidance on reasonable disclosure, we are not proposing to mandate the form, specific timing, or method for delivering disclosure pursuant to the Disclosure Obligation, other than the general requirement that the disclosure be made “prior to or at the time of” the recommendation. Instead, we aim to provide broker-dealers flexibility in determining how to satisfy the Disclosure Obligation. As part of that determination, the dual-registrant should consider how best to assist its retail customers in understanding the capacity in which it is acting. For example, dual-registrants could disclose capacity through a variety of means, including, among others, written disclosure at the beginning of a relationship (
A broker-dealer's fees and charges that apply to retail customers' transactions, holdings, and accounts would also be examples of items we would generally consider to be “material facts relating to the scope and terms of the relationship.” As such, fees and charges would generally fall under the requirement for written disclosure prior to, or at the time of, the recommendation. Fees and charges are important to retail investors,
As described more fully in the Relationship Summary Proposal, the Relationship Summary is designed to provide investors greater clarity concerning the principal fees and charges they should expect to pay and how the types of fees and charges affect the incentives of the firm and their financial professionals.
The type and scope of services a broker-dealer provides its retail customers would also be an example of what typically would be “material facts relating to the scope and terms of the relationship,” and thus would likely need to be disclosed prior to, or at the time of the recommendation, pursuant to this obligation. More specifically, we believe broker-dealers should, consistent with the goal of layered disclosure, build upon their disclosure in the Relationship Summary, and provide additional information regarding the types of services that will be provided as part of the relationship with the retail customer and the scope of those services.
In particular, in the Relationship Summary, broker-dealers would provide high level disclosures concerning services offered to retail investors, including, for example, recommendations of securities, assistance with developing or executing an investment strategy, monitoring the performance of the retail investor's account, regular communications, and limitations on selections of investments.
The Disclosure Obligation would also explicitly require the broker-dealer to, prior to or at the time of such recommendation, reasonably disclose all material conflicts of interest associated with the recommendation. For purposes of Regulation Best Interest, we propose to interpret a “material conflict of interest” as a conflict of interest that a reasonable person would expect might incline a broker-dealer—consciously or unconsciously—to make a recommendation that is not disinterested. In determining how to interpret what constitutes a “material conflict of interest,” we considered the definition of “material conflict of interest” as used in BIC Exemption and related PTEs.
We believe that this obligation to disclose should only apply to “
The Disclosure Obligation applies to any “material conflict of interest,” including those arising from financial incentives. As discussed below, the proposed Conflict of Interest Obligations would require a broker-dealer to establish, maintain and enforce written policies and procedures reasonably designed to: (1) Identify and at a minimum disclose, or eliminate, all material conflicts of interest associated with the recommendation; and (2) identify and disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives associated with the recommendation. To the extent a broker-dealer determines, pursuant to the Conflict of Interest Obligations, not to eliminate, but to disclose a material conflict of interest, or to disclose and mitigate a material conflict of interest that is a financial incentive, this Disclosure Obligation would apply.
We preliminarily believe that a material conflict of interest that generally should be disclosed would include material conflicts associated with recommending: Proprietary products,
For the avoidance of doubt, the requirement under Regulation Best Interest that a broker-dealer disclose information about material conflicts of interest is not intended to limit or restrict a broker-dealer's obligations under federal securities laws, including the general antifraud provisions of the federal securities laws, relating to disclosure of additional information to a customer at the time of the customer's investment decision.
We are proposing that the Disclosure Obligation would require a broker-dealer, or natural person who is an associated person of a broker or dealer to “reasonably” disclose material facts, including material conflicts. In lieu of setting explicit requirements by rule for what constitutes effective disclosure, the Commission proposes to provide broker-dealers with flexibility in determining the most appropriate way to meet this Disclosure Obligation depending on each broker-dealer's business practices, consistent with the principles set forth below and in line with the suggestion of some commenters that stressed the importance of allowing broker-dealers to select the form and manner of delivery of disclosure.
In addition to providing firms flexibility, we further believe it is important to require that broker-dealers or natural persons who are associated persons of the broker-dealer to “reasonably disclose” so that compliance with the Disclosure Obligation will be measured against a negligence standard, not against a standard of strict liability.
The DOL Fiduciary Rule also would avoid strict liability, albeit through a “good faith” exemption in its BIC Exemption. Section II(e)(8), BIC Exemption Release at 21046-21047.
Given the unique structure and characteristics of the broker-dealer relationship with retail customers—including the varying levels and frequency of recommendations that may be provided, and the types of conflicts that may be presented—we believe it is important to provide broker-dealers flexibility in determining the most appropriate and effective way to meet this Disclosure Obligation, consistent with the principles set forth below. Accordingly, at this time we are not proposing to require a standard written document akin to Form ADV Part 2A, as suggested by certain commenters. As discussed in more detail below, we preliminarily believe that while some forms of disclosure may be standardized, certain disclosures may need to be tailored to the particular recommendation, and some disclosures may be addressed through an initial more generalized disclosure about the material fact or conflict, followed by specific disclosure at another point. Accordingly, we have preliminarily determined to provide flexibility in the form and manner, and timing and frequency, of the disclosure.
The Commission believes that disclosure should be concise, clear and understandable to promote effective communication between a broker-dealer and retail customer.
As described above, we are not proposing to specify by rule the form (
The Disclosure Obligation would apply “prior to or at the time of” the recommendation. The timing of the disclosure is critically important to whether it may achieve the effect contemplated by the proposed rule. Investors should receive information early enough in the process to give them adequate time to consider the information and promote the investor's understanding in order to make informed investment decisions, but not so early that the disclosure fails to provide meaningful information (
In light of these goals, we would like to emphasize the importance of determining the appropriate timing and frequency of disclosure that may be effectively provided “prior to or at the time of” the recommendation, but which may be achieved through a variety of approaches: (1) At the beginning of a relationship (
The Commission anticipates that broker-dealers may elect to make certain required disclosures of information to their customers at the beginning of a relationship, such as in a relationship guide, account agreement, comprehensive fee schedule, or other written document accompanying such documents. While certain forms of disclosure may be standardized, certain disclosures may need to be tailored to a particular recommendation, for example, if the standardized disclosure does not sufficiently identify the material conflicts presented by the particular recommendation. Furthermore, additional disclosure may be needed beyond the standardized disclosure (such as an account agreement) when any previously provided information becomes materially inaccurate, or when there is new relevant material information (
The Commission preliminarily believes this flexible approach to disclosure is consistent with the broker-dealers' liabilities or obligations under the antifraud provisions of the federal securities laws.
We believe that the proposed Disclosure Obligation, in conjunction with the Relationship Summary and Regulatory Status Disclosure noted above is consistent with many of the principles underlying the disclosure recommendation regarding disclosure in the 913 Study and behind the disclosure obligations of the BIC Exemption—which we believe is to facilitate disclosure and retail customer understanding of the key information material to a retail customer's relationship with a broker-dealer, including the scope and terms of the relationship and material conflicts of interest —and provides much of the same information, but in a less prescriptive manner that is designed to provide firms flexibility in how to satisfy the obligation.
Specifically, broker-dealers relying on the BIC Exemption to provide investment advice to retirement accounts would need to do so pursuant to a written contract that includes specific language and disclosures, including, among others, provisions: Acknowledging fiduciary status; committing the firm and the adviser to adhere to standards of impartial conduct; and warranting the adoption of policies and procedures reasonably designed to ensure that advisers provide best interest advice and minimize the harmful impact of conflicts of interest. The firm would also need to disclose information on the firm's and advisers' conflicts of interest and the cost of their advice and provide certain ongoing web disclosures.
As previously noted, the 913 Study recommended that the Commission engage in rulemaking and/or issue interpretive guidance on the components of the recommended uniform fiduciary standard: The duties of loyalty and care.
We believe that our proposed Disclosure Obligation, in conjunction with the Relationship Summary and Regulatory Status Disclosure noted above, would address many of the underlying concerns of and would provide customers with substantially similar information as required under the BIC Exemption and recommended in the 913 Study.
The Disclosure Obligation under Regulation Best Interest further builds on and complements the Relationship Summary and Regulatory Status Disclosure and together, these obligations would clarify the capacity in which a firm or financial professional is acting, in an effort to minimize investor confusion, and facilitate greater awareness of key aspects of a relationship with a firm or financial professional through a layered approach to disclosure.
The Commission generally requests comment on the Disclosure Obligation. In addition, the Commission requests comment on the following specific issues:
• Would the Disclosure Obligation cause a broker-dealer to act in a manner that is consistent with what a retail customer would reasonably expect from someone who is required to act in his or her best interest? Why or why not?
• Should the Commission require new disclosure, beyond that which is currently required pursuant to common law, and Exchange Act and SRO rules?
• Should the Commission promulgate more specific disclosure requirements such as written account disclosure akin to Form ADV Parts 2A and 2B?
• Should the Commission require a specific type or amount of disclosure? What criteria should determine or inform the type or amount of disclosure?
• Should the Commission explicitly require that the disclosure be “full and fair”? Why or why not?
• Should the Commission require broker-dealers to “reasonably disclose” as proposed? Should the Commission provide additional guidance as to how broker-dealers can meet that standard? If so, what additional guidance would commenters recommend? Should the
• Do commenters believe that the Disclosure Obligation requires disclosure of information that investors would not find useful? If so, please specify what information and why.
• Is there additional information that investors would find useful? If so, please specify what information and why.
• The Commission requests comment on existing broker-dealer disclosure practices. Do broker-dealers currently provide disclosures that could satisfy this requirement? If so, what types of disclosures and when/how are they delivered? Do broker-dealers provide customer-specific disclosures indicating what type of account is held and in what capacity the firm is acting? If so, how are those disclosures made (
• Do broker-dealers currently provide more detailed disclosures than contemplated to be required as part of the Relationship Summary regarding the nature and scope of services provided, as well as the legal obligations and duties that apply to those services? If so, how and when is such disclosure provided (
• Would the Relationship Summary achieve the goal of the Disclosure Obligation of facilitating the retail customer's awareness of the material facts relating to the scope and terms of the relationship with the retail customer and all material conflicts of interest associated with the recommendation without the additional Disclosure Obligation? Should the Commission consider permitting broker-dealers to satisfy their obligations under this requirement solely by delivering the proposed Relationship Summary? Do commenters believe the Relationship Summary would ever fulfill the Disclosure Obligation? When would it? When would it not?
• The Commission has identified certain topics that would generally be considered material facts relating to the scope and terms of the relationships (
• Should the Commission require additional disclosures for dual-registrants, as suggested above, because the Relationship Summary and Regulatory Status Disclosure for dual-registrants would describe both brokerage and advisory services/capacities?
• Should the Commission articulate additional requirements or guidance for a dual-registrant to satisfy the Disclosure Obligation? If so, what additional requirements or guidance and why? Should dual-registrants be required to disclose, in writing, each time they change capacity?
• The Commission proposes to provide flexibility to a broker-dealer that is a dual-registrant to determine how to disclose that it is acting in a broker-dealer capacity. How do commenters anticipate that dual-registrants will meet this obligation? Specifically, how do commenters expect dual-registrants to meet the obligation to provide such disclosure “prior to or at the time of” a recommendation in their capacity as a broker-dealer? Should a broker-dealer be required to make a customer-specific or recommendation-specific disclosure about the capacity in which it is acting? Should that disclosure be made on a one-time or ongoing basis? Should the Commission mandate the form or method of delivery of that disclosure? For example, should the Commission require broker-dealers to include the disclosure in account opening forms or periodic statements or in other documents?
• Does the guidance concerning additional more detailed disclosures that broker-dealers should consider providing in furtherance of layered disclosure cause confusion about the level of disclosure firms are required to make in order to satisfy the requirement to disclose the terms and scope of the relationship? If so, how could the Commission clarify this guidance? Would the layered disclosure approach cause confusion among retail customers?
• The Commission requests comment on existing broker-dealer practices concerning fee disclosures. What types of fee disclosures do broker-dealers currently provide? Do broker-dealers currently provide fee disclosures that could satisfy this requirement? If so, what types of disclosures and when/how are they delivered? Do broker-dealers provide customer-specific disclosures indicating what type of fees are charged, how they are identified (
• Should the Commission mandate the form, specific content or method for delivering fee disclosure? Why or why not? Do commenters believe that disclosure of fees in a uniform manner would be beneficial for investors? If so, what would be the preferred style of such disclosure in order to facilitate investor comprehension of such fees?
• The Commission preliminarily believes that broker-dealers should be required to disclose, at a minimum, the types of fees that are included in the Relationship Summary. Should the Commission provide more clarity regarding what types of fees should be disclosed? Should the Commission add a materiality threshold for fee disclosure?
• Should the Commission mandate a comprehensive fee schedule? Why or why not? If so, should the Commission mandate the form, specific content or method of delivering the comprehensive fee schedule?
• Should broker-dealers be required to update fee disclosures 30 days or another specified time period before they raise fees or impose new fees? Should this requirement be limited to material fees? How should such fees be defined?
• Should broker-dealers be required to use specified terms to describe certain material fees? If so, what should those specified terms be?
• As proposed, the rule only requires disclosure to retail customers who receive recommendations. Should the Commission consider requiring fee disclosure to all retail customers, including customers in self-directed brokerage accounts? Why or why not?
• Would self-directed customers benefit from more detailed fee disclosure? If so, in what form should
• Regarding timing of disclosure, the Commission preliminarily believes that the disclosure should be made “prior to or at the time of” the recommendation. Should the Commission consider a different timing requirement? For example, should the Commission require disclosure “immediately prior to the recommendation”? Should the Commission instead mandate the timing and frequency of certain disclosures? If so, which disclosures should be subject to more specific timing or updating requirements? For example, should the Commission require annual delivery of certain disclosure, such as fee disclosures? Why or why not?
• Do commenters agree that in certain circumstances broker-dealers should be permitted to provide an initial disclosure followed by more specific disclosure after the recommendation? Why or why not? Do commenters require more guidance on when this would be permitted? If so, how could the Commission clarify this guidance?
• Are there services, in addition to those provided as examples, that should be considered material facts relating to the scope of terms of the relationships? If so, please explain. Are there specific types of services that broker-dealers provide that should be required to be disclosed? If so, which ones?
• Should the Commission require specific disclosures on products and product limitations? Why or why not?
• Should broker-dealers be subject to more specific requirements concerning the method of disclosures? If so, what additional requirements should the Commission consider, and why? If not, why not? For example, should the Commission impose requirements concerning prominence or method of delivery?
• Do commenters believe that all disclosures should be made in writing, as proposed? Should the Commission permit disclosures to be made orally, so long as a written record of the oral disclosure is made and retained?
• Should the Commission require that certain disclosures be made prior to the execution of a transaction? If so, which ones? Why or why not?
• Should broker-dealers be required to make certain disclosures before the first recommendation or transaction effected for a customer? If so, which ones? Why or why not?
• Are there any specific interactions or relationships between the disclosure requirements under the Disclosure Obligation and the Relationship Summary that should be addressed?
• Are there any specific interactions or relationships between the disclosure requirements under the Disclosure Obligation and the Conflict of Interest Obligations that should be addressed?
• Are there any specific interactions or relationships between the disclosure requirements in Regulation Best Interest and the existing general antifraud provisions that should be addressed? Do commenters believe the general antifraud provisions adequately address other non-recommendation related conflicts or should Regulation Best Interest also cover such conflicts?
The Commission requests comment on the proposed requirement to disclose all material conflicts of interest associated with the recommendation.
• Should the Commission require such disclosures?
• Should the Commission use a different interpretation for what is a “material conflict of interest”? If so, which one and why?
• Should the Commission define “material conflicts of interest” in terms of an incentive that causes a broker-dealer not to act in the retail customer's best interest? Why or why not?
• Are there any types of material conflicts that commenters believe the Commission should require to be disclosed? If so, which ones and why?
• Are there any material conflicts of interest that commenters believe cannot be disclosed sufficiently in writing? If so, which conflicts and why?
• Should the Commission require a specific type or amount of disclosure? What criteria should determine or inform the type or amount of disclosure?
• Should the disclosure requirements include quantification of conflicts of interest, the economic benefits from material conflicts of interest to firms and their associated persons, or the costs of such conflicts to retail customers or clients?
• Given the number of dually-registered representatives, would the existence of written disclosure in Form ADV Part 2B, including disclosure about financial incentives such as conflicts from compensation received in association with a broker-dealer, in the absence of comparable written disclosure expressly relating to other conflicts that may affect the same representative's recommendations in a broker-dealer capacity, create a misleading impression about the representative's conflicts or their potential impact on advice in a broker-dealer rather than an adviser capacity?
• Are there particular material conflicts arising from financial incentives or other material conflicts that the Commission should specifically require a broker-dealer to disclose to a retail customer? If so, which ones and why? If not, why not? Are there any for which the Commission should specifically require advance customer written consent? If so, which and why?
The Commission proposes to require, as part of Regulation Best Interest, a Care Obligation that would require a broker-dealer, when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer, to exercise reasonable diligence, care, skill, and prudence to: (1) Understand the potential risks and rewards associated with the recommendation, and have a reasonable basis to believe that the recommendation could be in the best interest of at least some retail customers; (2) have a reasonable basis to believe that the recommendation is in the best interest of a particular retail customer based on that retail customer's investment profile and the potential risks and rewards associated with the recommendation; and (3) have a reasonable basis to believe that a series of recommended transactions, even if in the retail customer's best interest when viewed in isolation, is not excessive and is in the retail customer's best interest when taken together in light of the retail customer's investment profile. These proposed obligations would require a broker-dealer making a recommendation of a securities transaction or investment strategy involving securities to a retail customer to have a reasonable basis for believing that the recommended transaction or investment strategy is in the best interest of the retail customer and does not put the financial or other interest of the broker-dealer before that of the retail customer.
Although the term “prudence” is not a term frequently used in the federal securities laws,
Under the Care Obligation, a broker-dealer generally should consider reasonable alternatives, if any, offered by the broker-dealer in determining whether it has a reasonable basis for making the recommendation. This approach would not require a broker-dealer to analyze all possible securities, all other products, or all investment strategies to recommend the single “best” security or investment strategy for the retail customer, nor necessarily require a broker-dealer to recommend the least expensive or least remunerative security or investment strategy.
Broker-dealers must deal with their customers fairly
Paragraph (a)(2)(ii)(A) of proposed Regulation Best Interest, which is intended to incorporate a broker-dealer's existing obligations under “reasonable-basis suitability,”
This understanding must include the “ `potential risks and rewards' and potential consequences of such recommendation.”
To meet this proposed requirement under paragraph (a)(2)(ii)(A), a broker-dealer would need to: (1) Undertake reasonable diligence (
In general, what would constitute reasonable diligence under proposed paragraph (a)(2)(ii)(A) will vary depending on, among other things, the complexity of and risks associated with the recommended security or investment strategy and the broker-dealer's familiarity with the recommended security or investment strategy.
While every inquiry will be specific to the broker-dealer and the investment or investment strategy, broker-dealers may wish to consider questions such as:
• Can less costly, complex, or risky products available at the broker-dealer achieve the objectives of the product?
• What assumptions underlie the product, and how sound are they? What market or performance factors determine the investor's return?
• What are the risks specific to retail customers? If the product was designed mainly to generate yield, does the yield justify the risk to principal?
• What costs and fees for the retail customer are associated with this product? Why are they appropriate? Are all of the costs and fees transparent? How do they compare with comparable products offered by the firm?
• What financial incentives are associated with the product, and how will costs, fees, and compensation relating to the product impact an investor's return?
• Does the product present any novel legal, tax, market, investment, or credit risks?
• How liquid is the product? Is there a secondary market for the product?
This list of questions is not meant to be comprehensive, nor should it substitute for a broker-dealer's own assessment of what factors should be considered to determine the risks and rewards of a particular investment or investment strategy. However, it is meant to illustrate the types of questions and considerations a broker-dealer generally should consider when developing an understanding of the potential risks and rewards associated with a recommendation, and when developing a reasonable basis to believe that the recommended investment or investment strategy could be in the best interest of at least
Beyond establishing an understanding of the recommended securities transaction or investment strategy, we believe that acting in the best interest of the retail customer would require a broker-dealer to have a reasonable basis to believe that a specific recommendation is in the best interest of the
For the reasons set forth below, this proposed obligation is intended to incorporate a broker-dealer's existing well-established obligations under “customer-specific suitability,”
Thus, under proposed Regulation Best Interest, the broker-dealer will be required to have a reasonable basis to believe, based on its diligence and understanding of the risks and rewards of the recommendation, and in light of the retail customer's investment profile, that the recommendation is in the best interest of the retail customer and does not place the broker-dealer's interest ahead of the customer's interest. We believe this will enhance the quality of recommendations, and will improve investor protection by minimizing the potential harmful impacts that broker-dealer conflicts of interest may have on recommendations provided to retail customers.
As described above, the broker-dealer's diligence and understanding of the risks and rewards would generally involve consideration of factors, such as the costs, the investment objectives and characteristics associated with a product or strategy (including any special or unusual features, liquidity, risks and potential benefits, volatility and likely performance in a variety of market and economic conditions), as well as the financial and other benefits to the broker-dealer.
Under the existing “customer specific suitability” obligation, to determine whether an investment recommendation is suitable for the customer when evaluated in terms of the investor's financial situation, tolerance for risk, and investment objectives, broker-dealers have a duty to seek to obtain relevant information from customers relating to their financial situations and to keep such information current.
The Commission also proposes to include this concept of a “customer's investment profile,” consistent with FINRA's suitability rule.
For clarification, in keeping with the requirement that a securities-related recommendation must be in the best interest of the customer at the time it is made, a broker-dealer generally should make a reasonable effort to ascertain information regarding an existing customer's investment profile prior to the making of a recommendation on an “as needed” basis—
We believe our proposed definition of “retail customer investment profile” identifies appropriate factors that should be considered as part of evaluating a recommendation and whether it is in a retail customer's best interest, because the factors generally are relevant to a determination regarding whether a recommendation is in the best interest of a particular customer (
We propose to interpret the customer-specific obligation in paragraph (a)(2)(ii)(B) of proposed Regulation Best Interest consistent with existing precedent, rules and guidance, but subject to the enhanced “best interest” (rather than “suitability”) standard. Thus, as noted above, when considering the factors that comprise a retail customer's investment profile, the broker-dealer would be required to consider whether it has sufficient information regarding the customer to properly evaluate whether a recommendation is in the best interest of the retail customer without placing the financial or other interest of the broker-dealer ahead of that particular retail customer's interests.
We reiterate that we recognize that it may be consistent with a retail customer's investment objectives—and in many cases, in a retail customer's best interest—for a retail customer to allocate investments across a variety of investment products, or to invest in riskier or more costly products, such as some actively managed mutual funds, variable annuities, and structured products. However, in recommending such products, a broker-dealer must satisfy its obligations under proposed Regulation Best Interest. Such recommendations would continue to be evaluated under a fact specific analysis based on the security or investment strategy recommended in connection with the retail customer's investment profile, consistent with the proposed best interest obligation.
In addition, as discussed above under the proposed obligation in paragraph (a)(2)(ii)(A), we emphasize that the costs and financial incentives associated with a recommendation would generally be one of many important factors—including other factors such as the product's or strategy's investment objectives, characteristics (including any special or unusual features), liquidity, risks and potential benefits, volatility and likely performance in a variety of market and economic conditions—to consider when determining whether a recommended security or investment strategy involving a security or securities is in the best interest of the retail customer.
We preliminarily believe that, under this prong of the Care Obligation, when a broker-dealer recommends a
Furthermore, we do not believe a broker-dealer could meet its Care Obligation through disclosure alone. Thus, for example, where a broker-dealer is choosing among identical securities with different cost structures,
The third obligation would require a broker-dealer to exercise reasonable diligence, care, skill, and prudence to have a reasonable basis to believe that a series of recommended transactions, even if in the retail customer's best interest when viewed in isolation, is not excessive and is in the retail customer's best interest when taken together in light of the retail customer's investment profile. The proposed requirement is intended to incorporate and enhance a broker-dealer's existing obligations under the federal securities laws and incorporate and go beyond FINRA's concept of “quantitative suitability.” We believe it is appropriate to incorporate this existing, well-established obligation, which would similarly promote consistency and clarity regarding this obligation. However, we believe it is appropriate to expand the scope of this requirement by applying it irrespective of whether a broker-dealer exercises actual or
Pursuant to the federal securities laws, broker-dealers can violate the federal antifraud provisions by engaging in excessive trading
Under the proposed rule, a broker-dealer must have a reasonable basis to believe that a series of recommended transactions is not excessive. Although no single test defines excessiveness, the following factors may provide a basis for determining that a series of recommended transactions is excessive: turnover rate,
The proposed rule would enhance a broker-dealer's existing obligations in two ways. First, the proposed rule would create a new, explicit obligation under the Exchange Act that a broker-dealer have a reasonable basis to believe that a series of recommended transactions is not excessive and is in the retail customer's best interest when taken together. As noted, the Commission has found unsuitable recommendations of a series of transactions on the basis that the “frequency of trading” was not suitable.
Second, the proposed rule would require a broker-dealer to have a reasonable basis to believe that a series of recommended transactions is not excessive and is in the retail customer's best interest, regardless of whether the broker-dealer has actual or
The Commission believes that a broker-dealer should have a reasonable basis to believe that a series of recommended transactions, even if in the retail customer's best interest when viewed in isolation, is not excessive and is in the retail customer's best interest when taken together in light of the retail customer's investment profile, consistent with subparagraph(a)(1). We believe that imposing this requirement without a “control” element would provide consistency in the investor protections provided to retail customers by this proposed paragraph (a)(2)(ii)(C) by requiring a broker-dealer to always form a reasonable basis as to the recommended frequency of trading in a retail customer's account—irrespective of whether the broker-dealer “controls” or exercises “
By requiring a broker-dealer that is making a recommendation to a retail customer to act in the retail customer's best interest without placing the broker-dealer's interests ahead of the retail customer's interest, which is satisfied (in part) by the broker-dealer exercising “reasonable diligence, care, skill, and prudence,” we believe the proposed Care Obligation generally reflects similar underlying principles as the “objective standards of care” that are incorporated in the best interest Impartial Conduct Standard as set forth by the DOL in the BIC Exemption.
As noted above, the DOL stated that the best interest Impartial Conduct Standard is intended to “incorporate the objective standards of care and undivided loyalty,” that require adherence to a professional standard of care in making investment recommendations that are in the investor's best interest, and not basing recommendations on the advice-giver's own financial interest in the transaction, nor recommending an investment unless it meets the objective prudent person standard of care.
Focusing on the “professional standard of care” or “duty of prudence,” the DOL explains that the “prudence” standard, as incorporated in the “best interest” standard set forth in the BIC Exemption, is “an objective standard of care that requires investment advice fiduciaries to investigate and evaluate
Our proposed Care Obligation establishes an objective, professional standard of conduct for broker-dealers that requires broker-dealers to “exercise reasonable diligence, care, skill and prudence to” understand the potential risks and rewards associated with their recommendation and have a reasonable basis to believe that it could be in the best interest of at least some retail customers, have a reasonable basis to believe that the recommendation is in a particular retail customer's best interest based on that retail customer's investment profile and the risks and rewards associated with the recommendation, and have a reasonable basis to believe that a series of recommended transactions, even if in the retail customer's best interest when viewed in isolation, is not excessive and is in the retail customer's best interest when taken together in light of the retail customer's investment profile. Moreover, as noted above, this Care Obligation cannot be satisfied through full disclosure, and proof of fraud or misrepresentation would also not be required.
In addition, the Commission believes that the incorporation and enhancement of existing broker-dealer suitability obligations as part of the proposed care obligation would address many of the concerns that were raised by the DOL as a rationale for not referring to the existing FINRA suitability standard as the basis for the best interest obligation under the Impartial Conduct Standards.
Further, we believe that the proposed Care Obligation is also similar to the recommended duty of care in the 913 Study. As previously noted, the 913 Study recommended that the Commission engage in rulemaking and/or issue interpretive guidance on the components of the recommended uniform fiduciary standard: the duties of loyalty and care.
As part of the proposed care obligation under Regulation Best Interest, we are only proposing an obligation with respect to the basis a broker-dealer must have in making a recommendation to a retail customer, and are not proposing the other aspects of the duty of care that are specified in the 913 Study—notably best execution and fair pricing and compensation requirements—as the Commission does not believe that it is necessary to do so at this time. As noted in the 913 Study,
Moreover, the 913 Study noted that the staff's recommendation to specify these aspects of the duty of care was partly based on the need to provide guidance to both investment advisers and broker-dealers of their obligations under the recommended uniform fiduciary duty.
Although we are not proposing a fiduciary duty that includes a duty of care for broker-dealers, it is important to note that we believe that the proposed care obligation under Regulation Best Interest, in combination with existing broker-dealer obligations (such as best execution), is generally consistent with the underlying principles of—albeit more prescriptive than— the duty of care enforced under the Advisers Act. We believe any differences in the articulation of these standards for broker-dealers, as compared to investment advisers, is appropriate given differences in the structure and characteristics of their relationships with retail customers, to preserve and incorporate existing guidance and interpretations related to broker-dealer suitability obligations, and to provide clarity to how Regulation Best Interest would change existing obligations.
The Commission requests comment generally on the proposed care obligation. In addition, the Commission seeks comment on the following specific issues:
• Would the Care Obligation cause a broker-dealer to act in a manner that is consistent with what a retail customer would reasonably expect from someone who is required to act in their best interest? Why or why not?
• Under the Care Obligation, a broker-dealer must exercise reasonable diligence, care, skill, and prudence when making a recommendation, including assessing the potential risks and rewards associated with the recommendation. Do commenters believe that Regulation Best Interest is sufficiently clear that a broker-dealer and its associated natural persons may make a recommendation which may result in investor losses due to market or other risks inherent in investing?
• Has the Commission provided sufficient guidance on how a broker-dealer can satisfy each component of the Care Obligation?
• Do commenters believe the proposed Care Obligation enhances broker-dealers' existing suitability obligations?
• Are there aspects of a broker-dealer's existing suitability obligations that the Commission should not incorporate? Are there additional obligations that the Commission should incorporate? If so, which ones and why?
• As noted, the Commission is not proposing additional aspects of the duty of care that are specified in the 913 Study—notably best execution and fair pricing and compensation requirements, as broker-dealers are currently subject to explicit standards of conduct relating to best execution and fair and reasonable compensation. Do commenters agree that enhancements to these obligations are not required at this time? If not, please explain why.
• Is there sufficient clarity regarding how a broker-dealer “exercises reasonable diligence, care, skill, and prudence”? In addition, is “prudence” a sufficiently clear term when referring to the broker-dealer's Care Obligation? Should the Commission consider another formulation for this obligation? If so, what language would be clearer?
• Is there sufficient clarity regarding how a broker-dealer determines if it has a reasonable basis to believe that the recommendation in the best interest of “some” retail customers in paragraph (a)(2)(ii)(A)? Why or why not? Should the rule expressly require a broker-dealer or associated person, in formulating this belief, to take into account all benefits to the broker-dealer or associated person from the recommendation and the costs to a hypothetical retail customer? Should the Commission require that a broker-dealer have a reasonable basis to believe that a recommendation is appropriate for the category of retail customers to which the retail customer belongs?
• Is there sufficient clarity regarding how a broker-dealer determines if it has a “reasonable basis to believe that that the recommendation is the best interest of the retail customer based on the retail customer's investment profile and the potential risks and rewards associated with the recommendation” in paragraph (a)(2)(i)(B)? Why or why not? Should the rule expressly require a broker-dealer or associated person, in formulating this belief, to take into account all benefits to the broker-dealer or associated person from the recommendation and the costs to the retail customer?
• Should the Commission take a different approach to defining the Care Obligation? If so, what approach should the Commission and take and why? For example, in lieu of establishing a Care Obligation that requires recommendations in the “best interest,” as described, should the Care Obligation codify existing suitability obligations and require certain additional obligations (such as not placing the financial or other interest of the broker-dealer ahead of the retail customer)? If so, what additional obligations should be required and why?
• As noted above, the Commission preliminary believes it is appropriate to incorporate the concept of a “customer's investment profile” consistent with FINRA's suitability rule. Do commenters agree? Why or why not? Should additional factors be considered?
• Should the Commission require broker-dealers to document their efforts to collect investment profile information? Relatedly, should broker-dealers be required to document why they believe one or more factors in a customer's investment profile are not relevant to a determination regarding whether a recommendation is in the best interest for a particular customer? Why or why not?
• Should the interpretation of what it means to make a recommendation in the “best interest” for purpose of paragraph (a)(2)(i)(B) be different from the interpretation of the best interest obligation under paragraph (a)(1)? Why or why not? Please be specific regarding any alternative suggestions and what they would or would not require. If the standard were different, should the Commission change the provision in the proposed rule that the obligation under paragraph (a)(1) is satisfied only by compliance with the elements of paragraph (a)(2)? If so, should the obligation in paragraph (a)(1) be an independent obligation, for violation of which a broker-dealer and associated person could be liable even if they complied with the elements of paragraph (a)(2)?
• Should a broker-dealer and its associated persons, when considering similar investment options available through the broker-dealer, have the obligation to recommend the least expensive and/or least remunerative option, at least if all other relevant factors are equal? Why or why not? What other factors should be relevant in such consideration?
• Should a broker-dealer and its associated persons, when considering investment options, only be required to consider options available through the broker-dealer? Alternatively, if a broker-dealer and its associated persons are required to consider additional options outside the broker-dealer, how should the Commission articulate the extent of this duty? Please be specific.
• Is the phrase “reasonably available alternative” sufficiently clear? Should the Commission specify certain factors to be used in the determination? Is there an alternative phrase or term that would be clearer? Please be specific.
• Is there sufficient clarity regarding what “less expensive” or “least remunerative” means and under what circumstances expense or remuneration should be a significant factor?
• Should the Commission define what “best interest” means for purposes of paragraph (a)(2)(i)(B)?
• Do commenters agree that turnover rate, cost-to-equity ratio and in-and-out-trading are relevant factors for determining that a series of recommended transactions is excessive for purposes of paragraph (a)(2)(i)(C)? If not, what factors should a broker-dealer consider with respect to this proposed obligation? Should the Commission expressly articulate the relevant factors as part of the rule?
• The Commission is proposing to use the term “series of recommended transactions” as part of the obligation in paragraph (a)(2)(i)(C), which is based, in part, on FINRA's quantitative suitability obligation. Is “series of recommended transactions” a sufficiently clear term when referring to the quantity/frequency of trades? Should the Commission consider another formulation for this obligation? If so, what language would be clearer?
• As noted above, the best interest obligation would not extend beyond a particular recommendation or generally require a broker-dealer to have a continuing duty to a retail customer. Is there sufficient clarity regarding how the obligation applies to a series of recommended transactions? Why or why not?
• The Commission is proposing, as part of the obligation in paragraph (a)(2)(i)(C), that a broker-dealer must have a reasonable basis to believe that a series of recommended transactions is
• As noted above, FINRA's quantitative suitability rule requires a broker-dealer to have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, are
• The Commission is not proposing to incorporate the element of control or
The Commission is proposing two requirements under Regulation Best Interest focused specifically on the treatment of conflicts of interest. These Conflict of Interest Obligations would require a broker-dealer entity
We believe that requiring the establishment of such policies and procedures is critical to identifying and addressing conflicts of interest, whether through elimination or, at a minimum, disclosure (and mitigation, in the case of financial incentives). We also believe that policies and procedures help ensure compliance with the proposed requirement to disclose any material conflicts of interest associated with a broker-dealer's recommendations pursuant to the Disclosure Obligation described above. We further believe that requiring the establishment of such policies and procedures serves the Commission's goal of facilitating the disclosure and mitigation of material conflicts of interest, while minimizing additional compliance costs that may be passed on to retail customers.
Under the proposed rule, broker-dealers would be permitted to exercise their judgment as to whether, for example, the conflict can be effectively disclosed (as discussed in Disclosure Obligation), determine what conflict mitigation methods may be appropriate, and determine whether or how to eliminate a conflict, if necessary, so long as the broker-dealer's policies and procedures are reasonably designed. Whether a broker-dealer's policies and procedures are reasonably designed to meet its Conflict of Interest Obligations will depend on the facts and circumstances of a given situation. The Commission also believes requiring policies and procedures specifically aimed at mitigating, in addition to disclosing, material conflicts of interest arising from financial incentives provides enhanced protections not available to retail customers through disclosure alone.
A broker-dealer would not comply with the Conflict of Interest Obligations of Regulation Best Interest by simply creating policies and procedures, if the broker-dealer does not maintain and enforce such policies and procedures.
As noted in the discussion of the Disclosure Obligation in Section II.D.1., we propose to interpret, for purposes of Regulation Best Interest, a “material conflict of interest” as a conflict of interest that a reasonable person would expect might incline a broker-dealer—consciously or unconsciously—to make a recommendation that is not disinterested.
For purposes of the Conflict of Interest Obligation in paragraph (a)(2)(iv), we preliminarily believe that material conflicts of interest arising from “financial incentives” associated with a recommendation generally would include, but are not limited to, compensation practices established by the broker-dealer, including fees and other charges for the services provided and products sold; employee compensation or employment incentives (
While our interpretation of the types of material conflicts of interest arising from financial incentives is broad, we do not intend to require broker-dealers to mitigate every material conflict of interest in order to satisfy their Conflict of Interest Obligations. We request comment below on the scope of the term financial incentives, whether we have appropriately identified the types of financial incentives that should be eliminated or mitigated and disclosed, whether there are other material conflicts of interest commenters believe are more appropriately eliminated or mitigated and disclosed, and whether there are certain financial incentives that are appropriately addressed through disclosure and for which additional mitigation is unnecessary or that the burden of mitigating the conflict would not justify any associated benefit to retail customers.
The Commission's proposed Conflict of Interest Obligations are limited to material conflicts of interest, and to material conflicts arising from financial incentives, that are
In determining whether a broker-dealer “establishes, maintains, and enforces reasonably designed policies and procedures,” to address its material conflicts of interest, as required by the Conflict of Interest Obligations, the Commission preliminarily believes it would consider whether a broker-dealer has adequate compliance and supervisory policies and procedures in place (as well as a system for applying such procedures) to identify and at a minimum disclose (and mitigate, in the case of financial incentives) or eliminate, material conflicts of interest. We believe that there is no one-size-fits-all framework, and broker-dealers should have flexibility to tailor the policies and procedures to account for, among other things, business practices, size and complexity of the broker-dealer, range of services and products offered and associated conflicts presented.
We believe that it would be reasonable for broker-dealers to use a risk-based compliance and supervisory system to promote compliance with Regulation Best Interest, rather than conducting a detailed review of each recommendation of a securities transaction or security-related investment strategy to a retail customer.
Among the components that broker-dealers should consider including in their programs are: Policies and procedures outlining how the firm identifies its material conflicts (and material conflicts arising from financial incentives), including such material conflicts of natural persons associated with the broker-dealer, clearly identifying all such material conflicts of interest and specifying how the broker-dealer intends to address each conflict; robust compliance review and monitoring systems; processes to escalate identified instances of
We believe that having a process to identify and appropriately categorize such conflicts of interest is a critical first step in helping to ensure that broker-dealers have reasonably designed policies and procedures to eliminate, or at a minimum disclose (and mitigate, as required) their material conflicts of interest. Reasonably designed policies and procedures to identify material conflicts of interest (including material conflicts arising from financial incentives) generally should do the following:
(i) Define such material conflicts in a manner that is relevant to a broker-dealer's business (
(ii) establish a structure for identifying the types of material conflicts that the broker-dealer (and natural persons who are associated persons of the broker-dealer) may face, and whether such conflicts arise from financial incentives;
(iii) establish a structure to identify conflicts in the broker-dealer's business as it evolves;
(iv) provide for an ongoing (
(v) establish training procedures regarding the broker-dealer's material conflicts of interest, including material conflicts of natural persons who are associated persons of the broker-dealer, how to identify such material conflicts of interest (and material conflicts arising from financial incentives), as well as defining employees' roles and responsibilities with respect to identifying such material conflicts of interest.
In addition to identifying material conflicts of interest, the Commission proposes to require that the policies and procedures be reasonably designed to at a minimum disclose, or eliminate, all material conflicts of interest associated with making recommendations to retail customers. In addition to the general guidance regarding reasonably designed policies and procedures outlined above, we believe that reasonably designed policies and procedures generally should establish a clearly defined and articulated structure for: Determining how to effectively address material conflicts of interest identified (
If a broker-dealer determines to satisfy its obligation to address material conflicts of interest through disclosure, the broker-dealer should consider the preliminary guidance on aspects of effective disclosure, as discussed above in the Disclosure Obligation.
While the Conflict of Interest Obligations would require a broker-dealer to have policies and procedures reasonably designed to at a minimum disclose or eliminate all material conflicts of interest related to the recommendation (or to disclose and mitigate or eliminate those material conflicts of interest arising from financial incentives), it does not mandate the absolute elimination of any particular conflicts, absent another requirement to do so. The absolute elimination of some particular conflicts could mean a broker-dealer may not receive compensation for its services, which is not the Commission's intent.
A broker-dealer seeking to address its Conflict of Interest Obligations through elimination of a material conflict of interest could choose to eliminate the conflict of interest entirely, for example, by removing incentives associated with a particular product or practice or not offering products with special incentives. Alternatively, a broker-dealer could satisfy this obligation by negating the effect of the conflict by, for example, in the case of conflicts related to affiliated mutual funds, crediting fund advisory fees against other broker-dealer charges—thus effectively eliminating the material conflict of interest.
Furthermore, although the Commission is not proposing to require a broker-dealer to develop policies and procedures to both disclose and mitigate
Under the requirement relating to the treatment of conflicts of interest arising from financial incentives, the Commission proposes to require broker-dealers 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. This proposed requirement is intended to capture the range of financial incentives that could pose a material conflict of interest.
The Commission recognizes the importance of the brokerage model as a potentially cost-effective (and sometimes, a less costly) option for investors to pay for investment advice. As discussed above, the Commission recognizes, however, that broker-dealer financial incentives—including internal compensation structures and compensation arrangements
In addition, through the proposed requirement to develop policies and procedures reasonably designed to mitigate conflicts of interest arising from financial incentives, we are clarifying how the best interest obligation would be fulfilled when a broker-dealer is engaging in principal trading by requiring a broker-dealer to, through its required policies and procedures, identify and address, the financial incentives presented by principal trading.
Accordingly, to make sure that recommendations are in the best interest of the retail customer, the Commission proposes requiring broker-dealers to establish, maintain and enforce written policies and procedures reasonably designed to identify and disclose
As noted above, in lieu of mandating specific mitigation measures or a “one-size fits all” approach, the Commission's proposal would leave broker-dealers with flexibility to develop and tailor reasonably designed policies and procedures that include conflict mitigation measures, based on each firm's circumstances.
For example, broker-dealers generally should consider incorporating the following non-exhaustive list of potential practices
• Avoiding compensation thresholds that disproportionately increase compensation through incremental increases in sales;
• minimizing compensation incentives for employees to favor one type of product over another, proprietary or preferred provider products, or comparable products sold on a principal basis—for example, establishing differential compensation criteria based on neutral factors (
• eliminating compensation incentives within comparable product lines (
• implementing supervisory procedures to monitor recommendations that are: Near compensation thresholds; near thresholds for firm recognition; involve higher compensating products, proprietary products or transactions in a principal capacity; or, involve the rollover or transfer of assets from one type of account to another (such as recommendations to rollover or transfer assets in an ERISA account to an IRA, when the recommendation involves a securities transaction)
• adjusting compensation for registered representatives who fail to adequately manage conflicts of interest; and
• limiting the types of retail customers to whom a product, transaction or strategy may be recommended (
In addition, we believe certain material conflicts of interest arising from financial incentives may be more difficult to mitigate,
The Commission believes that the proposed requirements relating to the treatment of conflicts are designed to address, albeit in a less prescriptive manner, the same concerns regarding broker-dealer conflicts of interest as expressed by the DOL in adopting the DOL Fiduciary Rule and related PTEs, including the conflicts associated with financial incentives, underlying the BIC Exemption. Among other things, the BIC Exemption includes provisions requiring: (1) Disclosure of information on the firm's material conflicts of interest, including web and transaction-based disclosure; and (2) adoption of policies and procedures reasonably designed to: (i) Ensure that advisers (
The DOL has stated that the restriction on compensation incentives under the conditions of the BIC Exemption does not prevent the provision of differential compensation to individuals (whether in type or amount, and including, but not limited to, commissions) based on investment decisions to the extent that the policies and procedures and incentive practices, when viewed as a whole, are reasonably and prudently designed to avoid a misalignment of the interests of advisers with the investors they serve as fiduciaries.
Our proposed Conflict of Interest Obligations are designed to address these same concerns, and support the objective that the recommendations of broker-dealers will not be self-interested, with a principles-based approach that is designed to provide flexibility to broker-dealers as to how to disclose and mitigate such conflicts of interest, depending on their business model, the level of conflicts presented, and the retail customers they serve. While the Commission recognizes that broker-dealers are subject to supervisory obligations under Section 15(b)(4)(E)
Furthermore, our proposed rule subjects broker-dealers to additional requirements when certain material conflicts are present. Specifically, Regulation Best Interest requires written policies and procedures reasonably designed to identify and address, through disclosure or elimination, of any material conflicts of interest that are associated with the recommendation, and imposes heightened obligations requiring written policies and procedures reasonably designed to identify and address, through disclosure and mitigation, or elimination, of material conflicts of interest that are related to financial incentives. We believe that these requirements address the same concerns that the DOL sought to address regarding conflicts of interest and the duty of loyalty that underlies the detailed obligations of the BIC Exemption, and also help ensure investment recommendations will be in the retail customer's best interest, consistent with our understanding of the DOL's objectives in the BIC exemption.
We also believe that the proposed Conflict of Interest Obligations, in conjunction with our Disclosure Obligation, are consistent with the principles underlying the recommendations of the 913 Study relating to a duty of loyalty. In the uniform fiduciary standard recommended in the Study, “incorporating Advisers Act Section 206(1) and 206(2)” would require an investment adviser or broker-dealer to “eliminate, or provide full and fair
We believe that the proposed Conflict of Interest Obligations reflect and build upon the principles underlying these 913 Study recommendations. As recommended by the 913 Study, we are proposing to require, through implementation of policies and procedures, broker-dealers to, at a minimum disclose, or eliminate, all material conflicts of interest, which draws from principles of an investment adviser's duty of loyalty under the Advisers Act, which includes an investment adviser's duty to disclose. One difference between the Conflict of Interest Obligations under Regulation Best Interest and the principles in the 913 Study is that the proposed obligation for broker-dealers is limited to disclosure of material conflicts associated with a recommendation. As discussed above, the Commission believes this limitation is appropriate because broker-dealers often provide a range of services as part of any retail customer relationship, many of which would not involve a recommendation, and such services already are subject to general and specific requirements to address associated conflicts of interest.
Further, in line with the 913 Study recommendations as discussed above, the Commission considered and believes that it is appropriate to also propose a requirement to establish and maintain reasonably designed policies and procedures to disclose and mitigate, or eliminate, material conflicts of interest related to financial incentives, in light of the concerns regarding potential harm to retail customers resulting particularly from broker-dealer conflicts of interest associated with financial incentives, such as compensation practices.
The proposed Conflict of Interest Obligations differ from the 913 Study in that Regulation Best Interest, as proposed, expressly requires a broker-dealer to establish, maintain, and enforce written policies and procedures reasonably designed to identify and address material conflicts, through elimination or disclosure (and mitigation in the case of material conflicts of interest arising from financial incentives), as opposed to expressly requiring that broker-dealers eliminate or provide full disclosure of conflicts of interest.
The Commission generally requests comment on the best interest obligation relating to the treatment of conflicts of interest. Specifically, we request comment on the following issues:
• Would the Conflict of Interest Obligations cause a broker-dealer to act in a manner that is consistent with what a retail customer would reasonably expect from someone who is required to act in their best interest? Why or why not?
• Should the Conflict of Interest Obligations apply to natural persons who are associated persons of a broker or dealer? Why or why not?
• Are there any specific interactions or relationships between the disclosure requirements under the Conflict of Interest Obligations and the Relationship Summary that should be addressed? Are there any specific interactions or relationships between the disclosure requirements under the Conflict of Interest Obligations and the Disclosure Obligation that should be addressed? If so, please explain.
• Are there any specific interactions or relationships between the disclosure requirements in Regulation Best Interest and the existing general antifraud provisions that should be addressed? If so, please explain.
• Do commenters believe the general antifraud provisions adequately address other non-recommendation related conflicts or should Regulation Best Interest also cover such conflicts?
• Do commenters agree with the requirement to create policies and procedures to promote and demonstrate compliance with the Conflict of Interest Obligations? Why or why not? If so, how should those policies and procedures differ, if at all, from those currently required by FINRA? If not, what other approaches do commenters suggest?
• Instead of requiring policies and procedures, should the Commission simply require broker-dealers to eliminate or mitigate and disclose conflicts of interest?
• Should the Conflict of Interest Obligations apply to natural persons who are associated persons? Why or why not?
• Do commenters agree with the Commission's approach to provide flexibility to broker-dealers in meeting their Conflict of Interest Obligations? Why or why not?
• Is the guidance concerning policies and procedures clear? Would this guidance assist broker-dealers in understanding how they can demonstrate compliance with the Conflict of Interest Obligation? Is there additional guidance that would provide additional clarity?
• Do commenters have additional examples of processes or systems the Commission should suggest or require broker-dealers to include in compliance and supervisory programs?
• Should the Conflict of Interest Obligations specify certain minimum policies and procedures? If so, what specific required policies and procedures should we include?
• Should the Commission require in Regulation Best Interest that broker-dealers undergo supervisory and compliance reviews? If so, how
• Is it sufficiently clear to commenters that the Commission does not require the policies and procedures required by the Conflict of Interest Obligations be assessed on a transaction-by-transaction basis, but rather that broker-dealers may use a risk-based compliance and supervisory system? Why or why not?
• Should the Commission provide additional guidance on identification of material conflicts of interest? Why or why not? If so, what type of guidance should the Commission provide?
• Similar to the Care Obligation, should a broker-dealer be required to “exercise reasonable diligence, care, skill, and prudence” to comply with the Conflict of Interest Obligations? Why or why not? Would this lower or raise the standard for the Conflict of Interest Obligations?
• How will the Conflict of Interest Obligations affect dual-registrants? Do commenters believe dual-registrants can adequately comply with such requirements? Why or why not?
• Are the situations identified in this proposal those where conflicts of interest are present, the most prevalent or have the greatest potential for harm or both? To what extent are retail customers harmed by these types of conflicts?
• Has the Commission identified the types of conflicts of interest that need to be addressed in connection with Regulation Best Interest and are these appropriately addressed to meet the objective that broker-dealers provide recommendations in the best interest of retail customers? Are there new or different types of conflicts of interest that the Commission should consider? If so, which ones?
• Do commenters have other suggestions on how broker-dealers can eliminate material conflicts of interest, including financial incentives? If so, please provide examples.
• Do commenters agree with the scope of the Commission's proposed requirement related to disclosure and mitigation, or elimination, of all material conflicts of interest arising from financial incentives? Do commenters agree with the proposed interpretation of such financial incentives? Why or why not? Please explain. Do commenters believe any financial incentives could be adequately addressed through disclosure or elimination (and do not require mitigation)? If so, which ones? Why or why not? Which material conflicts of interest do commenters believe must be mitigated? Why?
• Do commenters believe that retail customers recognize and understand material conflicts of interest presented by broker-dealer compensation arrangements, including the incentive to seek to increase broker-dealers' compensation at the expense of the retail customers they are advising?
• In lieu of or in addition to disclosure, should the Commission explicitly require firms to mitigate conflicts generally and not only those arising from financial incentives? Why or why not? Or should we provide flexibility to firms to decide whether to disclose or mitigate conflicts generally (
• Are there circumstances in which the Commission should explicitly require elimination of certain material conflicts of interest because mitigation would not be sufficient? Why or why not? If so, please specify which ones.
• Should Regulation Best Interest expressly require broker-dealers to regularly (
• Commenters in the past have highlighted several activities of broker-dealers that are most likely to be impacted by an enhanced standard of care for the provision of investment advice to retail customers, such as a fiduciary standard. The Commission requests data and other information related to the nature and magnitude of conflicts of interest when broker-dealers engage in these activities and how Regulation Best Interest would serve to increase or decrease broker-dealers' conflicts of interest:
○ Recommending proprietary products and products of affiliates;
○ Engaging in principal trades with respect to a recommended security (
○ 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 (
○ Receiving third-party compensation in connection with securities transactions or distributions (
○ Providing ongoing, episodic or one-time advice.
The Commission also requests comment on reasonable conflict mitigation measures, specifically:
• What factors should broker-dealers weigh and evaluate in establishing reasonable mitigation measures?
• Should the Commission take a more prescriptive approach with regard to conflict mitigation measures? Why or why not?
• Do commenters have further examples of potential mitigation measures beyond the non-exhaustive list provided above? Do commenters believe that any of the examples provided on the list would not be effective at mitigating conflicts related to financial incentives? Why or why not?
• What impact should the firm's size have on implementation of reasonable mitigation measures?
• Are there conflicts of interest that commenters believe the Commission should prohibit? If so, which ones and why? For example, do commenters believe the Commission should prohibit receipt of certain non-cash compensation (
• Should the Commission require affirmative retail customer consent for certain types of conflicts of interest? Why or why not?
• Would the guidance related to mitigating conflicts provide clarity to firms? Why or why not? Is this guidance consistent with the Commission's goal of improving the quality of recommendations that retail customers receive? What are some areas in which commenters would like more guidance?
• Are there certain product classes that commenters believe the Commission should outright prohibit? If so, which ones and why?
• Do commenters believe neutral compensation across certain products (
In connection with proposed Regulation Best Interest, we are proposing new record-making and recordkeeping requirements for broker-dealers with respect to certain information collected from or provided to retail customers. Exchange Act Section 17(a)(1) requires registered broker-dealers to make and keep for prescribed periods such records as the Commission deems “necessary or appropriate in the public interest, for the protection of investors.”
Under Rule 17a-3(a)(17), broker-dealers that make recommendations for accounts with a natural person as customer or owner are required to create and periodically update customer account information.
Accordingly, we are proposing to amend Rule 17a-3 to add a new paragraph (a)(25), which would require, for each retail customer to whom a recommendation of any securities transaction or investment strategy involving securities is or will be provided, a record of all information collected from and provided to the retail customer pursuant to Regulation Best Interest, as well as the identity of each natural person who is an associated person of a broker or dealer, if any, responsible for the account. The new paragraph would specify, however, that the neglect, refusal, or inability of a retail customer to provide or update any such information would excuse the broker-dealer from obtaining that information.
Under Rule 17a-4(e)(5), broker-dealers are required to maintain and preserve in an easily accessible place all account information required pursuant to Rule 17a-3(a)(17)
We are not proposing new record retention requirements regarding the written policies and procedures that broker-dealers would be required to create pursuant to Regulation Best Interest because such information is already currently required to be retained pursuant to Exchange Act Rule17a-4(e)(7).
The Commission requests comment on recordkeeping and retention requirements related to Regulation Best Interest:
• Should the Commission impose additional record-making requirements related to Regulation Best Interest? Why or why not? If the Commission were to adopt additional requirements, what records should we specifically require broker-dealers to make?
• Should the Commission impose additional record retention requirements related to Regulation Best Interest? Why or why not? If the Commission were to adopt additional requirements, what records should we specifically require broker-dealers to retain?
The Advisers Act regulates the activities of certain “investment advisers,” who are defined in section 202(a)(11) of the Advisers Act as persons who, for compensation, engage in the business of advising others about securities. Section 202(a)(11)(C) excludes from the definition of investment adviser a broker or dealer whose performance of such advisory services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation for those services (the “broker-dealer exclusion”). The broker-dealer exclusion shows, on the one hand, that Congress recognized broker-dealers may give a certain amount of advice to their customers in the course of their regular business as broker-dealers and that it would be inappropriate to bring them within the scope of the Advisers Act merely because of this aspect of their
The Commission has on many occasions discussed the scope of the broker-dealer exclusion. In particular, the Commission has for many years considered issues related to a broker-dealer's exercise of investment discretion over customer accounts and the extent to which such practices could be considered solely incidental to the business of a broker-dealer. Since at least 1978, the Commission has recognized that the broker-dealer exclusion requires some limitations on a broker-dealer's exercise of investment discretion. At that time, the Commission solicited comment on the question of whether broker-dealers who exercised discretionary authority over customers' accounts should,
In considering why limitations on broker-dealers' exercise of investment discretion are needed, the Commission has noted that discretionary brokerage relationships “have many of the characteristics of the relationships to which the protection of the Advisers Act are important.”
At the same time, the Commission has recognized that at least some exercise of discretionary authority by broker-dealers could be considered solely incidental to their business. Under a previous interpretation, a broker-dealer's discretionary account was subject to the Advisers Act only if the broker-dealer had enough other discretionary accounts to trigger the Advisers Act.
Although we did not adopt our 2007 proposal, many commenters were generally supportive of our approach.
Our staff acknowledged that broker-dealers may provide some discretionary account services in the 913 Study.
We believe that it is appropriate for the Commission to again consider the scope of the broker-dealer exclusion with regard to a broker-dealer's exercise of investment discretion in light of both proposed Regulation Best Interest and the proposed Relationship Summary. Additionally, some commenters to the Chairman's request asked that we expressly affirm the interpretive provision we adopted in 2005 and proposed in 2007.
In light of the foregoing, we request comment on the following:
• Should a broker-dealer's provision of unfettered discretionary investment advice be considered solely incidental to the conduct of its business as a broker-dealer?
• Should a broker-dealer's provision of limited discretionary investment advice be considered solely incidental to the conduct of its business as a broker-dealer? If so, what limitations on a broker-dealer's exercise of investment discretion would make it solely incidental to the conduct of its business as a broker-dealer?
• Should we propose an interpretive rule placing express limits on investment discretion permissible under the solely incidental exclusion as we did in 2007? What would be the consequences of such a rule?
• In 2007, we proposed to permit broker-dealers to exercise investment discretion granted by a customer on a temporary or limited basis. Is that appropriate? Would it provide the intended investor protection? Would it provide the clarity regarding the applicable business model and standard of care?
• In 2007 we provided examples of when we would consider a broker-dealer's investment discretion to be temporary or limited.
• Do broker-dealers generally use the examples from the 2007 release to determine when to seek authorization to exercise temporary or limited investment discretion from a customer? Are there other circumstances that cause broker-dealers to seek authorization to exercise investment discretion?
• The Commission requests data and other information related to the nature and magnitude of discretionary services offered by broker-dealers. To what extent do broker-dealers offer a range of discretionary brokerage accounts? What is the range of discretionary services offered, and what types of limits do broker-dealers apply to such services?
• We understand that dually-registered firms generally treat discretionary accounts as advisory accounts. Is this understanding correct? To what extent and under what circumstances do broker-dealers treat discretionary accounts as brokerage accounts? If broker-dealers offer
• Section 3(a)(35) of the Exchange Act defines “investment discretion.”
• Do broker-dealers rely on the staff's 2005 statement that it would not deem a broker-dealer to exercise investment discretion for purposes of the then existing Advisers Act rule 202(a)(11)-1 as a result of the exercise of investment discretion by one of its associated persons over a “related account”?
• We are concerned that any approach to the broker-dealer exclusion in the Advisers Act that would permit broker-dealers unlimited investment discretion could increase incentives for improper conduct, particularly the incentive to churn accounts because broker-dealers receive transactional compensation. To what extent would permitting broker-dealers to exercise unlimited investment discretion increase the risk of such conduct? Are there protections in addition to those already in place, or limitations on the permissible use of investment discretion, that we could take to reduce such risks? To what extent would subparagraph (a)(2)(i)(C) of proposed Regulation Best Interest reduce such risks?
• To what extent does broker-dealers' exercise of investment discretion for their customers increase investor choice in financial services? What are the benefits and risks to investors? How could the risks be addressed through regulation, including Regulation Best Interest?
• The Commission also requests commenters' views on potential opportunities for broker-dealers to offer discretionary brokerage services in the future. To what extent would broker-dealers anticipate offering additional discretionary brokerage services?
• As discussed in this release and the Relationship Summary Proposal, investors are often confused by the differences between advisory and brokerage accounts. Would drawing a specific distinction between discretionary and non-discretionary accounts resolve some of this confusion?
The Commission requests comments on all aspects of Regulation Best Interest. The Commission particularly requests comment on the general impact the proposal would have on recommendations to retail customers and on the behavior of broker-dealers, including the interaction of Regulation Best Interest with the requirements of the Relationship Summary Proposal. The Commission also seeks comment on the interaction of Regulation Best Interest with FINRA and other SRO rules, the antifraud provisions of the federal securities laws, the Advisers Act, ERISA, and the Code. In addition, the Commission seeks comment on the following specific issues:
• Does Regulation Best Interest clearly define the obligations to which broker-dealers would be subject? Are there clarifications or instructions to the proposed requirements that would aid broker-dealers' compliance with the proposed rule? If so, what are they, and what would be the benefits of providing clarifications or instructions?
• As proposed, compliance with paragraph (a)(2) of Regulation Best Interest is designed to satisfy the duty in (a)(1). Is this the right relationship between these two pieces? Should paragraph (a)(2) be expressed as a minimum standard? Or should the duty in expressed in paragraph (a)(1) have residual force and effect apart from the obligations in (a)(2)? Alternatively, should compliance with (a)(2) be a safe harbor? Or should it create a legal presumption that the broker-dealer has met the standard in (a)(1)? Should the Commission create a compliance safe harbor for Regulation Best Interest? Why or why not? If so, what conditions should a broker-dealer be required to satisfy to claim the safe harbor? What impact would this have on the recommendations that retail customers receive?
• Should broker-dealers be subject to any additional requirements with respect to the best interest obligation proposed under Regulation Best Interest? If so, what requirements and why?
• Should the Commission require policies and procedures to assist with compliance with Regulation Best Interest? If so, how would those policies and procedures differ, if at all, from those currently required by FINRA?
• Should the Commission consider making other adjustments to the regulatory obligations of broker-dealers, and if so, which obligations?
• Should the Commission include in the rule text the interpretations and recommendations included in the guidance provided above? If so, which interpretations and recommendations and why or why not?
• Do commenters believe any of the proposed definitions under Regulation Best Interest should be eliminated or modified? Are there any additional terms that should be defined; if so, what are those terms, how should such terms be defined, and why?
• To what extent would Regulation Best Interest help address any investor confusion about the standard of conduct that applies when a broker-dealer provides advice in the form of recommendations? What, if any, other steps should the Commission consider to attempt to mitigate investor confusion?
• What impact would Regulation Best Interest have on the range of choice—both in terms of services related to advice and products—that is available to brokerage retail customers today? Would it preserve such choice? What, if any, additional or different steps should the Commission consider to attempt to preserve choice or mitigate any negative impact on the range of choice available to brokerage customers to receive financial advice?
• What impact would Regulation Best Interest have on the ability of broker-dealers to compete with other financial intermediaries to provide advice to investors in the future?
• To what extent would Regulation Best Interest be consistent with relevant SRO requirements? Would Regulation Best Interest be stricter or less strict than SRO obligations? Would Regulation Best Interest conflict with or be redundant of SRO obligations; if so, please identify which SRO obligations and whether and how the Commission should consider to address such conflicts or redundancies.
• Is it appropriate for Regulation Best Interest to be designed to be generally consistent with DOL and SRO
• Does proposed Regulation Best Interest address current deficiencies in the current standard applicable to broker-dealers who provide advice? Why or why not? Please explain.
• Are there any recommendations in the 913 Study that should be, but have not been, incorporated into the proposed rule? Please elaborate.
• To what extent is the proposed Regulation Best Interest consistent or inconsistent with broker-dealers' existing obligations? How? What impact would such consistency or inconsistency have on retail customers and broker-dealers?
• Are there any specific interactions or relationships between the proposed rules and other federal securities laws that should be addressed?
• Are there any specific interactions between the proposed rules and other regulatory requirements, such as SRO rules or state securities laws that should be addressed?
• Are there any specific interactions between the proposed rules and any non-securities statutes and regulations (
• Do any of the proposed requirements conflict with any existing requirements, including any requirement currently imposed by an SRO or by a state regulator, such that it would be impractical or impossible for a broker-dealer to meet both obligations? If so, which one(s) and why?
• Do commenters agree that proposed Regulation Best Interest is consistent with and similar to (if not the same as) related obligations under the duties of loyalty and care as interpreted under the Advisers Act? Why or why not? Please explain.
• If the Commission were to adopt this proposal, there would still be different standards of conduct for retail customer accounts subject to the DOL Fiduciary Rule and those that are not, as well as existing differences between standards of conduct applicable to broker-dealers and those applicable to investment advisers when providing investment advice. Should the Commission consider harmonizing regulatory obligations related to the provision of advice that are applicable to broker-dealers and investment advisers? Why or why not? If so, how so? Please be specific with regard to the existing obligations and how they should be changed.
• To what extent would regulatory harmonization address investors' confusion about the obligations owed to them by broker-dealers and investment advisers? To what extent would regulatory harmonization result in additional investor confusion or otherwise negatively impact investors? What would be positive and negative investor impacts of regulatory harmonization? To what extent would regulatory harmonization affect investors' choice of financial firms and options to pay for financial advice? Please explain.
• Are there any specific interactions between Regulation Best Interest and state standards that should be addressed? What have commenters' experiences been with respect to current state fiduciary standards (regulatory and common law) for broker-dealers that provide investment advice? How are these standards similar or different than this proposal? What are commenters' views regarding proposed state fiduciary standards for broker-dealers?
The Commission is mindful of the costs imposed by, and the benefits obtained from, our rules. Whenever the Commission engages in rulemaking and is required to consider or determine whether an action is necessary or appropriate in the public interest, Section 3(f) of the Exchange Act requires the Commission to consider whether the action would promote efficiency, competition, and capital formation, in addition to the protection of investors.
Where possible, the Commission quantifies the likely economic effects of proposed Regulation Best Interest; however, as explained further below, the Commission is unable to quantify certain economic effects because it lacks the information necessary to provide reasonable estimates. In some cases, quantification is particularly challenging due to the difficulty of predicting how market participants would act under the conditions of the proposed rule. Nevertheless, as described more fully below, the Commission is providing both a qualitative assessment and quantified estimate of the potential effects, including the potential aggregate initial and aggregate ongoing costs, where feasible. The Commission encourages commenters to provide data and information to help quantify the benefits, costs, and the potential impacts of the proposed rule on efficiency, competition, and capital formation.
The relationship between a retail customer and a broker-dealer is an example of what is referred to in economic theory as an “agency” relationship. In an agency relationship, one party, commonly referred to as “the principal,” engages a second party, commonly referred to as “the agent,” to perform some service on the principal's behalf.
Contracts are a common mechanism used by principals and agents to ameliorate agency problems. They do so by explicitly setting out the responsibilities of both parties under the contract. Typically, in return for compensation from the principal, an agent agrees to perform certain actions that will benefit the principal. For example, in a typical contract between a broker-dealer and a retail customer, the broker-dealer agrees to provide execution services in return for compensation in the form of either a commission or a markup. The contract ameliorates the conflict between the two parties because the broker-dealer is compensated only if it provides the contracted service.
Explicit contracting is an efficient mechanism for ameliorating agency costs when the principal can monitor the agent's performance at low cost. For certain services, however, it may be difficult or costly for principals to monitor agent performance. For example, in seeking investment advice, retail customers may expect broker-dealers to understand the potential risks and rewards associated with a recommended transaction or strategy. While it might be possible, in theory, to include such an explicit provision in the contract between the customer and the broker-dealer to this effect, it would be difficult for the customer to confirm the broker-dealer's actual understanding. The inability of the customer to confirm the broker-dealer's actual understanding limits the usefulness of such a provision in ameliorating the agency conflict between the customer and the broker-dealer.
Another factor that determines the effectiveness of explicit contracting and monitoring by the principal is the ability of the principal to accurately measure and assess the actions of the agent.
Finally, we note that beyond the agency costs described above, there are costs associated with specifying the contractual terms themselves. Specifying contractual terms potentially involves forecasting all future states of the world that are relevant to the contractual relationship and specifying the parties' obligations in each of those states. In environments as complex as financial markets, the ability to forecast future states may be especially difficult. Further, even if financial firms and retail customers were able to forecast all future states of the world relevant to their relationship, the process of contractually specifying each state and the financial firm's obligation to a retail customer in each of those states could be very costly.
As an alternative to explicit contracting and monitoring by principals, agents can expend resources (
In situations where the costs of explicit contracting and monitoring and bonding are large, or where the cost of writing and enforcing contracts is large, a legal or regulatory standard of conduct can serve as an alternative mechanism for ameliorating agency costs.
Regulation Best Interest would create a minimum professional standard of conduct for broker-dealers under the Exchange Act that is designed to ameliorate the agency costs associated with conflicts between broker-dealers and their retail customers. It would also articulate the role of regulators in enforcing such standard of conduct. As a result, the firm's legal and regulatory obligations would be designed to result in the firm providing advice at a level of quality that better matches the expectations of its retail customers.
In the absence of some form of amelioration, the agency conflicts between broker-dealers and retail customers may influence the advice that retail customers obtain in a number of ways. In the narrow context of a choice between two products with similar expected returns and risk profiles, but with different commissions, an agency conflict leaves the retail customer no worse off in terms of investment outcomes except to the extent that higher commissions result in total returns that are lower on one product than on the other. Under other circumstances, however, an agency conflict may impose greater or different costs on retail customers and, more generally, on financial markets.
For example, a financial firm that is able to systematically choose a higher fee product to recommend to its retail customers may rationally respond by constructing a menu of offerings that permit it to choose to recommend products that yield the firm higher expected payoffs. However, such menus may restrict retail customer access to financial products that are equally suitable but that could provide retail customers with better risk-return profiles. Agency conflicts that arise from material conflicts of interest may similarly cause financial firms to limit the choices available to retail customers. Financial firms may have incentives to prefer proprietary products or products of affiliates over more conventional products that may be equally suitable for the retail customers, but potentially more beneficial for the firms.
Furthermore, the ability of financial firms to act on conflicts may have repercussions for retail customer welfare if it erodes retail customer trust in financial markets or the market for financial advice. As noted in the Relationship Summary Proposal, evidence suggests a relatively low level of financial literacy among retail customers.
As discussed above, there are significant investor protections offered by a best interest standard of conduct approach to addressing the principal-agent issue. However, it is important to note that both parties potentially benefit from the reduction of agency costs. As an initial matter, both retail customers and financial firms enter into an agency relationship only when both sides expect the relationship will make them better off. Generally, both parties enter into a contracting relationship when the retail customer values the financial firm's services at a value that is greater than the minimum price at which the financial firm is willing to supply them (the financial professional's “reservation price”).
To make this concrete, consider a situation where a principal values the agent's services at $10,000 and the minimum price at which the agent is willing to provide the service is $5,000.
Suppose, however, that the principal recognizes that the agent's preferences are not perfectly aligned with her own and that given the difference in preferences the principal revises her expectation of the agent's behavior, and therefore the valuation of the agent's services, to $7,000. The potential gains from trade have been reduced from $5,000 to $2,000. The $3,000 reduction in gains from trade is a real cost of the agency conflict between the two parties.
Suppose further that the two parties could agree to a contract with explicit provisions that would ameliorate the agency conflict to such a degree that the principal would believe the agent's services to be worth $9,000. Further, suppose that the contract has associated costs of $500.
However, contracts may be inefficient under certain circumstances. For example, suppose there existed additional contract provisions that could further ameliorate the agency conflict to a degree that the principal would believe that the agent's services to be worth an additional $500, or $9,500 in total (=$9,000 + $500), but that those provisions cost $750 to implement. In this case, it would not be in the parties' interests to engage in those additional contracting provisions
Importantly, this example does not reflect the types of factors that can impact how these gains from trade will be shared. For example, broker-dealers may have an informational advantage that could allow them to maintain a large share of the gains of trade that flow from their relationship with retail customers. We understand that retail customers generally do not know the structure of mutual fund fees or how much is remitted back to broker-dealers recommending those funds. The proposed rule would no longer make it possible for the broker-dealer to make a recommendation solely based on the portion of fees that flow back to the broker-dealer, thereby reducing the share of the gains from trade that broker-dealers are currently able to retain. In response, broker-dealers may try to recoup this loss by increasing the fees for recommendations to retail customers. Fees that broker-dealers charge to retail customers, unlike the compensation that broker-dealers extract from product sponsors, are generally required to be disclosed. To the extent that retail customers are sensitive to fee increases (
Therefore, a standard of conduct may be an efficient alternative to the costly explicit contracting illustrated above. We acknowledge, however, that standards also can be costly. In the analysis that follows in Section C below, we characterize the benefits and costs associated with the proposed best interest standard of conduct and their resulting effect on the gains from trade to be shared between broker-dealers and their retail customers.
The Commission analyzed the effect of proposed Regulation Best Interest on the market for broker-dealer services. For simplification, the Commission presents its analysis as if the market for broker-dealer services encompasses one broad market with multiple segments, even though, in terms of competition, it may be more realistic to think of it as numerous interrelated markets. The market for broker-dealer services covers many different markets for a variety of services, including, but not limited to, managing orders for customers and routing them to various trading venues; providing advice to retail customers on an episodic, periodic, or ongoing basis; holding retail customers' funds and securities; handling clearance and settlement of trades; intermediating between retail customers and carrying/clearing brokers; dealing in government bonds; privately placing securities; and effecting transactions in mutual funds that involve transferring funds directly to the issuer. Some broker-dealers may specialize in just one narrowly defined service, while others may provide a wide variety of services.
As of December 2017, there were approximately 3,841 registered broker-dealers with over 130 million customer accounts. In total, these broker-dealers have close to $4 trillion in total assets, which are total broker-dealer assets as reported on Form X-17a-5.
Panel B of Table 1 limits the broker-dealers to those that report some retail customer activity. As of December 2017,
As shown in the table below, based on responses to Form BD, broker-dealers' most significant business lines include private placements of securities (61.4 of broker-dealers), retail sales of mutual funds (54.2), acting as a broker or dealer retailing corporate equity securities over the counter (51.2), acting as a broker or dealer retailing corporate debt securities (46.6), acting as a broker or dealer selling variable contracts, such as life insurance or annuities (39.5), acting as a broker of municipal debt/bonds or U.S. government securities (39.0 and 36.7, respectively), acting as an underwriter or selling group participant of corporate securities (30.0), investment advisory services (24.2), among others.
Proposed Regulation Best Interest could affect, indirectly, other providers of investment advice, such as investment advisers, because the proposed rule could impact the competitive landscape in the market for the provision of financial advice.
As of December 2017, there were 12,659 investment advisers registered with the Commission. The majority of Commission-registered investment advisers report that they provide portfolio management services for individuals and small businesses.
Of all SEC-registered investment advisers, 366 identified themselves as dually-registered broker-dealers.
Based on staff analysis of Form ADV data, approximately 60% of investment advisers (7,600) have some portion of their business dedicated to individual clients, including both high net worth and non-high net worth individual clients,
As an alternative to registering with the Commission, smaller investment advisers could register with state regulators.
Approximately 77% of state-registered investment advisers (13,470) have some portion of their business dedicated to retail investors,
Over time, the relative numbers of broker-dealers and Commission-registered investment advisers have changed. Figure 1 presented below shows the time series trend in the relative numbers of broker-dealers and Commission-registered investment advisers between 2005 and 2017. Over the last 13 years, the number of broker-dealers has declined from over 6,000 in 2005 to less than 4,000 in 2017, while the number of investment advisers has increased from approximately 9,000 in 2005 to over 12,000 in 2017. This change in the relative numbers of broker-dealers and investment advisers over time likely affects the competition for advice and potentially reduces the choices available to retail customers on how to receive or pay for such advice, the nature of the advice, and the attendant conflicts of interest.
Increases in the number of investment advisers and decreases in the number of broker-dealers could have occurred for a number of reasons, including anticipation of possible regulatory changes to the industry, other regulatory restrictions, technological innovation (
Further, there has been a substantial increase in the number of retail clients at investment advisers, both high net worth clients and non-high net worth clients, as shown in Figure 2. Although the number of non-high net worth retail customers of investment advisers dipped between 2010 and 2012, since 2012, more than 12 million new non-high net worth retail clients have been added. With respect to assets under management, we observe a similar, albeit more pronounced pattern for non-high net worth retail clients as shown in Figure 3. For high net worth retail clients, there has been a pronounced increase in AUM since 2012, although AUM has leveled off since 2015.
We estimate the number of associated natural persons of broker-dealers through data obtained from Form U4, which generally is filed for individuals who are engaged in the securities or investment banking business of a broker-dealer that is a member of an SRO (“registered representatives” or “RR”s).
We estimate the number of registered representatives and registered IARs (together “dually-registered representatives”) at broker-dealers, investment advisers, and dual-registrants by considering only the employees of those firms that have Series 6 or Series 7 licenses or are registered with a state as a broker-dealer agent or investment adviser representative.
In Table 6 below, we estimate the number of employees who are registered representatives, investment adviser representatives, or dually-registered representatives.
In Table 6, approximately 24% of registered employees at registered broker-dealers or investment advisers are dually-registered representatives. However, this proportion varies significantly across size buckets. For example, for firms with total assets between $1 billion and $50 billion,
Approximately
Commission experience indicates that there is a broad range of financial incentives provided by standalone broker-dealers and dually-registered firms to their representatives.
Several firms had varying commission payout rates depending on the product type being sold. For example, payouts ranged from 76.5% for stocks, bonds, options, and commodities to 90% for open-ended mutual funds, private placements, and unit investment trusts. Several firms charged varying commissions on products depending on the amount of product sold (
For financial professionals who did not earn commission-based compensation, some firms charged retail customers flat fees ranging from $500 to $2,500, depending on the level of service required, such as financial planning, while others charged hourly rates ranging from $150 to $350 per hour. For dually-registered firms that charged clients based on a percentage of assets under management, the average percentage charged varied based on the size of the account: The larger the assets under management, the lower the percentage fee charged. Percentage-based fees for the sample firms ranged from approximately 1.5% for accounts below $250,000 to 0.5% for accounts in excess of $1 million.
In addition to “base” compensation, most firms also provided bonuses (based on either individual or team performance) or variable compensation, ranging from approximately 10% to
Regulation Best Interest would require broker-dealers and natural persons associated with broker-dealers, 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 of the broker or dealer making the recommendation, ahead of the interest of the retail customer. Regulation Best Interest incorporates and goes beyond the existing broker-dealer regulatory regime for advice. In this section, we describe the existing regulatory baseline for broker-dealers, including existing obligations under the federal securities laws and FINRA rules, in particular those related to the suitability of recommendations and disclosure of conflicts of interest, state regulation, existing antifraud provisions, and state laws that impose fiduciary obligations, and other obligations that would be imposed by the DOL Fiduciary Rule and related PTEs, most notably the BIC Exemption.
Under the antifraud provisions of the federal securities laws and SRO rules, broker-dealers are required to deal fairly with their customers. By virtue of engaging in the brokerage profession, a broker-dealer makes an implicit representation to those persons with whom it transacts business that it will deal fairly with them, consistent with the standards of the profession.
Under FINRA Rule 2111, there are three primary suitability requirements for broker-dealers and associated persons. First, reasonable-basis suitability requires that, based on reasonable diligence, a broker-dealer must have a reasonable basis that a recommendation is suitable for at least some retail customers.
As described above, broker-dealers are subject to a number of specific disclosure obligations when they effect certain customer transactions, and are subject to additional disclosure obligations under the antifraud provisions of the federal securities laws.
In addition to the antifraud provisions of the federal securities laws, courts interpreting state common law have imposed fiduciary obligations on broker-dealers in certain circumstances. 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, owe customers a fiduciary duty.
DOL amendments to its regulation defining investment advice in the DOL Fiduciary Rule would broadly expand the types of broker-dealer services that may trigger fiduciary status for the purposes of the prohibited transaction provisions of ERISA and the Code as a result of rendering investment advice to retirement accounts.
Existing broker-dealer obligations under the federal securities laws and FINRA rules prohibit misleading statements and require fair and reasonable compensation. The antifraud provisions of the federal securities laws prohibit broker-dealers from making misleading statements,
As discussed above, as a practical matter, broker-dealers offering IRA brokerage accounts would generally need to meet the conditions of the BIC Exemption or one of the related PTEs to make recommendations to brokerage customers with such accounts and receive commissions or other compensation relating to recommended transactions. To determine the universe of broker-dealers that offer IRA brokerage accounts and generally would need to meet the conditions of the BIC Exemption for purposes of this baseline, we assume that all broker-dealers that have retail accounts are required to comply with the PTEs, including the BIC Exemption, in providing services to at least some of their retail accounts. The Commission does not currently have data on the number of firms that would rely on these PTEs and that would be required to provide these disclosures.
A recent survey and study were conducted to provide information about how the broker-dealer industry has begun to transition as a result of the DOL Fiduciary Rule. In 2017, the Securities Industry and Financial Markets Association (“SIFMA”) teamed with Deloitte and conducted a study focusing on the impact of the DOL Fiduciary Rule on retirement investors and financial institutions.
Of the 21 SIFMA members that participated in the survey, 53% eliminated or reduced access to brokerage advice services and 67% have migrated away from open choice to fee-based or limited brokerage services. For those retail customers faced with eliminated or reduced brokerage advice services, 63% chose to move to self-directed accounts rather than fee-based accounts and cited the reasons as “not wanting to move to a fee-based model, not in the best interest to move to a fee-based model, did not meet account minimums, or wanted to maintain positions in certain asset classes prohibited by the fee-based models.” For those retail customers that migrated from brokerage to fee-based models, the average change in all-in fees increased by 141% from 46 basis points (bps) to 110 bps.
Further, 95% of survey participants altered their product offerings, by reducing or eliminating certain asset or share classes. For example, 86% of the respondents reduced the number or type of mutual funds (
To date, the survey participants have incurred compliance costs of $600 million, although the costs vary by the size of the respondent. For instance, large firms with net capital in excess of $1 billion are expected to have start-up and ongoing compliance costs of $55 million and $6 million, respectively, while firms between $50 million and $1 billion in net capital are expected to have start-up and ongoing compliance costs of $16 million and $3 million, respectively. The SIFMA Study estimates that total start-up compliance costs for large and medium-size firms combined will be approximately $4.7 billion, compared to the DOL's estimate of between $2 billion and $3 billion, while ongoing costs will be approximately $700 million per year (DOL's estimates between $463 million and $679 million annually).
In formulating Regulation Best Interest, the Commission has considered the potential benefits of establishing a best interest standard of conduct for broker-dealers and the potential costs to the firms and retail customers of complying with the best interest obligation.
The best interest standard of conduct for broker-dealers would enhance the quality of investment advice that broker-dealers provide to retail customers, help retail customers evaluate the advice received, and improve retail customer protection when soliciting advice from broker-dealers. By imposing a best interest obligation on broker-dealers, Regulation Best Interest would achieve these benefits by ameliorating the agency conflict between broker-dealers and retail customers. The three components of the best interest obligation, namely the Disclosure Obligation, the Care Obligation, and the Conflict of Interest Obligations work together towards ameliorating this agency conflict by addressing specific aspects of the conflict. In particular, these obligations, taken together, are meant to provide assurances to the retail customer that a broker-dealer provides a certain quality of recommendation that is consistent with the customer's best interest.
The Disclosure Obligation, as discussed above, would reduce the informational gap with respect to certain elements of the relationship that are not currently fully disclosed. In particular, this obligation would foster retail customer awareness and understanding of key broker-dealer practices as well as material conflicts of interest associated with broker-dealer recommendations that would ultimately improve a retail customer's assessment of the recommendations received.
The Care Obligation, as discussed above, is designed to result in the broker-dealer providing advice at a level of quality that better matches the expectations of retail customers, and, as a result, should enhance the quality of recommendations received.
Proposed Regulation Best Interest would impose two concurrent Conflict of Interest requirements, as described above. These Conflict of Interest Obligations would enable broker-dealers to meet the Disclosure Obligation with regard to material conflicts of interest which would enhance customer understanding of broker-dealer conflicts associated with a recommendation and the extent to which those conflicts may influence a recommendation. This enhanced understanding of broker-dealer conflicts would aid retail customers in assessing, and deciding whether to act on, broker-dealer recommendations. Taken together, the Disclosure Obligation, the Care Obligation and the Conflict of Interest Obligations are designed to reduce the effects of conflicted broker-dealer advice and thereby improve retail customer protection.
The Commission acknowledges, however, that Regulation Best Interest, through its component obligations, would potentially give rise to direct costs to broker-dealers and indirect costs to retail customers. For example, the requirement to act in the retail customer's best interest of the Care Obligation may lead some broker-dealers to determine that they no longer wish to make certain recommendations, and, as a result, may forgo some of the revenue stream associated with such recommendations. The disclosure requirements of the Disclosure Obligation and the Conflict of Interest Obligations would go beyond existing disclosure obligations, and, as a result, may impose direct costs on broker-dealers. Certain aspects of the Conflict of Interest Obligations may decrease the incentives of registered representatives to expend effort in providing quality advice, and, therefore, may impose a cost on retail customers if there is a decline in the quality of recommendations. Finally, other aspects of the Conflict of Interest Obligations may limit retail customer choice and, therefore, impose costs on retail customers, because broker-dealers, for compliance or business reasons, may determine to avoid certain products, despite the fact that those products may be beneficial to certain retail customers in certain circumstances.
Although, in establishing a best interest obligation for broker-dealers, the Commission considers these and other potential benefits and costs, the Commission notes that generally it is difficult to quantify such benefits and costs. Several factors make the quantification of the effects of the best interest obligation difficult. There is a lack of data on the extent to which broker-dealers with different business practices engage in disclosure and conflict mitigation activities to comply with existing requirements, and therefore how costly it would be to comply with the proposed requirements. The proposed rule would also give broker-dealers flexibility in complying with the best interest obligation, and, as a result, there could be multiple ways in which broker-dealers could satisfy this obligation, so long as it complies with its baseline obligations. Finally, any estimate of the magnitude of such benefits and costs would depend on assumptions about the extent to which broker-dealers are currently engaging in disclosure and conflict mitigation activities, how broker-dealers would choose to satisfy the best interest obligation, and, potentially, how retail customers perceive the risk and return of their portfolio, the likelihood of acting on a recommendation that complies with the best interest obligation, and how the risk and return of their portfolio change as a result of how they act on the recommendation. Since the Commission lacks the data that would help narrow the scope of these assumptions, the resulting range of potential quantitative estimates would be wide and, therefore, not informative about the magnitude of the benefits or costs associated with the best interest obligation.
In this section, we discuss the benefits of a best interest standard of conduct, generally, and the benefits associated with the components of Regulation Best Interest, specifically.
Proposed Regulation Best Interest would create an express best interest obligation under the Exchange Act that consists of three components: The Disclosure Obligation, the Care Obligation, and the Conflict of Interest Obligations. These obligations, taken together, are meant to provide assurances to retail customers that broker-dealers provide a certain quality of recommendations that are consistent with the customers' best interest and to enhance retail customer protection. The best interest obligation, including the specific component obligations, may not be reduced or narrowed through contract with a retail customer.
As discussed in Section IV.2, explicit contracts may, in some cases, be inefficient means of ameliorating agency costs. In such cases, legal and regulatory obligations can provide alternative and more efficient tools to ameliorate these costs. For example, FINRA rules require broker-dealers making recommendations to: (i) Have a reasonable basis to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors, and (ii) based on a particular customer's investment profile, have a reasonable basis to believe that the recommendation is suitable for that customer. Moreover, under FINRA rules, a broker-dealer or associated person who has actual or
In the absence of these rules, these requirements are all provisions that could, at least theoretically, be included in broker-dealer account agreements with retail customers. Including these provisions would be meant to provide assurance to the retail customer that a broker-dealer provides a certain quality of recommendations. But inclusion of such provisions would likely have limited effectiveness because the retail customer would have little, if any, ability to confirm the broker-dealer's compliance with the provisions. If these provisions regarding the quality of advice were left open to contract, it is equally likely that the broker-dealer (as the more informed party) would be able to offer less optimal terms regarding the quality of advice to be provided to the retail customer.
Proposed Regulation Best Interest, through the Disclosure, the Care, and the Conflict of Interest Obligations, would incorporate and go beyond current broker-dealer obligations under federal securities laws and SRO rules in ways that would ameliorate the agency conflict between broker-dealers and retail customers and would create a number of potentially significant benefits for retail customers.
As discussed in more detail below, the Disclosure Obligation would foster retail customer awareness and understanding of certain specified information regarding the retail customer's relationship with the broker-dealer as well as material conflicts of interest associated with broker-dealer recommendations. As a result, this obligation would reduce the informational gap between a broker-dealer making a recommendation and a retail customer receiving that recommendation, which, in turn, may cause the retail customer to act differently with regard to the recommendation. For example, the retail customer may reject a broker-dealer recommendation that she would otherwise not reject absent the new information made available by the Disclosure Obligation. Anticipating a potential change in the behavior of the retail customer with respect to acting on recommendations as a result of the Disclosure Obligation, a broker-dealer may adjust its own behavior by providing recommendations that are less likely to be rejected by the retail customer. By virtue of being tailored to the retail customer's anticipated behavior, these recommendations are more likely to be in the retail customer's best interest, and therefore of higher quality relative to the recommendations that the broker-dealer would supply absent this obligation. Thus, the Disclosure Obligation would enhance the quality of recommendations that broker-dealers provide to retail customers. Furthermore, to the extent
Similarly, the Care Obligation would allow broker-dealers to provide recommendations at a level of quality that better matches the expectations of its retail customers, and, therefore, would enhance the quality of recommendations that broker-dealers provide to retail customers.
Finally, the Conflict of Interest Obligations would require broker-dealers to establish, maintain, and enforce policies and procedures that are reasonably designed to identify and disclose or eliminate material conflicts of interest and establish, maintain, and enforce policies and procedures that are reasonably designed to identify and eliminate, or disclose and mitigate, material conflicts of interest arising from financial incentives associated with their recommendations. Such policies and procedures would benefit retail customers because they would be designed to reduce conflicts of interest that may motivate the behavior of associated persons of broker-dealers and thereby enhance the quality of the recommendations that they provide to their retail customers. Furthermore, these obligations work in conjunction with the Disclosure Obligation by including requirements designed to reduce the uncertainty with respect to whether a broker-dealer recommendation is subject to conflicts of interest. In particular, the Conflict of Interest Obligations would benefit retail customers by helping them better evaluate the recommendations received from broker-dealers.
Proposed Regulation Best Interest would establish the Disclosure Obligation, which would foster a retail customer's awareness and understanding of specified information regarding the relationship with the broker-dealer as well as material conflicts of interest associated with broker-dealer recommendations. To meet the Disclosure Obligation, the Commission would consider the following to be examples of material facts relating to the scope and terms of the relationship with the retail customer that a broker-dealer would be required to disclose in writing: (1) That it is acting in a broker-dealer capacity with respect to the recommendation; (2) fees and charges that apply to the retail customer's transactions, holdings, and accounts; and (3) type and scope of services provided by the broker-dealer. Additionally, a broker-dealer would be required to disclose in writing all material conflicts of interest that are associated with the recommendation.
Currently, broker-dealers are not subject to an explicit and broad disclosure obligation under the Exchange Act. However, broker-dealers may provide information about their services and accounts, which may include disclosure about a broker-dealer's capacity, fees, and conflicts on their firm websites and in their account opening agreements. In addition, as noted above, broker-dealers are currently subject to specific disclosure obligations when making recommendations. Broker-dealers generally may be liable under federal securities laws' antifraud provisions if they do not give “honest and complete information” or disclose any material adverse facts or material conflict of interest, including economic self-interest. Many of these existing disclosure obligations depend on the facts and circumstances around recommendations, and different broker-dealers may comply with them differently. In addition, these disclosure obligations may not always produce information that is sufficiently relevant to a recommendation to assist a retail customer in meaningfully evaluating the recommendation. For instance, retail customers may not be aware of or understand the broker-dealer's conflicts of interest.
The disclosure obligations for broker-dealers under Regulation Best Interest are more express and more comprehensive compared to existing disclosure requirements and liabilities. Namely, a broker-dealer that makes recommendations to a retail customer would be required to provide the retail customer with sufficiently specific facts about any material conflicts of interest such that the retail customer would be able to understand the conflict and make an informed decision about the broker-dealer recommendations. The Commission has provided preliminary guidance above on aspects of disclosure by a broker-dealer to a retail customer; this disclosure would help the retail customer understand specified information regarding the relationship with the broker-dealer, including the broker-dealer's material conflicts of interest.
In the case of retail customers who have both brokerage and advisory accounts with the same financial professional, such as dual-registrants, it may not always be clear whether the financial professional is acting in a capacity of broker-dealer or investment adviser when providing advice.
By articulating an explicit disclosure requirement under the Exchange Act as part of the best interest obligation, the Disclosure Obligation would facilitate improved disclosure practices among broker-dealers. In addition, the Disclosure Obligation would facilitate retail customer awareness and understanding of certain key facts concerning their relationship with a broker-dealer, as well as conflicts of interest, and would provide retail customers with sufficiently specific facts to help them evaluate a broker-dealer recommendation. As a result, the Disclosure Obligation ameliorates the agency conflict between retail customers and broker-dealers, and therefore provides a potentially important benefit to investors in the form of reduced agency conflict between retail customers and broker-dealers.
The magnitude of the benefit from the reduced agency conflict would depend on a number of determinants, such as how retail customers perceive the risk and return of their portfolio, how they would act on a recommendation given the new information made available by the Disclosure Obligation, and, finally, how the risk and return of their portfolio would change as a result of acting on a recommendation. Given the number and complexity of assumptions, the Commission lacks the data that would allow it to narrow the scope of the assumptions regarding these determinants and estimate the magnitude of the benefit.
As noted above, the Care Obligation of the proposed rule would go beyond the existing broker-dealer obligations under FINRA's suitability rule by requiring that broker-dealers act in the best interest of their retail customers, without placing the financial or other interest of the broker-dealer or associated person making the recommendation ahead of the interest of the retail customer. Furthermore, the Care Obligation does not include an
The new requirements of the Care Obligation of proposed Regulation Best Interest may restrict broker-dealers from making certain recommendations. For instance, broker-dealers would not be able to make recommendations to retail customers that comply with FINRA's suitability rule if they do not also comply with all the requirements of the Care Obligation. While the impact of the Care Obligation restrictions on broker-dealer recommendations to retail customers would depend largely, as noted earlier, on the facts and circumstances related to each recommendation and the investment profile of the retail customer receiving that recommendation, the fact that the Care Obligation incorporates and goes beyond existing broker-dealer suitability obligations may yield certain benefits for retail customers. For instance, to the extent that currently broker-dealers comply at all times with FINRA's suitability requirements but do not always account for the retail customer's best interest, as proposed here, when choosing between securities with similar payoffs but different cost structures, the Care Obligation would encourage broker-dealers to recommend a security that would be more appropriately suited to achieve the retail customer's objectives. Thus, by promoting recommendations that are better aligned with the objectives of the retail customer, the Care Obligation of proposed Regulation Best Interest would provide an important benefit to retail customers, ameliorating the agency conflict between broker-dealers and retail customers and, in turn, improving the quality of recommendations that broker-dealers provide to retail customers.
The Commission is unable to quantify the magnitude of these benefits to retail customers for a number of reasons. First, broker-dealer recommendations would depend largely on the facts and circumstances related to each recommendation and the investment profile of the retail customer receiving that recommendation. Second, broker-dealers currently do not have an explicit obligation to act in their customers' best interest when making recommendations. Finally, the magnitude of these benefits to retail customers would depend on how retail customers generally perceive the risk and return of their portfolio, the likelihood of acting on a recommendation that complies with the best interest obligation, and, ultimately, how the risk and return of their portfolio change as a result of how they act on the recommendation. Any estimate of the magnitude of such benefits would depend on assumptions about the facts and circumstances surrounding a recommendation, the investment profile of the retail customer, how retail customers perceive the risk and return of their portfolio, the determinants of the likelihood of acting on a recommendation that complies with the best interest obligation, and, finally, how the risk and return of their portfolio change as a result of how they act on the recommendation. Because the Commission lacks the data that would help narrow the scope of these assumptions, the resulting range of potential estimates would be wide, and, therefore, would not be informative about the magnitude of these benefits to retail customers.
Another way in which the proposed rules would incorporate and go beyond existing standards is by requiring a broker-dealer to have a reasonable basis to believe that a series of recommended transactions, even if in the retail customer's best interest when viewed in isolation, is not excessive and is in the retail customer's best interest when taken together in light of the retail customer's investment profile, regardless of whether the broker-dealer has actual or
The Commission is unable to quantify the magnitude of the benefits that retail customers could receive as a result of the new obligations for broker-dealers that provide a series of recommendations to retail customers for largely the same reasons that make the quantification of the other Care Obligation benefits, as discussed above, difficult.
Regulation Best Interest would include two requirements relating to the treatment of conflicts. The first requirement under the Conflict of Interest Obligations would require a broker-dealer
As noted in our earlier discussion of the Disclosure Obligation, a broker-dealer that determines to address a conflict of interest identified through policies and procedures by disclosing it should provide the retail customer, in writing, with sufficiently specific facts so that the customer is able to understand the material conflicts of interest and is able to make an informed decision about the broker-dealer recommendations.
The benefits to retail customers of this disclosed information have been discussed earlier under the Disclosure Obligation. These benefits are difficult to quantify for the same reasons that the benefits of the overall Disclosure Obligation in Section IV.D.1.a. are difficult to quantify.
As noted earlier, as an alternative to addressing a conflict of interest identified through policies and procedures by disclosing it, a broker-dealer may choose, instead, to satisfy this Conflict of Interest Obligation by eliminating it altogether. If a broker-dealer addresses the material conflict of interest by eliminating it, a retail customer benefits from receiving a recommendation that is free of that particular conflict of interest.
Generally, we preliminarily believe that having express Conflict of Interest Obligations would result in broker-dealers establishing policies and procedures focusing specifically on identifying and evaluating conflicts and determining whether each of the identified conflicts is material and should be disclosed or eliminated. We also preliminarily believe that broker-dealers may be more inclined to evaluate and address material conflicts of interest and eliminate more egregious conflicts of interest to the extent that disclosure of the conflict would result in reputation risk. Further, having a clearly defined obligation that would require, among other things, that a broker-dealer establish written policies and procedures reasonably designed to identify and disclose, or eliminate, all material conflicts of interest associated with a recommendation may result in increased retail customer confidence in the recommendation received. Finally, the Conflict of Interest Obligation may improve retail customer welfare, to the extent that the obligation permits retail customers to understand better which recommendations, within a broader set of suitable recommendations, are or are not conflicted and the extent and nature of any such conflicts, while maintaining retail customer access to a broad variety of recommendations.
The Conflict of Interest Obligations of proposed Regulation Best Interest include the additional requirement that a broker or dealer, 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.
This Conflict of Interest Obligation would apply to material conflicts of interest that arise from financial incentives. As discussed in more detail above, we interpret a material conflict of interest as a conflict of interest that a reasonable person would expect might incline a broker-dealer—consciously or unconsciously—to make a recommendation that is not disinterested. Material conflicts of interest that arise from financial incentives include, but are not limited to, conflicts arising from compensation practices such as how a broker-dealer compensates its employees, and how a broker-dealer is compensated by third-parties for whom it may act as a distributor or service provider.
As noted in our earlier discussion of the Disclosure Obligation, a broker-dealer that determines to address a conflict of interest arising from financial incentives identified through policies and procedures by disclosing and mitigating it should provide the retail customer, in writing, with sufficiently specific facts so that the retail customer is able to understand the material conflicts of interest and is able to make an informed decision about the broker-dealer's recommendations. The benefits to retail customers of this disclosed information have been discussed earlier under the Disclosure Obligation.
As noted earlier, as an alternative to addressing conflicts of interest through disclosure and mitigation of a material conflict of interest arising from financial incentives, a broker-dealer may choose, instead, to satisfy this Conflict of Interest Obligation by eliminating the conflict altogether. If a broker-dealer establishes policies and procedures to address a conflict of interest through eliminating a material conflict of interest arising from financial incentives associated with a recommendation, a retail customer benefits from receiving a recommendation that is free of that particular conflict of interest. In other words, if a retail customer receives a broker-dealer recommendation and written disclosure about certain material conflicts of interest arising from financial incentives associated with the recommendation, the retail customer can expect that the conflicts of interest arising from financial incentives and that are omitted from such disclosure are either not material or eliminated. This may benefit retail customers to the extent that the absence of certain conflicts of interest arising from financial incentives associated with a recommendation may increase retail customers' trust in the advice they obtain and in financial markets.
However, unlike other material conflicts of interest, under proposed Regulation Best Interest, developing policies and procedures to address material conflicts of interest arising from financial incentives through disclosure alone would not be sufficient. The requirement to establish, maintain, and enforce policies and procedures to mitigate conflicts of interest related to financial incentives is a significant expansion of current broker-dealer requirements to address conflicts. As discussed in Section II.D.3.b., the Commission has provided preliminary guidance on reasonably designed policies and procedures for identifying and disclosing and
The Commission is unable to quantify the size of these benefits for several reasons. First, Regulation Best Interest would provide broker-dealers flexibility in choosing whether to address a conflict of interest arising from financial incentives through disclosure and mitigation, or elimination and flexibility in choosing among methods of mitigation. Second, the size of these benefits would depend on how retail customers generally perceive the risk and return of their portfolio, the likelihood of acting on a recommendation that complies with the best interest obligation, and, ultimately, how the risk and return of their portfolio change as a result of how they act on the recommendations. Any estimate of the size of such benefits would depend on assumptions about how broker-dealers choose to comply with this requirement of the Conflict of Interest Obligations, how retail customers perceive the risk and return of their portfolio, the determinants of the likelihood of acting on a recommendation that complies with the best interest obligation, and, finally, how the risk and return of their portfolio change as a result of how they act on the recommendation. Since the Commission lacks the data that would help narrow the scope of these assumptions, the resulting range of potential estimates would be wide, and, therefore, not informative about the magnitude of these benefits.
In this section, we discuss the costs of a best interest standard of conduct, generally, and the costs associated with the components of Regulation Best Interest, specifically.
As discussed in more detail below, proposed Regulation Best Interest would entail direct costs for broker-dealers and indirect costs for retail customers and other parties with a stake in the market for investment advice (
For instance, with respect to the Disclosure Obligation, the disclosure requirements would incorporate and go beyond existing disclosure obligations and liabilities, and, as a result, may impose direct costs on broker-dealers.
With respect to the Care Obligation, the requirement to have a reasonable basis to believe that a recommendation is in the best interest of a particular retail customer based on that retail customer's investment profile and the risks and rewards associated with the recommendation may impose a cost on the broker-dealers that determine that they no longer wish to make certain recommendations to brokerage customers, and, as a result, forgo some of the revenue stream associated with such recommendations. Other requirements of this obligation may impose operational and legal costs on broker-dealers.
Finally, with respect to Conflict of Interest Obligations, the requirement to establish, maintain, and enforce written policies and procedures to eliminate material conflicts of interest as an alternative to disclosing such conflicts may impose potential costs on broker-dealers to the extent that they determine to satisfy this requirement by no longer offering certain recommendations or services, and, therefore, forgo some of the revenue stream associated with such recommendations or services. The requirement to establish, maintain, and enforce written policies and procedures to mitigate or eliminate certain material conflicts of interest arising from financial incentives may alter the incentives of registered representatives to expend effort in providing quality advice, and, therefore, may impose a cost on retail customers due to the potential decline in the quality of recommendations. The same requirement may limit retail customer choice, and therefore impose costs on retail customers, because broker-dealers, for compliance or business reasons, may determine to avoid recommending certain products to retail brokerage customers, despite the fact that these products may be beneficial to certain retail customers in certain circumstances.
The Commission acknowledges that, taken together, the proposed rules may generate tension between broker-dealers' regulatory requirements and their incentives to provide high quality recommendations to retail customers, including by recommending costly or complex products. Retail customers may have diverse and complex investment needs and goals and may benefit from tailored trading strategies and financial products that may entail higher costs (
As noted above, the proposed rule would establish a best interest standard of conduct for broker-dealers when making recommendations to retail customers. Below, we discuss the operational and programmatic costs anticipated as a result of the proposed rule.
Broker-dealers typically provide training to their employees with respect
In addition to the potential costs described above, certain factors might mitigate the potential costs of proposed Regulation Best Interest. As discussed earlier in Section IV.C, in addition to obligations imposed by the existing standard of conduct, broker-dealers that are servicing retirement accounts would also be subject to obligations imposed by the DOL Fiduciary Rule and the BIC Exemption.
While all broker-dealers would have to comply with Regulation Best Interest, broker-dealers that service retirement accounts would also have to comply with the DOL Fiduciary Rule and the BIC Exemption. Since the best interest obligation of the proposed rule does not incorporate all the requirements that the DOL Fiduciary Rule and the BIC Exemption, broker-dealers that service retirement accounts may incur additional costs as a result of overlapping but not identical regulations. For example, broker-dealers that implement the BIC Exemption would be subject to the disclosure regime imposed by the proposed rule, as well as the disclosure requirements mandated by the BIC Exemption.
The proposed rule may impose programmatic costs on broker-dealers by limiting their ability to make certain recommendations or deterring them from making certain recommendations. To the extent that broker-dealers are currently able to generate revenues from securities recommendations that are consistent with FINRA's suitability rule but not consistent with this proposed best interest obligation, those revenues would be eliminated under the proposed rule. Specifically, if a broker-dealer determines to no longer recommend a product because that product is inferior to another product with similar payoffs but lower cost, the revenue loss would consist of the difference between the cost of the former product and the cost of the latter product. While the FINRA suitability standard does not explicitly prohibit a broker-dealer from putting its interest ahead of the customer's, FINRA interpretations suggest that a broker-dealer may not put its interest ahead of the customer's.
Broker-dealers may also face increased costs due to enhanced legal exposure as a result of a potential increase in retail customer arbitrations.
Proposed Regulation Best Interest would impose a number of obligations on broker-dealers, including the Disclosure Obligation.
As noted earlier, the Disclosure Obligation would incorporate and go beyond the existing disclosure obligations and liabilities by establishing an explicit disclosure requirement for broker-dealers under the Exchange Act, by facilitating a more uniform level of disclosure of the material scope and terms of the relationship between broker-dealer and retail customer as well as broker-dealer material conflicts of interest across broker-dealers and by providing retail customers with sufficiently specific facts concerning their relationship with broker-dealers.
As discussed earlier, certain requirements of the Disclosure Obligation could be satisfied in part by complying with the requirements of the concurrent proposed Relationship Summary and Regulatory Status Disclosure. For instance, with respect to the requirement to disclose a broker-dealer's capacity, a standalone broker-dealer would be able to satisfy fully the requirement by delivering the Relationship Summary to the retail customer and by maintaining a reasonable basis to believe that a retail customer had been delivered the Relationship Summary prior to or at the time when a recommendation was made, and by complying with the Regulatory Status Disclosure. In contrast, a dual-registrant would only be able to satisfy partially the requirement to disclose a broker-dealer's capacity by complying with the Relationship Summary rule and the Regulatory Status Disclosure. Given that a dual-registrant may act in broker-dealer capacity or investment adviser capacity when providing advice to a retail customer, a dual-registrant would have to comply with the Disclosure Obligation expressly.
With respect to the requirement to disclose a broker-dealer's fees, the Disclosure Obligation may enhance the informativeness of the broker-dealer disclosure to retail customers over the existing disclosure practices. Currently, disclosure practices with respect to a broker-dealer's fees may not be sufficiently informative to remove a retail customer's uncertainty about the fees that it would have to pay by acting on a broker-dealer recommendation.
Finally, broker-dealers would be able to satisfy the requirement to disclose all material conflicts of interest by complying with the requirements of the Conflict of Interest Obligations. Thus, for broker-dealers that comply with the Conflict of Interest Obligations, the Disclosure Obligation with respect to disclosure of material conflicts of interest would impose no additional costs on broker-dealers. The Conflict of Interest Obligations would impose costs on broker-dealers, and those costs are discussed in more detail below.
As noted above, proposed Regulation Best Interest would give broker-dealers flexibility with respect to the form, timing, or method of complying with the disclosure requirements. While this flexibility would help broker-dealers tailor their form, timing, or method of complying with the disclosure requirements to their business practices, it may also impose a cost on broker-dealers because, in the absence of a mandated form, timing, or method of disclosure, broker-dealers would have to expend resources to develop standardized methods of disclosure that could be easily understood by their retail customers.
Finally, as discussed above, the requirement to create certain written records of information collected from and provided to a retail customer of the Disclosure Obligation may impose additional costs on broker-dealers. This new record-making requirement would amend Exchange Act Rule 17a-3 by adding new paragraph (a)(25) that would require that a broker-dealer create a record of all information collected from and provided to the retail customer pursuant to Regulation Best Interest. In addition, the Commission is proposing to amend Exchange Act Rule 17a-4(e)(5) to require broker-dealers to retain the records required pursuant to Rule 17a-3(a)(25) for at least six years.
The Commission is unable to fully quantify the costs of the Disclosure Obligation due to a number of factors. First, the Commission lacks data on the extent to which current disclosure practices are different from the disclosure requirements of the Disclosure Obligation. Second, given that the proposed rule would give broker-dealers flexibility in complying with the requirements of the Disclosure Obligation, there could be multiple ways in which broker-dealers may satisfy these requirements. Finally, the portion of compliance costs that broker-dealers may pass on to retail customers may depend on the costs that a retail customer would incur to switch from one broker-dealer to another or from a broker-dealer to an investment adviser
While a range of estimates for the costs of the Disclosure Obligation may be difficult to obtain due to the potentially wide range of assumptions about these factors, preliminary estimates for the portion of these costs borne by broker-dealers may be obtained under specific assumptions. As discussed further in Section V.D, the Commission preliminarily believes that the preparation and delivery of standardized language, fee schedules, and standardized conflict disclosures that broker-dealers are expected to provide to retail customers to comply with the Disclosure Obligation would impose an initial aggregate burden of 5,808,703 hours and an additional initial aggregate cost of $40.79 million as well as an ongoing aggregate burden of 1,965,564 hours on broker-dealers.
The Care Obligation of the proposed rule, as described above, would incorporate and go beyond a broker-dealer's existing obligations in two ways. First, the proposed obligation would draw on broker-dealers' existing well-established obligations for “customer-specific suitability,” but would go beyond those obligations by requiring that the broker-dealer have a reasonable basis to believe that the recommendation is in the best interest of the retail customer based on the retail customer's investment profile. Second, the proposed rule would require a broker-dealer to have a reasonable basis to believe that a series of transactions is not excessive and is in the retail customer's best interest, regardless of whether the broker-dealer has actual or
Under FINRA's suitability rule and other applicable legal standards, broker-dealers are also expected to make an effort to ascertain relevant information about a retail customer's investment profile prior to making a recommendation on an “as needed” basis. In general, the reasonableness of a broker-dealer's effort to collect information regarding a customer's investment profile information depends on the facts and circumstances of a given situation.
The requirements of the Care Obligation of proposed Regulation Best Interest mirror closely but are not identical to the current broker-dealer practices pursuant to the requirements of FINRA's suitability rule and other applicable legal standards. The first important difference is the requirement that broker-dealers have a reasonable basis to believe that a recommendation is in the best interest of a retail customer and that a series of recommendations is not excessive and in the best interest of the retail customer. The suitability standard does not have an explicit best interest requirement and therefore broker-dealers may be able to make recommendations today that, while suitable, may not meet the Care Obligation proposed as part of Regulation Best Interest. As noted above, to the extent that current broker-dealer practices pursuant to the requirements of FINRA's suitability rule do not reflect the proposed best interest standard of conduct, the Care Obligation would impose a cost on broker-dealers. The other important difference is the removal of the element of control from the requirement to have a reasonable basis to believe that a series of recommendations is not excessive and in the best interest of the retail customer. As noted above, unlike the quantitative suitability requirement of FINRA's suitability rule, this requirement of the Care Obligation applies irrespective of whether a broker-dealer has actual or
As noted earlier, the proposed rule would also amend Exchange Act Rule 17a-4(e)(5) to require broker-dealers to retain any customer information that the customer would provide to the broker-dealer pursuant to Regulation Best Interest, as well as copies of any conflict disclosures provided to the customer by the broker-dealer pursuant to Regulation Best Interest, in addition to the existing requirement to retain information obtained pursuant to Exchange Act Rule 17a-3(a)(17). Furthermore, broker-dealers would be required to retain all of the retail customer investment profile information that they would obtain as well as copies of conflict disclosures they would provide for six years. Currently, under Rule 17a-3(a)(17), broker-dealers that make recommendations for accounts with a natural person as customer or owner are required to create, and periodically update, specified customer account information. However, the information collection requirements of Rule 17a-3(a)(17) do not cover all aspects of “customer investment profile” that broker-dealers may attempt to obtain to make a customer-specific suitability determination under FINRA's suitability rule. To the extent that a retail customer would provide a broker-dealer with information about the customer's investment profile pursuant to either FINRA's suitability rule or Regulation Best Interest, the proposed rule would require that broker-dealers retain that information for six years. However, since the Care Obligation of proposed Regulation Best Interest has no record-making requirement with respect to information that broker-dealers obtain from retail customers, the Commission believes that the costs to the broker-dealers of the retention requirement to be small.
The Care Obligation may also impose costs on retail customers, to the extent that broker-dealers pass on costs to their retail customers. The Commission is unable to fully quantify the size of these costs due to a number of factors. First, while the FINRA suitability standard does not explicitly prohibit a broker-dealer from putting its interest ahead of the customer's, FINRA's interpretation suggests that a broker-dealer may not put its interest ahead of the customer's.
As noted above, proposed Regulation Best Interest would require broker-dealers to comply with two Conflict of Interest Obligations. The first of these obligations would require a broker-dealer 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.
Before determining whether to satisfy this Conflict of Interest Obligation by disclosing, or eliminating, all material conflicts of interest associated with a recommendation, broker-dealers would have to first identify such material conflicts. To this end, the obligation would require that broker-dealers establish written policies and procedures reasonably designed to identify material conflicts of interest. In particular, these policies and procedures would be expected to identify a conflict in a manner that is relevant to a broker-dealer's business practice, identify which conflicts arises from financial incentives, provide a structure for identifying new conflicts as broker-dealers' business practices evolve, and provide a structure for an ongoing review for the identification of conflicts relevant to current business practices.
Once the broker-dealer identifies a material conflict of interest associated with a recommendation, the obligation requires that broker-dealers establish written policies and procedures reasonably designed to at a minimum disclose, or eliminate, the identified material conflict of interest. In addition, reasonably designed policies and procedures would likely include a discussion regarding the delivery of a Relationship Summary, Regulatory Status Disclosure, or other standardized documentation developed to disclose material conflicts of interest to the retail customer. The Commission preliminarily believes that such policies and procedures would provide a structure for effectively addressing new or existing material conflicts of interest that are relevant to a recommendation.
If a broker-dealer determines to satisfy the obligation through disclosure, the broker-dealer would be expected to provide the retail customer, in writing, with sufficiently specific facts so that the customer is able to understand the conflicts of interest a broker-dealer has and can make an informed decision about a recommended transaction or strategy. As noted above, proposed Regulation Best Interest would provide broker-dealers with flexibility in determining the most appropriate way to meet their disclosure obligation in a manner consistent with their business practices.
If a broker-dealer determines to satisfy the obligation by eliminating an identified material conflict of interest, the broker-dealer would be expected to, for instance, remove any incentives associated with recommending a particular product or service, not offer products that come with associated incentives, or negate the effect of the conflict. The effects of this obligation on broker-dealers and their retail customers are discussed in more detail below.
In addition to the requirement that broker-dealers establish written policies and procedures to identify and at a minimum disclose, or eliminate, material conflicts of interest, the obligation would also require that broker-dealers maintain and enforce such policies and procedures. Toward that end, broker-dealers would be expected to develop risk-based compliance and supervisory systems that promote compliance with proposed Regulation Best Interest consistent with their business practices and in a manner that focuses on areas of those business practices that pose risks of violating the Conflict of Interest Obligations. Broker-dealers are currently subject to supervisory obligations under Section 15(b)(4)(E) of the Exchange Act and SRO rules, including the establishment of policies and procedures reasonably designed to prevent and detect violations of, and to achieve compliance with, the federal securities laws and regulations, as well as applicable SRO rules.
The requirement to establish, maintain, and enforce written policies and procedures to identify and at a minimum disclose, or eliminate, material conflicts of interest would impose initial and ongoing costs and burdens on broker-dealers. As discussed in more detail in Section V.D., the Commission preliminarily believes that broker-dealers would update their policies and procedures to comply with this requirement and would incur an initial aggregate burden of 131,320 hours and an additional initial aggregate cost of approximately $24.84 million, as well as an ongoing aggregate annualized burden of 28,670 hours, and an ongoing aggregate annualized cost of approximately $3.08 million.
Broker-dealers may offer a wide variety of dealer services and products to retail customers. Under the Exchange Act, a “dealer” is defined as “any person engaged in the business of buying and selling securities (not including security-based swaps, other than security-based swaps with or for persons that are not eligible contract participants) for such person's own account through a broker or otherwise.”
In all of these instances broker-dealers transact with their customers as principals. As discussed above, when a broker-dealer makes a recommendation to a retail customer that involves products or services associated with its dealer activities, the recommendation would be subject to a conflict of interest. The Conflict of Interest Obligations would require that broker-dealers establish, maintain, and enforce written policies and procedures reasonably designed to identify and disclose (and mitigate when financial incentives are involved), or eliminate such conflicts of interest that are material.
If a broker-dealer determines to comply with the Conflict of Interest Obligations by eliminating material conflicts of interest associated with recommendations on products or services on which the broker-dealer acts as a dealer, the broker-dealer would be expected to, for instance, remove any incentives associated with recommending such products or services, not offer products that come with associated incentives, or negate the effect of the conflict. For instance, the broker-dealer may choose to no longer recommend such products or services or continue to make such recommendations but effectuate the transactions in a way that does not involve a principal trade.
Eliminating this type of conflict of interest may have an impact on broker-dealers' revenue and may reduce the set of securities transactions recommended by a broker-dealer; or it may alter the specific securities transactions that a broker-dealer recommends or the manner and cost and quality of execution (
The costs of complying with the Conflict of Interest Obligation by eliminating material conflicts of interest related to financial incentives that arise from broker activity are discussed in a subsequent section below.
A broker-dealer would have to establish, maintain, and enforce written policies and procedures that are reasonably designed to at a minimum disclose those material conflicts of interest that the broker-dealer does not determine to eliminate.
As described in Section IV.B above, when making a recommendation, broker-dealers are subject to a number of disclosure requirements under current Commission antifraud obligations, Exchange Act rules, and FINRA rules. Also, as described in Sections I.A and IV.B above, when engaging in transactions directly with customers on a principal basis, a broker-dealer violates Exchange Act Rule 10b-5 when it knowingly or recklessly sells a security to a customer at a price not reasonably related to the prevailing market price and charges excessive markups, without disclosing the fact to the customer. Exchange Act Rule 10b-10 also requires a broker-dealer effecting transactions in securities to provide written notice to the customer of certain information specific to the transaction at or before the completion of the transaction, including the capacity in which the broker-dealer is acting (
The Commission believes that policies and procedures would likely include instructions for a broker-dealer to determine whether a material conflict of interest, once identified, would need to be disclosed.
As noted above, Regulation Best Interest would not prescribe the process by which broker-dealers should disclose all material conflicts of interest to their retail customers. Instead, the proposed rule would give broker-dealers flexibility in identifying the most efficient and effective way of complying with the disclosure obligation that is consistent with a broker-dealer's business practice. Furthermore, although the obligation to disclose material conflicts of interest may impose costs on broker-dealers, the Commission preliminarily believes that permitting disclosure instead of outright elimination of material conflicts may reduce the costs the overall best interest obligation could impose on retail customers. This is because the disclosure alternative may preserve access to any recommendations that retail customers currently might find beneficial, even taking into account the existence of material conflicts.
Broker-dealers that currently employ minimal disclosure practices that comply with the current disclosure requirements under federal securities laws and applicable SRO rules about material conflicts of interest with respect to their recommendations may incur higher costs of complying with this enhanced disclosure obligation.
The Commission is unable to fully quantify these costs due to a number of factors. First, the Commission lacks data that quantifies how different current disclosure practices are compared to where they should be to comply with the disclosure obligation with respect to conflicts of interest. Second, given that the proposed rule allows broker-dealers flexibility in complying with the disclosure obligation, there could be multiple ways in which broker-dealers could satisfy this obligation. While a range of estimates for the costs of disclosure obligation with respect to conflicts of interest may be difficult to obtain due to the potentially wide range of assumptions about these factors, preliminary estimates for the portion of these costs borne by broker-dealers may be obtained under specific assumptions. These latter costs are discussed in Section IV.D.2.b above and in more detail in Section V.D. below.
Proposed Regulation Best Interest also includes the additional requirement that a broker, dealer, or associated person 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.
As noted above, we would interpret a material conflict of interest arising from financial incentives to include the structure of fees and other charges for the services provided and products sold; employee compensation or employment incentives (
Broker-dealers may consider establishing policies and procedures like the following to fulfill the Conflict of Interest Obligation: Policies and procedures outlining how the firm identifies its material conflicts (and material conflicts arising from financial incentives), including such material conflicts of natural persons associated with the broker-dealer, clearly identifying all such material conflicts of interest and specifying how the broker-dealer intends to address each conflict; robust compliance review and monitoring systems; processes to escalate identified instances of noncompliance to appropriate personnel for remediation; procedures that clearly designate responsibility to business lines personnel for supervision of functions and persons, including determination of compensation; processes for escalating conflicts of interest; processes for a periodic review and testing of the adequacy and effectiveness of policies and procedures; and training on the policies and procedures. Furthermore, as noted above, such policies and procedures would be expected to provide a structure for effectively addressing new or existing material conflicts of interest that arise from financial incentives associated with a recommendation, including whether to disclose and mitigate or eliminate such a conflict. Finally, in order to enforce such policies and procedures, and consistent with the discussion above, broker-dealers may determine that it is necessary to modify their current supervisory systems or develop new ones.
The requirement to establish, maintain, and enforce written polices pursuant to the requirement to identify and disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives of the Conflict of Interest Obligations would impose costs on broker-dealers. These costs are discussed in Section IV.D.2.d above and in more detail in Section V.D below.
For some broker-dealers, compensation arrangements with product-sponsoring third parties may be an important source of revenue. For instance, as described in Section IV.B, sales of investment company products range on average between 8 percent and 20 percent of broker-dealer revenue, depending on the size of the broker-dealer. Some (but not necessarily all) of these products are subject to compensation arrangements between broker-dealers and third parties that are sponsoring these products. As noted above, when making recommendations to retail customers on products that are subject to compensation arrangements, a broker-dealer has a financial incentive, and therefore a conflict of interest. The Conflict of Interest Obligations would require that the broker-dealer establish, maintain, and enforce written policies that are reasonably designed to identify and disclose and mitigate, or eliminate this type of conflict of interest. If a broker-dealer were to determine to eliminate this conflict, the broker-dealer would have to take actions that would negate the existence of the conflict in the first place. For instance, the broker-dealer could credit retail customers all
More generally, broker-dealers that determine to eliminate conflicts of interest arising from financial incentives may lose up to the entire revenue stream associated with recommending products that are subject to compensation arrangements. However, to the extent that eliminating the conflict of interest arising from financial incentives causes broker-dealers to offer only products that are no longer subject to this type of conflict, the revenue stream generated by these products would offset some of the revenue loss associated with products no longer recommended. Furthermore, to the extent that broker-dealers that chose to eliminate this conflict would limit their recommendations on products subject to compensation arrangements, retail customers would no longer have access to the same advice. The Commission preliminarily believes that the cost to broker-dealers of eliminating conflicts of interest arising from financial incentives could be large. As noted earlier, investment company products account currently for a significant portion of broker-dealers' revenues. However, only a portion of such revenues come from recommendations that broker-dealers make on investment company products to retail customers. Since the Commission lacks data at this level of granularity, the Commission is unable to quantify the magnitude of the potential revenue loss from eliminating conflicts of interest associated with financial incentives. Similarly, for reasons that include the aforementioned data limitation and the difficulty in quantifying how retail customers value broker-dealer advice (
In addition to conflicts of interest arising from financial incentives, broker-dealers also may be subject to conflicts of interest associated with internal compensation structures that may give rise to financial incentives to registered representatives. Much as there is an agency relationship between retail customers and broker-dealers, there is an agency relationship between broker-dealers and registered representatives. Broker-dealer and registered representative incentives may not be perfectly aligned. Like any agency relationship, contracts can be structured in such a way as to better align the incentives of the broker-dealer and its registered representatives. For example, broker-dealers may offer registered representatives compensation structures that reward them based on the amount of revenues they bring in from providing services, including advice. Such compensation structures are designed to benefit both the broker-dealers and the registered representatives by motivating greater effort by registered representatives. If a broker-dealer were to eliminate the use of compensation structures that motivate effort by registered representatives, its revenues would likely decline unless offset by replacement revenue streams. At the same time, the agency costs associated with the relationship between a broker-dealer and its registered representatives could increase to the point where such a relationship may not be justified going forward. In particular, a registered representative at a standalone broker-dealer may determine to terminate his or her relationship with the broker-dealer, while a registered representative at a dual-registrant may determine to offer advice only in a capacity of investment adviser. Such dynamics would have a negative impact on the supply of broker-dealer recommendations, which, in turn, would limit retail customer access to broker-dealer advice.
Given these considerations, we preliminarily believe that the costs associated with eliminating material conflicts of interest associated with compensation structures could be large for both broker-dealers and retail customers. However, the Commission is unable to fully quantify the magnitude of such costs due to a number of factors. First, the cost to broker-dealers would depend on determinants such as the extent to which internal compensation structures reward registered representatives for generating revenues and the sensitivity of broker-dealer revenues to elements of the registered representatives' compensation contract that rewards them for generating revenue (
As noted earlier, when providing recommendations, broker-dealers potentially are liable under the federal securities laws' antifraud provisions if they do not give “honest and complete information” or disclose all material adverse facts and material conflicts of interest, including economic self-interest, in connection with a recommendation. The disclosure obligations for broker-dealer material conflicts of interest—including conflicts related to financial incentives—under Regulation Best Interest would go beyond the existing disclosure requirements and liabilities. Namely, a broker-dealer making a recommendation to a retail customer would be expected to provide the retail customer with sufficiently specific facts about any material conflicts of interest arising from financial incentives associated with the recommendation such that the retail customer would be able to understand the conflict and make an
A broker-dealer would have to establish, maintain, and enforce written policies and procedures that are reasonably designed to disclose and mitigate those material conflicts of interest arising from financial incentives that the broker-dealer does not determine to eliminate. The Commission expects that such policies and procedures would include instructions for a broker-dealer to determine whether a material conflict of interest, once identified, would need to be disclosed and mitigated.
The requirement to establish, maintain, and enforce written policies and procedures that are reasonably designed to disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives of the Conflict of Interest Obligations would impose costs on broker-dealers. Broker-dealers that currently engage in disclosure practices that are closer to the disclosure obligation of the proposed rule would likely incur lower costs of complying with this obligation. However, as noted above, Regulation Best Interest would provide broker-dealers with flexibility in determining the most appropriate way to meet this disclosure obligation, consistent with each broker-dealer's business practices.
Similar to the discussion above about the disclosure obligation with respect to all conflicts of interest, the Commission is unable to fully quantify the costs associated with this obligation due to two factors. First, the Commission lacks data that quantifies how different current disclosure practices are compared to where they should be to comply with the disclosure obligation with respect to conflicts of interest arising from financial incentives. Second, given that the proposed rule allows broker-dealers flexibility in complying with this disclosure obligation, there could be multiple ways in which broker-dealers could satisfy this obligation. While a range of estimates for the costs of disclosure obligation may be difficult to obtain due to the potentially wide range of assumptions about these factors, preliminary estimates for the portion of these costs borne by broker-dealers may be obtained under specific assumptions. These latter costs are discussed in Section IV.D.2.b above and in more detail in Section V.D below.
In addition to the disclosure obligation, the Conflict of Interest Obligations of Regulation Best Interest would also require that broker-dealers to establish, maintain, and enforce policies and procedures to mitigate conflicts of interest related to financial incentives—including conflicts arising from internal compensation structures and compensation arrangements with product sponsors. The costs that broker-dealers would potentially incur to comply with this new requirement depends on what may constitute reasonable mitigation. The proposed rule does not stipulate specific conflict mitigation measures. Instead, the Commission's proposal would give broker-dealers flexibility to develop and tailor policies and procedures aimed at conflict mitigation measures based on each firm's business practices (such as the size of the firm, retail customer base, the nature and significance of the compensation conflict, and the complexity of the product).
Some conflicts of interest related to financial incentives arise from internal compensation structures. As discussed above, the Commission preliminarily believes that the costs to broker-dealers from eliminating material conflicts of interest associated with compensation structures could be large. As an alternative, broker-dealers could retain the compensation structures to address the incentive conflict between the broker-dealers and registered representatives, while taking actions to mitigate the material conflict of interest that those structures may create between broker-dealers or registered representatives and retail customers.
Certain aspects of the market for brokerage services may serve, on their own, to mitigate, to some extent, conflicts of interest between broker-dealers and retail customers that may arise from compensation structures. Potential legal liability and reputational risk related to unsuitable recommendations can serve as a motivation to ameliorate the conflict between broker-dealer representatives and customers. Concerned about their potential legal liability as well as their reputations, many broker-dealers currently take actions to ameliorate conflicts.
As noted above, proposed Regulation Best Interest would give broker-dealers the flexibility to develop and tailor individual conflict mitigating measures based on their business practices. The cost of mitigating material conflicts associated with financial incentives will depend, among other things, upon the extent to which broker-dealers are currently engaging in conflict mitigating activities. As discussed above, FINRA's 2013 study of conflicts states that a number of firms are already engaging to various degrees in some of those activities.
Conflicts of interest related to financial incentives may also arise from financial arrangements between broker-dealers and product sponsors. Furthermore, as discussed above, the Commission preliminarily believes that the costs to broker-dealers from eliminating material conflicts of interest associated with financial incentives could be large. As an alternative, broker-dealers may determine not to eliminate a conflict and instead to mitigate it. To comply with the Conflict of Interest Obligations of the proposed rule, broker-dealers that offer recommendations to retail customers based on products subject to agreement with product sponsors would have to adopt conflict mitigation measures that would reasonably meet these obligations. As noted earlier, the proposed rule does not explicitly specify mandatory conflict mitigation measures. Instead, the rule would give broker-dealers flexibility to develop and tailor conflict mitigation measures consistent with their business practices.
Some broker-dealers may determine to eliminate the most expensive products. For instance, broker-dealers may perceive that the monitoring costs of ensuring that their registered representatives act in the retail customer's best interest when making recommendations based on the full set of offered products (including the most and least expensive products) may be too large. It is possible that such an approach, which eliminates products based on cost alone, may result in a broker-dealer not making available products that, while being more expensive, may provide better performance than products that are still offered. Thus, conflict mitigating measures that constrain the set of products offered may limit retail customer choice and, therefore, may impose a cost on retail customers. Furthermore, these conflict mitigating measures may impact the way registered representatives get compensated, and, therefore, may alter their incentives to expend effort (
More generally, the use of tailored products by broker-dealers to mitigate conflicts of interest arising from financial incentives may introduce additional complexities that could ultimately increase the costs borne by retail customers. Therefore, there may be circumstances where broker-dealers determine that eliminating rather than mitigating conflicts through the use of products would be more advantageous for the retail customer.
The factors that would affect a broker-dealer's choice to either eliminate or mitigate conflicts are likely to vary. One example involving the range of considerations that would need to be taken into account is the use of “clean” shares, launched recently by a number of mutual fund families. Clean shares, unlike other types of mutual fund share classes, do not involve typical sales and servicing fees. Instead, broker-dealers would be able to set their own commissions which could be structured to avoid the conflicts posed by existing distribution and servicing fee structures. For instance, broker-dealers could set the commissions for these products according to neutral factors that have been discussed earlier.
While some broker-dealers may determine that clean shares are a potential solution to mitigating conflicts of interest arising from compensation arrangements for mutual funds, because broker-dealers could set the fee schedules according to neutral factors, retail customers purchasing clean shares could face higher costs compared to other share classes depending on the investors' holding period for the shares. For some retail customers with short time horizons, clean shares may be more costly relative to other mutual fund share classes. Moreover, due to the nature of clean shares, retail customers may not receive other benefits associated with some mutual fund share classes, such as rights of accumulation that allow investors to account for the value of previous fund purchases with the value of the current purchases. Investors also may not be able to use letters of intent for further purchases to qualify for breakpoint discounts.
In addition, broker-dealers that use clean shares may incur costs stemming from, among other things, back-office work, training of employees, reprogramming of systems, changes to compliance and desk policies and procedures, and changes to clearing procedures. In addition, while some fund complexes currently offer clean shares, not all of them do. While this trend may change in the future, broker-dealers may not be able to offer products that rely on clean shares in each product class. Further, broker-dealers may choose to incorporate clean shares into compliance systems for other commission-based products.
For broker-dealers that determine to rely on clean shares to mitigate conflicts related to financial incentives, revenues may either increase or decrease depending on the extent that the commissions charged on the clean share products are different than the overall
As noted earlier, in general, complying with the Conflict of Interest Obligations to mitigate certain material conflicts of interest may reduce broker-dealers' incentives to provide recommendations of high quality to their retail customers, and, therefore, may impose a cost on retail customers who seek advice from broker-dealers. Furthermore, certain conflict mitigation measures may be costly to implement. These implementation costs would be borne by broker-dealers, and, to the extent that they can pass on some of the costs to their retail customers, by retail customers as well.
Another way in which a broker-dealer may determine to mitigate a material conflict of interest arising from compensation arrangements with product sponsors is by expanding the set of products that the broker-dealer may recommend to a retail customer to include products that are less prone to this type of conflict of interest. That is, a broker-dealer could recommend several products that satisfy the best interest obligation and achieve the same goal (as perceived by the broker-dealer) but that differ along several dimensions, such as expected performance and the amount of compensation that the broker-dealer receives from product sponsors. Presumably, no choice in this set of suitable recommendations is strictly dominated by any of the other choices, or else some of the recommendations in this set would not be consistent with the best interest obligation. To the extent that the retail customer picks a choice in this set that happens to offer less compensation to the broker-dealer compared to the choice that the broker-dealer would have recommended under the baseline, the broker-dealer may incur some revenue loss.
The discussion above suggests that the requirement to establish, maintain, and enforce written policies and procedures to mitigate material conflicts of interest arising from financial incentives may impose costs on broker-dealers, such as potential revenue loss and costs related to the implementation of conflict mitigating measures. The Commission is unable to quantify the magnitude of these costs for a number of reasons. First, the Commission lacks data on the extent to which current broker-dealer recommendations are subject to conflicts of interest related to financial incentives. Second, given that the proposed rule allows broker-dealers to tailor their conflict mitigating measures to their business practices, there could be multiple ways in which broker-dealers could address the conflict mitigating aspect of the Conflict of Interest Obligation. Finally, any estimate of the magnitude of such costs would depend on assumptions about the extent to which broker-dealers are currently providing retail customers with conflicted recommendations, how broker-dealers would choose to satisfy the conflict mitigating aspect of the obligation, the costs associated with implementing conflict mitigating measures, and, finally, how retail customers would respond to recommendations that reflect a given set of conflict mitigating measures. While a range of estimates for the costs of the mitigation aspect of the Conflict of Interest Obligation may be difficult to obtain due to the potentially wide range of assumptions about these factors, preliminary estimates for the portion of these costs borne by broker-dealers may be obtained under specific assumptions. For instance, the Commission preliminarily believes that reasonably designed policies and procedures should establish a clearly defined process for determining how to address any identified material conflict of interest, including whether and how to disclose and mitigate a material conflict of interest arising from financial incentives. The costs associated with establishing, maintaining, and enforcing such policies are discussed in Section IV.D.2.d.
The discussion above also suggests that the way broker-dealers choose to comply with the requirement to establish, maintain, and enforce written policies and procedures to mitigate material conflicts of interest arising from financial incentives may impose costs on retail customers. If a broker-dealer errs on the side of caution and pursues the most conservative rather than the optimal conflict mitigating measures, retail customers may end up with fewer investment choices,
The Commission is unable to quantify the magnitude of the costs to retail customers due to having access to potentially fewer investment choices and a potential decline in the quality of recommendations received, because such costs would depend on determinants such as how retail customers generally perceive the risk and return of their portfolio, the likelihood of acting on a recommendation that complies with the best interest obligation, and, ultimately, how the risk and return of their portfolio change as a result of how they act on the recommendation. Since the Commission lacks the data that would help narrow the scope of the assumptions regarding these determinants, the resulting range of potential estimates would be wide, and, therefore, not informative about the magnitude of the costs that the conflict mitigating aspect of the Conflict of Interest Obligation would impose on retail customers.
In addition to the potential costs imposed on broker-dealers and retail customers, the conflict mitigating aspect of the Conflict of Interest Obligations may also impose costs on product sponsors that sell their products through broker-dealers. If product sponsors rely on the broker-dealers' distribution channels to fund their products, and use compensation arrangements that create financial incentives for broker-dealers, the proposed best interest obligation may undermine those incentives and may adversely impact the funding of these products.
Specifically, broker-dealers may determine to mitigate conflicts of interest arising from financial incentives tied to compensation from product sponsors by no longer offering some of those products. These conflict mitigating measures would affect the funding of the products that are being eliminated, and therefore, the proposed rule may impose funding costs on product sponsors. The Commission is unable to quantify the magnitude of these funding costs for several reasons. First, it is difficult to identify the
In this section, we discuss the impact that proposed Regulation Best Interest may have on efficiency, competition, and capital formation. As discussed above, the proposed rule entails both benefits and costs. The tradeoff between the benefits and costs, and the resulting effect on the gains from trade to be shared between broker-dealers and retail customers, is essential for evaluating the impact of the proposed rule on efficiency, competition, and capital formation.
To the extent that retail customers perceive that the amelioration of the principal-agency conflict reinforces retail customers' beliefs that broker-dealers will act in their best interest, retail customers' demand for broker-dealer recommendations may increase. In turn, the potential increase in the demand for broker-dealer recommendations could lead to an increase in the number of broker-dealers in the marketplace, and therefore to an increase in the competition among broker-dealers. An increase in competition could manifest itself in terms of better service, better pricing, or some combination of the two, for retail customers.
However, Regulation Best Interest could also have negative effects on competition. It is possible that in the process of ameliorating the agency conflict between broker-dealer and retail customers, Regulation Best Interest may impose costs on broker-dealers or retail customers that would be large enough to reduce the gains from trade shared by broker-dealers and retail customers. For instance, to the extent that the cost of the rule to broker-dealers would cause some broker-dealers to charge more for providing advice, the proposed rule may have negative competitive effects for retail customers in the form of higher pricing for advice. Similarly, to the extent that the reduction in the gains from trade causes a significant reduction in the supply of broker-dealer advice, the proposed rule may have negative competitive effects for retail customers in the form of higher prices for advice.
The reduction in the gains from trade for broker-dealers may come in the form of lower profits. In some cases, the reduction in profits may be large enough to cause some broker-dealers or their associated persons to no longer offer broker-dealer advice. In particular, the potential reduction in the profits associated with broker-dealer advice may create further incentives for some standalone broker-dealers and their associated persons to join investment advisers and, in the process, persuade their retail customers to become investment advisory clients. Similarly, some dually-registered broker-dealers may decide to only offer advice through the investment advisory side of the business or to persuade their customers to switch to advisory accounts. Regulation Best Interest may also have a differential impact on broker-dealers depending on whether they are standalone or dual-registrants. Unlike standalone broker-dealers, a dual-registrant would be able to offer advice in its capacity as an investment adviser but execute the transaction in its capacity as a broker-dealer. Because such a dual-registrant acted as a broker-dealer solely when providing execution services and not when providing advice, the dual-registrant would not be subject to the requirements of the proposed rule for its advice. Rather, the dual-registrant would be subject to the investment advisers' fiduciary standard of care.
If a dual-registrant would incur a larger cost of complying with the new requirements of the best interest obligation compared to the cost of complying with the requirements of the investment advisers' fiduciary standard of care and the concurrent proposed interpretation for investment advisers with respect to providing advice, the dual-registrant may have an incentive to bypass the requirements of the proposed rule by providing advice in the capacity of investment adviser, while executing transactions in the capacity of broker-dealer. To the extent that dual-registrants would engage in this practice, and to the extent that retail customers would be willing to pay for this type of advice, the magnitude of impacts from Regulation Best Interest would be lower for dual-registrants than for standalone broker-dealers. As a corollary, the proposed rule could give dual-registrants a competitive advantage over standalone broker-dealers.
Beyond having an effect on competition among broker-dealers, it is possible that the proposed rule could affect competition between broker-dealers and investment advisers. Whether the proposed rule will have an effect on competition between broker-dealers and investment advisers will depend on how they market their services for advice and how potential customers choose between the two. For certain retail customers, fee structure or costs may be the primary driver of the choice of whether to obtain advice from a broker-dealer or an investment adviser. For example, a buy-and-hold retail customer or a retail customer who does not trade often may find the one-time commission charge commonly charged by a broker-dealer preferable to the ongoing percent-of-assets under management fee of an investment adviser. Because the proposed rules are not likely to change the way broker-dealers and investment advisers charge for their services, the proposed rules may not substantially alter the way in which retail customers that are sensitive to differences in fee structures and costs choose between the two.
It may be the case, however, that certain retail customers base their choice between a broker-dealer and an investment adviser, at least in part, on their perception of the standards of conduct each owes to their customers. For example, there may be retail customers who prefer the commission structure of a broker-dealer, but who also prefer the fiduciary standard of conduct applicable to investment advisers. For certain of those retail customers, the preference for a fiduciary standard of care may lead them to choose an investment adviser. Because the proposed rule establishes a best interest standard of conduct that incorporates and goes beyond the current broker-dealer standard of conduct, broker-dealers may be better able to compete with investment advisers for those customers. To the extent that there are customers who prefer the commission structure of a broker-dealer, but who chose to use an investment adviser because of their fiduciary standard of conduct, we expect that the proposed rule will enhance competition between broker-dealers and investment advisers.
The gains from trade that result from broker-dealers complying with Regulation Best Interest may depend also on the type of products being recommended. It may be the case that for certain products that broker-dealers are currently offering, the best interest standard improves the gains from trade to such an extent that retail customer demand for broker-dealers' recommendations with respect to those products increases. Similarly, the best interest standard may also have a positive impact on retail customer demand for broker-dealer recommendations in the case of products that are currently offered only by a limited set of broker-dealers. The overall potential increase in the demand for broker-dealer recommendations would encourage entry in the broker-dealer sector, which would tend to lead to increased competition among broker-dealers. An increase in competition could manifest itself in terms of better service, better pricing, or some combination of the two, for retail customers.
Conversely, it may be the case that for some products the best interest standard reduces the gains from trade to such an extent that broker-dealers determine to no longer make recommendations to retail customers with respect to those products. The potential decline in the number of broker-dealers willing to provide recommendations to their brokerage customers for these products may have negative competitive effects within the markets where these products are traded. For instance, if a significant portion of the trading volume in these products flows from retail customers acting on recommendations from broker-dealers, then the possibility of broker-dealers no longer offering recommendations on these products may adversely impact the pricing and availability of these products.
The potentially negative impact of complying with the best interest obligation of the proposed rule on the pricing of products that may no longer be part of some broker-dealers' product offering would likely be diminished for those products that are available to purchase outside a broker-dealer distribution channel. Products that broker-dealers offer advice on currently also may be offered through other non-broker-dealer channels such as investment advisers and commercial banks. For example, commercial banks can engage in broker-dealer activity, subject to certain conditions, without having to register as broker-dealers.
In addition, the possibility that broker-dealers may determine to no longer offer recommendations related to certain products that are subject to compensation arrangements with product sponsors may have a potential competitive impact on product sponsors. To the extent that product sponsors compete over funding for their products based on compensation arrangements with broker-dealers, the mitigation measures that broker-dealers may implement to comply with the best interest obligation, such as the potential elimination of some of these products, may change how product sponsors compete with each other. For instance, product sponsors may, under the proposed rules, choose to compete based on product quality rather than compensation arrangements with the broker-dealers that distribute the products.
A portion of the enhanced gains from trade may be attributable to the best interest standard enhancing the quality of recommendations provided by broker-dealers to retail customers relative to the baseline. Recommendations that broker-dealers make to retail customers would be of higher quality if they were to promote investment opportunities that better help customers achieve their investment goals. These recommendations are not only consistent with the proposed best interest standard but may also reflect the higher effort that broker-dealers expend to understand the universe of investment opportunities that would fit best with the retail customers' investment profiles. Higher quality recommendations may also be a manifestation of the proposed rules' impact on competition between broker-dealers that may choose to compete more intensively on the quality of recommendations. At the same time, however, the incentives of broker-dealers to expend effort when providing quality recommendations would depend on how broker-dealers choose to respond to this rule and, if they continue to make recommendations to brokerage customers, how they choose to mitigate certain material conflicts of interest. To the extent that the tradeoff between enhancing the quality of advice and mitigating material conflicts of interest results in facilitating higher quality broker-dealer recommendations to retail customers, Regulation Best Interest could improve the efficiency of retail customers' portfolios that benefit from broker-dealer advice.
Among investment opportunities that better help customers achieve their savings goals, there would be some that would finance valuable projects in the corporate sector of the economy (as opposed to the financial sector,
As noted above, the proposed rule also may have potentially differential implications for recommendations related to different products, leading to heterogeneous impacts on capital formation. In markets for financial products where the best interest standard improves the gains from trade, or where the benefits from ameliorating conflicts exceed the costs of additional requirements, the proposed rule could result in increased retail customer demand for broker-dealer recommendations for these products from current retail customers, as well as new retail customers. To the extent that increased demand for broker-dealer recommendations for particular products leads retail customers to allocate more capital to securities markets, and given the role of broker-dealers in the capital formation process, we could expect greater demand for such products which could, in turn, promote capital formation. In contrast, for those products where the best interest standard could erode the gains from trade, the supply of broker-dealer recommendations may decline, producing the opposite effect on capital formation. At the same time, the potential decline in the supply of broker-dealer recommendations on these products may negatively impact the efficiency of portfolio allocation of those retail customers who might otherwise benefit from broker-dealer recommendations with respect to these products. In addition, a reduction in broker-dealers' propensity to recommend certain products could impair the efficiency with which capital in the economy is allocated to the corporate sector.
As discussed earlier, the mitigation measures that broker-dealers may implement to comply with the best interest obligation with respect to conflicts of interest arising from compensation arrangements with product sponsors may result in product sponsors competing over funding based on features other than compensation arrangements, such as product quality. In turn, competition among product sponsors based on product quality may result in more funding going to the higher quality products, and hence may increase capital allocation efficiency.
The proposed rule would require broker-dealers, when recommending 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 of the recommendation and would require that broker-dealers act without placing the financial or other interest of the broker, dealer, or natural person who is an associated person of the broker or dealer making the recommendation, ahead of the retail customer's interest. In this section, a number of alternatives to proposed Regulation Best Interest are discussed, including: (1) A disclosure-only alternative; (2) a principles-based standard of conduct obligation; (3) a fiduciary standard for broker-dealers; and (4) enhanced standards akin to conditions of the BIC Exemption.
As an alternative to proposed Regulation Best Interest, that includes Disclosure, Care, and Conflict of Interest Obligations, the Commission could have the Disclosure Obligation alone, whereby broker-dealers would be obligated to disclose all material facts and conflicts, rather than also requiring broker-dealers to establish, maintain, and enforce policies and procedures to disclose (and mitigate) or eliminate material conflicts of interest associated with recommendations or financial incentives associated with recommendations. Under a disclosure-only alternative, broker-dealers would need to provide disclosure of material facts relating to the scope and term of the relationship, disclosure of material conflicts of interest with respect to the recommendation itself, and disclosures pertaining to broker-dealer compensation arrangements with third parties and their internal compensation structure. Relative to the current baseline of disclosure required by broker-dealers, a disclosure-only alternative would increase the amount of disclosure provided to retail customers and would bring such disclosure under the Exchange Act. Further, such enhanced disclosure could provide benefits to retail customers through increased information about material facts about the broker-dealer and customer relationship as well as potential conflicts of interest that broker-dealers may have.
Under the disclosure-only alternative, the proposed Relationship Summary and Regulatory Status Disclosure could serve as key components of any additional disclosure that would be required under the disclosure-only alternative. In our concurrent rulemaking, we propose to:
Under this alternative, the overall costs to broker-dealers to comply with the requirements of the rule would be larger than those associated with currently required disclosure for broker-dealers; however, the costs to comply would likely be lower relative to proposed Regulation Best Interest.
The Commission preliminarily believes that a rule that only required the disclosure of conflicts of interest would be less effective than the proposed rule because broker-dealers would not be required to act in the best interest of their customers under the Exchange Act.
As an alternative, the Commission could rely on a principles-based standard of conduct, which could be developed by each broker-dealer based on its business model rather than directly requiring conduct standards. Under this alternative, broker-dealers would be required to comply with a principles-based approach to providing recommendations that are in the best interest of their customers, without expressly being subject to requirements to disclose, mitigate, or eliminate conflicts of interest. This alternative would focus on the competence of broker-dealers to provide advice and would continue to rely on SRO rules and the antifraud provisions of the federal securities laws and SRO rules to address broker-dealer conflicts. A principles-based standard of conduct would provide increased flexibility for broker-dealers to tailor their recommendations to retail customers, subject to the current obligations under the existing regulatory baseline, discussed above, to make suitable recommendations. This approach could impose lower compliance costs on regulated entities relative to the requirements of the proposed rule.
The Commission preliminarily believes that an approach that does not include the express requirements of the Disclosure, Care, or the requirements of the Conflict of Interest Obligations is likely to be less effective at reducing harm to retail customers that arises from conflicts of interest. Further, because each broker-dealer could have its own principles-based approach to meeting its care obligation under the Exchange Act, broker-dealers could interpret the standard differently. Variations in retail customer protection could make it difficult for retail customers to evaluate the standard of care offered by a broker-dealer and compare these across broker-dealers.
By contrast, Regulation Best Interest is designed to set a standard applicable to all broker-dealers. In the absence of a requirement to disclose or eliminate conflicts of interest or a requirement to mitigate financial conflicts,
As an alternative, the Commission could impose a fiduciary standard on broker-dealers for retail customers.
As discussed above, any prescribed standard of conduct, such as a fiduciary standard, can seek to address the principal-agent problem between retail customers and firms and financial professionals, whereby principals (retail customers) are concerned that their agents (firms and financial professionals) will not act in the best interest of the principal. In the context of investment advice, firms and financial professionals may have incentives (financial or otherwise) to provide advice to their retail customers that benefits the firm or the financial professional but may be suboptimal from the retail customer's perspective. For example, a financial professional might offer costly products, when low(er) cost alternatives are reasonably available, may offer affiliated or proprietary products, or may trade more or less frequently than is beneficial to the retail customer. As discussed above in the discussion of broad economic considerations, retail customers may not be able to adequately monitor the firms or financial professionals to ensure that their agents are working in the retail customer's best interest. Therefore, regardless of the type of investment professional providing the advice, that advice may be conflicted and potentially harm retail customers.
Although conflicts of interest may exist in any type of relationship, the nature of such conflicts vary depending on the type of firm or financial professional that provides the advice. Broker-dealers and registered representatives generally provide financial advice at the transactional level, and the nature of the relationship between customers and broker-dealers and the level of monitoring by broker-dealers tends to be episodic, rather than ongoing. Investment advisers and their representatives commonly provide ongoing monitoring to their clients. Because of the differences in the nature of the relationship, the conflicts that are likely to arise from broker-dealers (
Over time, different bodies of laws and standards have emerged that are generally tailored to the different business models of broker-dealers and investment advisers and that provide retail customer protection specific to the relationship types and business models to which they apply. While obligations for broker-dealers and investment advisers that arose from common law may appear similar, each set of laws and obligations has emerged independently. Moreover, such differences between business models have provided retail customers with choice about the type of investment advice that they seek and how they pay for such advice.
A fiduciary standard for broker-dealers could produce greater uniformity between broker-dealers' and investment advisers' standards. A uniform fiduciary standard for broker-dealers and investment advisers could bring more uniformity to the professional standards of conduct regarding advice provided to retail customers. A uniform standard could potentially reduce certain conflicts and increase disclosure of others, thereby enhancing the quality of such advice,
As discussed above, the broker-dealer and investment adviser models have emerged to meet the investing and advice needs of particular clienteles with varying needs for monitoring, advice, and services. Given the different business models, different standards have emerged to provide retail customer protection reflective of the business model. We preliminarily believe that a uniform fiduciary standard that would attempt to fit a single approach to retail customer protection to two different business models is unlikely to provide a tailored solution to the conflicts that uniquely arise for either broker-dealers or investment advisers.
The Commission could alternatively propose a fiduciary standard coupled with a series of disclosure and other requirements akin to the full complement of conditions of the DOL's BIC Exemption adopted in connection with the DOL Fiduciary Rule, which would apply to broker-dealers when making investment recommendations for all types of retail accounts rather than only in connection with services to retirement accounts.
The alternative of requiring broker-dealers to adopt a fiduciary standard coupled with a series of disclosure and other requirements akin to the full complement of conditions of the DOL's BIC Exemption for all retail customer accounts and not solely with respect to retirement assets could likely have economic effects for broker-dealers. Given that some broker-dealers have already adopted some of the conditions of the DOL's BIC Exemption for retirement accounts and may have already implemented the conditions for non-retirement accounts, the incremental costs could be low under such an alternative. However, the incremental costs could be reduced only to the extent that broker-dealers have already begun to implement the conditions of the DOL's BIC Exemption. Further, as discussed above, some components of the DOL's BIC Exemption are already part of the broker-dealer regulatory framework; therefore, any potential economic effects associated with such conditions would be reduced.
An alternative that would impose on broker-dealers a fiduciary standard coupled with set of requirements akin to the full complement of the BIC Exemption conditions could drive up costs to retail customers of obtaining investment advice from broker-dealers, and could cause some retail customers to forgo advisory services through broker-dealers if they were priced out of the market.
Alternatively, as costs of complying with a fiduciary standard coupled with a set of requirements akin to the full complement of BIC Exemption conditions increase, some broker-dealers may abandon certain subsets of retail customer accounts, which would similarly deprive some broker-dealer customers of investment advice. A set of requirements that are akin to the conditions of the BIC Exemptions, were they to be imposed upon broker-dealers for all retail customer accounts, would also likely have competitive effects for both broker-dealers and investment advisers,
The Commission preliminarily believes that requiring broker-dealers to comply with a fiduciary standard coupled with a set of requirements akin to the full complement of conditions under the BIC Exemption could impose costs on broker-dealers and impact retail customers and the market for investment advice; however, the Commission is unable to quantify the costs and benefits associated with this alternative. Moreover, the Department of Labor has a different regulatory focus than the Commission; therefore, a wholesale incorporation of conditions consistent with the BIC Exemption is not entirely consistent with the regulatory approach of the Commission.
The Commission requests comment on all aspects of this initial economic analysis, including whether we have correctly identified the problem, its magnitude, and the set of reasonably available solutions and alternative approaches. We also request comment on whether the analysis has: (i) Identified all benefits and costs, including all effects on efficiency, competition, and capital formation; (ii) given due consideration to each benefit and cost, including each effect on efficiency, competition, and capital formation; and (iii) identified and considered reasonable alternatives to the proposed regulations. We request and encourage any interested person to submit comments regarding the proposed regulations, our analysis of the potential effects of the proposed regulations, and other matters that may have an effect on the proposed regulations. We request that commenters identify sources of data and information as well as provide data and information to assist us in analyzing the economic consequences of the proposed regulations. We also are interested in comments on the qualitative benefits and costs we have identified and any benefits and costs we may not have discussed. We also request comment on the assumptions underlying our analysis and cost estimates.
In addition to our general request for comment on the economic analysis associated with the proposed regulations, we request specific comment on certain aspects of the proposal:
• We request comment on our characterization of the relationship between a broker-dealer and a retail customer. Do commenters agree with our principal-agent characterization of this relationship? Are there different ways of characterizing this relationship that we should consider? Is the concept of “gains from trade” appropriate for capturing the economic impact of the proposed regulation on the broker-dealers and their retail customers? Are there alternative economic concepts that we should consider? Is the example that illustrates how the concept of “gains for trade” works useful for understanding the economic impacts of the proposed regulation? Can commenters suggest alternative examples?
• We request comment on our assumptions related to identifying broker-dealers that are likely to have retail customers. If only “sales” activity is marked on Form BR, is it appropriate to assume that a firm has both “retail” and “institutional” sales activities?
• We request comment on the financial incentives provided by broker-dealers to registered representatives and other associated persons of the broker-dealer. Are the ranges provided reasonable? Are there other types of compensation arrangements or financial incentives that are provided to associated persons of broker-dealers, particularly registered representatives, which are not included in the baseline? Please be specific and provide data and analysis to support your views.
• We request comment on our characterization of the benefits of proposed Regulation Best Interest. We believe that the proposed rule achieves its main benefits by ameliorating the agency conflict between broker-dealers and retail customers. Do commenters agree with our characterization of the benefits? Are there other benefits of the proposed rule that have not been identified in our discussion and that warrant consideration? Are the assumptions that form the basis of our analysis of the benefits appropriate? Can commenters provide data that supports or opposes these assumptions? Can commenters provide data that would help the Commission quantify the magnitude of the benefits identified in our discussion or other benefits that we missed to identify in our discussion and that warrant consideration?
• We request comment on our characterization of the costs of the proposed Regulation Best Interest. We believe that the best interest obligation through its component obligations would impose direct costs on broker-dealers. Furthermore, we believe that depending on how broker-dealers chose to comply with the best interest obligation, the proposed rule may impose costs on retail customers. Do commenters agree with our characterization of the costs? Are there other costs of the proposed rule that have not been identified in our discussion and that warrant consideration? Are the assumptions that form the basis of our analysis of the costs appropriate? Can commenters provide data that supports or opposes these assumptions? Can commenters provide data that would help the Commission quantify the magnitude of the costs identified in our discussion or other costs that we missed to identify in our discussion and that warrant consideration?
• How do commenters anticipate that the benefits and costs of the proposed rule will be shared between broker-dealers and their retail customers? Please be specific and provide data and analysis to support your views.
• Are there any effects on efficiency, competition, and capital formation that are not identified or are misidentified in our economic analysis? Please be specific and provide data and analysis to support your views.
• What would the costs for broker-dealers be if the provision of discretionary investment advice, whether or not limited in scope, were not to be considered ”solely incidental” to broker-dealer's business under Advisers Act rule 202(a)(11)(C)? Would there be any costs or benefits to retail customers? How would the market for the provision of financial advice change? Would dually-registered firms treat discretionary accounts as brokerage accounts?
• Do commenters believe that the alternatives the Commission considered are appropriate? Are there other reasonable alternatives that the
Certain provisions of the proposed rules and rule amendments would impose new “collection of information” requirements within the meaning of the Paperwork Reduction Act of 1995 (“PRA”).
The Commission is submitting the proposed rules and rule amendments to the Office of Management and Budget (“OMB”) for review and approval in accordance with the PRA.
Proposed pursuant to the Commission's authority under the Dodd-Frank Act and the Exchange Act, Regulation Best Interest would: (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; (4) and establish obligations that require mitigation, and not just disclosure, of conflicts of interest arising from financial incentives associated with broker-dealer recommendations. Generally, in crafting proposed Regulation Best Interest, we aimed to provide broker-dealers flexibility in determining how to satisfy the component obligations. For purposes of this analysis, we have made assumptions regarding how a broker-dealer would comply with the obligations of Regulation Best Interest, as well as the proposed amendments to Rule 17a-3(a)(25) and Rule 17a-4(e)(5).
Proposed Regulation Best Interest would impose a best interest obligation on a broker-dealer when making recommendations of any securities transaction or investment strategy involving securities to “retail customers.” Except where noted, we have assumed that a dually-registered firm, already subject to the Investment Advisers Act, would be subject to new, distinct burdens under proposed Regulation Best Interest.
As of December 31, 2017, 3,841 broker-dealers were registered with the Commission—either as standalone broker-dealers or as dually-registered entities. Based on data obtained from Form BR, the Commission preliminarily 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 and the proposed amendments to Rules 17a-3(a)(25) and 17a-4(e)(5).
As with broker-dealers, proposed Regulation Best Interest would impose a best interest obligation on natural persons who are associated persons of broker-dealers, when making recommendations of any securities transaction or investment strategy involving securities to “retail customers.”
The Commission preliminarily believes that approximately 435,071 natural persons would qualify as retail-facing, licensed representatives at standalone broker-dealers or dually-registered firms,
Regulation Best Interest would require broker-dealers to act in the best interest of a retail customer when recommending any securities transaction or investment strategy involving securities to a retail customer. As discussed above, proposed Regulation Best Interest would specifically provide that this best interest obligation shall be satisfied if: (1) The broker, dealer or natural person who is an associated person of a broker or dealer, prior to or at the time of a recommendation, reasonably discloses 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 that are associated with the recommendation; (2) the broker, dealer or natural person who is an associated person of a broker or dealer, exercises reasonable diligence, care, skill, and prudence in making a recommendation; (3) the broker or dealer establishes, maintains, and enforces written policies and procedures reasonably designed to identify and at a minimum disclose, or eliminate, all material conflicts of interest that are associated with such recommendations; and (4) the broker or dealer establishes, maintains, and enforces 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.
Furthermore, the proposed addition of paragraph (a)(25) to Rule 17a-3 would impose new record-making obligations on broker-dealers subject to Regulation Best Interest, while the Proposed Amendment to Rule 17a-4(e)(5) would impose new record retention obligations on broker-dealers subject to Regulation Best Interest.
The obligations arising under Regulation Best Interest, the Proposed Amendment to Rule 17a-3(a)(25), and the Proposed Amendment to Rule 17a-4(e)(5) would give rise to distinct collections of information and
The collections of information associated with these proposed rules and proposed rule amendments are described below.
Regulation Best Interest would require a broker-dealer entity
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. 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 SRO staff in connection with examinations and investigations.
Following is a detailed discussion of the estimated costs and burdens associated with broker-dealers' Conflict of Interest Obligations.
We believe that most broker-dealers have policies and procedures in place to address material conflicts, 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, we believe that broker-dealers would employ a combination of in-house and outside legal and compliance counsel to update existing policies and procedures.
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.
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
We therefore estimate the total initial aggregate burden to be 131,320 hours,
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 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 broker-dealers of approximately 24,660 hours.
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.
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 burden for small broker-dealers would be 4,010 hours for in-house compliance manager review.
We therefore estimate the total ongoing aggregate ongoing burden to be 28,670 hours,
The Commission acknowledges that policies and procedures may vary greatly by broker-dealer, 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.
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.
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.
We additionally believe that the determination whether the conflicts of interest, once identified, are material, would require approximately five hours per broker-dealer,
To maintain compliance with Regulation Best Interest, we assume for purposes of this PRA 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.
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 Regulation Best Interest among registered representatives. The initial and ongoing costs and burdens associated with such a training program are estimated below.
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,
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.
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.
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.
The Disclosure Obligation under proposed Regulation Best Interest 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 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.
The collections of information associated with these Disclosure Obligations, as well as the associated record-making and recordkeeping obligations are addressed below.
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.
As discussed above, the Commission preliminarily believes that a standalone broker-dealer would be able to satisfy its obligation to disclose that it is acting in a broker-dealer capacity by providing
We assume, for purposes of this PRA analysis, that a dually-registered broker-dealer would satisfy its obligation to disclose it is acting in a broker-dealer capacity by creating an account disclosure with standardized language, and by providing it to the retail customer at the beginning of the relationship. The account disclosure would set forth when the broker-dealer would be acting in a broker-dealer capacity, and how the broker-dealer would notify the retail customer of any changes in its capacity. We understand that many broker-dealers already include such information in account disclosures.
While many broker-dealers do provide fee information to retail customers in a fee schedule, the Commission believes that to comply with proposed Regulation Best Interest broker-dealers would likely either amend this schedule or develop a new fee schedule to disclose the fees and charges applicable to retail customers' transactions, holdings, and accounts through the use or development of a comprehensive, standardized fee schedule. This fee schedule would be delivered to retail customers at the beginning of a relationship. If, at the time the recommendation is made, the disclosure made to the retail customer is not current or does not contain all material facts regarding the fees of the particular recommendation, the broker-dealer would need to deliver an amended fee schedule.
With respect to disclosure of the types and scope of services provided by the broker-dealer, we assume for purposes of this PRA analysis that broker-dealers would satisfy the Disclosure Obligation by including this information in the account disclosure provided to the retail customer at the beginning of the relationship, as described above. The broker-dealer would need to deliver an amended account disclosure to the retail customer in the case of any material changes made to the type and scope of services.
Proposed Regulation Best Interest would require a broker-dealer to reasonably disclose in writing all material conflicts of interest that are associated with a recommendation.
As discussed above, 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 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.
The corresponding estimated total annual reporting costs and burdens are addressed below.
Standalone broker-dealers would satisfy the obligation to disclose capacity through the delivery to retail customers of the Relationship Summary, in accordance with the rules and guidance set forth in the Relationship Summary Proposal. Additionally, although we understand that many dual-registrants and standalone broker-dealers, as a matter of best practice, already disclose capacity and types and scope of services to retail customers, for purposes of this analysis, we are assuming that dual-registrants would create new account disclosure related to capacity and all broker-dealers would create account disclosure related to types and scope of services specifically for purposes of compliance with Regulation Best Interest. The Commission assumes that broker-dealers would provide the account disclosure to each retail customer account, regardless of whether the retail customer has multiple accounts with the broker-dealer.
While the Commission recognizes that the Disclosure Obligation applies to the broker-dealer entity and its registered representatives, we do not expect registered representatives to incur any initial or ongoing burdens with respect to the capacity, scope and terms of the relationship, as we assume for purposes of this analysis that this information would be addressed by the broker-dealer entity's account disclosure. With regard to disclosure of capacity, the Commission believes that dually-registered representatives of broker-dealers would incur initial and ongoing burdens. Following is a discussion of the estimated initial and ongoing burdens and costs.
We estimate that a dually-registered firm would incur an initial internal burden of 10 hours for in-house counsel and in-house compliance personnel
In addition, we estimate that dual-registrants would incur an estimated external cost of $4,720 for the assistance of outside counsel in the preparation and review of standardized language regarding capacity.
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
Given these assumptions, we estimate that a small broker-dealer would incur an internal initial burden of 10 hours for in-house counsel and in-house compliance personnel to draft this standardized language.
Given the broader array of products and services offered, we estimate that a large broker-dealer would incur an internal burden of 20 hours to draft this standardized language.
We estimate that all broker-dealers would each incur approximately 0.02 burden hour
We estimate a total initial aggregate burden for dually-registered, small and large broker-dealers to develop and deliver to retail customers account disclosures relating to capacity and type and scope of services of 1,956,620 burden hours.
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 dual-registrant'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.
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 in-house 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.
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 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.
With respect to delivery of the amended account agreements in the
The total ongoing aggregate burden for dually-registered, small and large broker-dealers to review, amend, and delivery updated account disclosures to reflect changes in capacity, types and scope of services would be 427,700 burden hours per year.
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.
The Commission assumes for purposes of this analysis that a broker-dealer would disclose its fees and charges through a standardized fee schedule, delivered to the retail customer at the inception of the relationship, or, for existing retail customers, prior to or at the time of a recommendation and, as discussed below, would amend such fee schedules in the event of material changes. Although we understand that many broker-dealers already provide fee schedules to retail customers, we are assuming for purposes of this analysis that a fee schedule would be created specifically for purposes of compliance with Regulation Best Interest. While the Commission recognizes that the fee disclosure included in Disclosure Obligation applies to the broker-dealer entity and its natural associated persons, we do not expect any burdens or costs on registered representatives related to the fees and charges as this information would be addressed in the broker-dealer entity's fee schedule.
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 one-time external cost of $2,360 for smaller broker-dealers
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.
The total aggregate initial burden for broker-dealers is therefore estimated at 405,360
For purposes of this PRA 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
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.
The Commission acknowledges that the type of fee schedule may vary greatly by broker-dealer, and therefore that the costs or burdens associated with updating the standardized fee schedule might similarly vary.
Regulation Best Interest would require broker-dealers to reasonably disclose all material conflicts that are associated with a recommendation. Because the Disclosure Obligation applies to both broker-dealers entity and registered representatives, the Commission expects that the broker-dealer entity and its registered representatives would incur initial and ongoing burdens. However, as with the disclosure of capacity and types and scope of services, we assume for purposes of this analysis that broker-dealers would incur the burdens and costs of disclosing material conflicts of interest on behalf of their registered representatives.
The Disclosure Obligation of proposed Regulation Best Interest would provide broker-dealers 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.
For purposes of this PRA analysis, we assume that a standardized conflict disclosure document would be developed by in-house counsel and reviewed by outside counsel. For small broker-dealers, 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.
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 broker-dealers 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.
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.
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.
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.
Under proposed Regulation Best Interest, prior to or at the time of making the recommendation, 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. However, any PRA burdens or costs associated with the Care Obligation are discussed below with respect to proposed Rule 17a-3(a)(25).
Records made and retained in accordance with the proposed amendments to Rule 17a-3(a)(25) and 17a-4(e)(5) would (1) assist a broker-dealer in supervising and assessing internal compliance with Regulation Best Interest; and (2) assist the Commission and SRO staff in connection with examinations and investigations.
The record-making and recordkeeping costs and burdens associated with the proposed amendments to Rule 17a-3(a)(25) and Rule 17a-4(e)(5) are addressed below.
Proposed Rule 17a-3(a)(25) would require a broker-dealer to make a record of all information collected from and provided to the retail customer pursuant to Proposed Regulation Best Interest. We understand that broker-dealers currently make records of relevant customer investment profile information, and we therefore assume that no additional record-making obligations would arise as a result of broker-dealers' or their registered representatives' collection of information from retail customers.
In addition, the proposed amendment to Rule 17a-3(a)(25) would require a broker-dealer, “for each retail customer to whom a recommendation of any securities transaction or investment strategy involving securities is or will be provided,” to make a record of the “identity of each natural person who is an associated person, if any, responsible for the account.” We understand that broker-dealers likely make such records in the ordinary course of their business pursuant to Exchange Act Rules 17a-3(a)(6) and (7). However, we are assuming, for purposes of compliance with proposed Rule 17a-3(a)(25), that broker-dealers would need to create a record, or modify an existing record, to identify the associated person, if any, responsible for the account in the context of proposed Regulation Best Interest.
We assume that broker-dealers would satisfy the record-making requirement of the proposed amendment to Rule 17a-3(a)(25) by amending an existing account disclosure document to include this information. We believe that the inclusion of this information in an account disclosure document would require, on average, approximately 1 hour per year for outside counsel at small broker-dealers, at an average rate of $472/hour, for an annual cost of $472 for each small broker-dealer to update an account disclosure document. The projected initial, aggregate cost for small broker-dealers would be $378,544.
We do not believe that the identity of the registered representative responsible for the retail customer's account would change. Accordingly, we believe that there are no ongoing costs and burdens associated with this record-making requirement of the proposed amendment to Rule 17a-3(a)(25).
For each record made pursuant to proposed Rule 17a-3(a)(25), the proposed amendment to Rule 17a-4(e)(5) would require broker-dealers to retain “all account record information required pursuant to [Regulation Best Interest] and all records required pursuant to [Regulation Best Interest], in each case until at least six years after the earlier of the date the account was closed or the date on which the information was collected, provided, replaced, or updated.” As discussed above, the following records would likely need to be retained pursuant to proposed Rule 17a-3(a)(25): (1) A standardized Relationship Summary document, developed in accordance with the rules and guidance contained in the Relationship Summary Proposal; (2) existing account disclosure documents; (3) a comprehensive fee schedule; and (4) disclosures identifying material conflicts.
We believe that, to reduce costs and for ease of compliance, broker-dealers would utilize their existing recordkeeping systems in order to retain the forgoing records made pursuant to Regulation Best Interest, and as required to be kept under the Proposed Amendment to Rule 17a-4(e)(5). As noted above, broker-dealers currently are subject to recordkeeping obligations pursuant to Rule 17a-4, which require, for example, broker-dealers to “preserve for a period of not less than six years, the first two years in an easily accessible place, all records required to be made pursuant to” Rule 17a-3(a)(1), (a)(2), (a)(3), (a)(5), (a)(21), (a)(22), and analogous records created pursuant to paragraph 17a-3(f). Thus, for example,
We believe that broker-dealers would leverage their existing recordkeeping systems to include any additional or amended records required by Regulation Best Interest or pursuant to Proposed Amendment to Rule 17a-4(e)(5), and would similarly leverage their existing recordkeeping systems to account for any differences in the retention period. Thus, where broker-dealers currently retain documents on an electronic database to satisfy existing Rule 17a-4 or otherwise, we would expect broker-dealers to maintain any additional documents required by Regulation Best Interest or Proposed Amendment to Rule 17a-4(e)(5) by the same means. Likewise, where broker-dealers maintain documents required by existing Rule 17a-4 by paper, we would expect broker-dealers to continue to do so.
Based on the assumption that broker-dealers will rely on existing infrastructures to satisfy the recordkeeping obligations of Regulation Best Interest and Proposed Amendment to Rule 17-a(4)(e)(5), we believe the burden for broker-dealers to add new documents or modify existing documents to the broker-dealer's existing retention system would be approximately 15.9 million burden hours for all broker-dealers, assuming a broker-dealer would need to upload or file each of the five account documents discussed above for each retail customer account.
We estimate that the approximate ongoing burden associated with the recordkeeping requirement of proposed amendment to Rule 17a-4(e)(5) is 3.17 million burden hours per year.
The collections of information relating to: (1) “Regulation Best Interest;” (2) the Proposed Amendment to Rule 17a-3—Records to be Made by Certain Exchange Members, Brokers and Dealers (OMB control number 3235-0033); and (3) the Proposed Amendment to Rule 17a-4—Records to be Preserved by Certain Brokers and Dealers (OMB control number 3235-0279) are mandatory for all broker-dealers.
With respect to written disclosure provided to the retail customer as required by Regulation Best Interest, such disclosure would not be kept confidential. Other information provided to the Commission in connection with staff examinations or investigations would be kept confidential, subject to the provisions of applicable law.
The Commission is using the above estimates for the purposes of calculating reporting burdens associated with Regulation Best Interest, the Proposed Amendment to Rule 17a-3 and the Proposed Amendment to Rule 17a-4. We request comment on our estimates for the new and recurring burdens and associated costs described above in connection with Regulation Best Interest. In addition to the request for comments made throughout this Section V, the Commission more generally seeks comment on its estimates as to: (1) The number of natural persons who are associated persons; (2) the number of broker-dealers that make securities-related recommendations to retail customers; (3) the number of natural persons who are associated persons that make securities-related recommendations to retail customers; and (4) any other costs or burdens associated with Regulation Best Interest that have not been identified in this release.
The Commission additionally invites comment on any other issues related to the costs and burdens associated with Regulation Best Interest. Pursuant to 44 U.S.C. 3506(c)(2)(B), we request comment in order to:
• Evaluate whether the proposed collection of information is necessary for the performance of our functions, including whether the information will have practical utility;
• evaluate the accuracy of our estimates of the burdens of the proposed collections of information;
• determine whether there are ways to enhance the quality, utility and clarity of the information to be collected; and
• evaluate whether there are ways to minimize the burden of the collection of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology.
Persons wishing to submit comments on the collection of information requirements of Regulation Best Interest should direct them to (1) the Office of Management and Budget, Attention: Desk Officer for the Securities and Exchange Commission, Office of FOIA Services, Washington, DC 20503; and (2) Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090, with reference to File No. S7-XX-XX. Requests for materials submitted to OMB by the Commission with regard to this collection of information should be in writing, with reference to File No. S7-XX-XX, and be submitted to the Securities and Exchange Commission, Office of Investor Education and Advocacy, 100 F Street NE, Washington, DC 20549-0213. OMB is required to make a decision concerning the collections of information between 30 and 60 days after publication, so a comment to OMB is best assured of having its full effect if OMB receives it within 30 days of publication.
For purposes of the Small Business Regulatory Enforcement Fairness Act of
• An annual effect on the economy of $100 million or more (either in the form of an increase or a decrease);
• a major increase in costs or prices for consumers or individual industries; or
• significant adverse effect on competition, investment or innovation. If a rule is “major,” its effectiveness will generally be delayed for 60 days pending Congressional review.
The Commission requests comment on the potential impact of Regulation Best Interest and the Proposed Amendment to Rule 17a-4(e)(5) on:
• The U.S. economy on an annual basis,
• Any potential increase in costs or prices for consumers or individual industries, and
• Any potential effect on competition, investment, or innovation.
Commenters are requested to provide empirical data and other factual support for their view to the extent possible.
The Regulatory Flexibility Act (“RFA”)
As discussed above in Section I, the Commission is proposing Regulation Best Interest to establish a standard of conduct for 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. While broker-dealers are subject to extensive existing obligations, there is no specific obligation under the Exchange Act that broker-dealers make recommendations that are in their customers' best interest. The Commission believes it is appropriate to make enhancements to the obligations that apply when broker-dealers make recommendations to retail customers.
The proposed standard of conduct is to act in the best interest of the retail customer at the time a 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. This obligation shall be satisfied if: The broker-dealer or a natural person who is an associated person of a broker-dealer, before or at the time of such recommendation reasonably discloses to the retail customer, in writing, the material facts relating to the scope and terms of the relationship, and all material conflicts of interest associated with the recommendation; the broker-dealer or a natural person who is an associated person of a broker-dealer, in making the recommendation, exercises reasonable diligence, care, skill, and prudence; the broker-dealer establishes, maintains, and enforces written policies and procedures reasonably designed to identify and at a minimum disclose, or eliminate, all material conflicts of interest that are associated with such recommendations; and the broker-dealer establishes, maintains, and enforces 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.
The Commission's objectives in proposing Regulation Best Interest are to: (1) Enhance the quality of recommendations provided by broker-dealers to retail customers, by establishing under the Exchange Act a “best interest” care obligation that encompasses and goes beyond existing broker-dealer suitability obligations under the federal securities laws and that cannot be satisfied through disclosure alone,
Furthermore, the proposed addition of paragraph (a)(25) to Rule 17a-3 would impose new record-making obligations on broker-dealers subject to Regulation Best Interest,
Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act Section 913(f), Public Law 111-203, 124 Stat. 1376, 1827 (2010), and Exchange Act sections 3, 10, 15, 17, 23 and 36 thereof, 15 U.S.C. 78c, 78j, 78o, 78q, 78w and 78mm, the Commission is
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 17a-5(d) under the Exchange Act,
As discussed in Section V,
The RFA requires a description of the projected reporting, recordkeeping, and other compliance requirements of proposed Regulation Best Interest and the proposed rule and rule amendments to Rules 17a-3(a)(25) and 17a-4(e)(5), including an estimate of the classes of small entities that will be subject to the requirements and the type of professional skill necessary to prepare required reports and records. Following is a discussion of the associated costs and burdens of compliance with proposed Regulation Best Interest, as incurred by small entities.
As described more fully above in Section V.D.1., the Conflict of Interest Obligations would generally include the obligation to: (1) Update written policies and procedures to comply with Regulation Best Interest; (2) identify material conflicts of interest; and (3) develop a training program to maintain and enforce the policies and procedures that promote compliance with Regulation Best Interest.
To initially comply with this obligation, we believe that small entities would primarily rely on outside counsel to update existing policies and procedures. We believe that the initial costs associated with this for small entities would be $18,880 per small entity (reflecting an estimated 40 hours of outside legal counsel services), and an aggregate cost of $15.1 million for all small entities.
To identify whether a material conflict of interest exists in connection with a recommendation, a small entity would need to establish mechanisms to proactively and systematically identify conflicts of interest in its business on an ongoing or periodic basis.
We additionally believe that the determination whether the conflicts of interest, once identified, are material, would require approximately five hours per small entity,
To maintain compliance with Regulation Best Interest, we expect that a broker-dealer should seek to identify additional conflicts as its business evolves. We estimate that a small entity's business line and compliance personnel would jointly spend, on average, 10 hours
Proposed Regulation Best Interest would also require a small entity to maintain and enforce its written policies and procedures. Toward this end, we expect small entities to develop training programs that promote compliance with Regulation Best Interest among registered representatives. We assume that small entities would likely use a computerized training module to train registered representatives. We estimate that a small entity 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.
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.
In addition, small entities would incur an initial start-up cost for registered representatives to undergo training through the training module. We estimate the training time at one hour per registered representative, for a total aggregate burden of 4,236 burden hours.
We assume that small entities 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 4,236 burden hours per year.
Pursuant to the Disclosure Obligations of proposed Regulation Best Interest, a small entity would need 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 (including, at a minimum, disclosure of capacity, fees and charges, and types and scope of services); and (2) reasonably disclose to the retail customer, in writing, all material conflicts of interest that are associated with the recommendation. The estimated costs and burdens incurred by small entities in relation to these Disclosure Obligations are discussed in detail below.
We estimate that dually-registered small entities would incur an initial internal burden of ten hours for in-house counsel and in-house compliance personnel to draft language regarding capacity for inclusion in the standardized account disclosure that is delivered to the retail customer.
Similarly, we estimate that small entities would incur an initial burden of ten hours for in-house counsel and in-house compliance personnel to draft this standardized language.
We estimate that small entities would each incur approximately 0.02 burden hour for delivery of the account disclosure document.
On an ongoing basis, we estimate that small entities would review and amend the standardized language in the account disclosure, on average, once a year. Further, we assume that such amendments would likely be minimal.
We estimate that each dually-registered small entity would spend approximately five hours annually for compliance and business line personnel to review changes in its capacity and types and scope of services offered, and another two hours annually for in-house counsel to amend the account disclosure to disclose material changes to the broker-dealer's capacity and types and scope of services offered, for a total of seven hours. The estimated ongoing aggregate burden would therefore 287 hours for small entity dual-registrants capacity.
With respect to small entity standalone broker-dealers, we estimate they would spend two for in-house compliance and business personnel to review and update changes in capacity or the types or scope of services offered, and we estimate another two hours annually for in-house counsel to amend the account disclosure to disclose material changes to capacity or the types or scope of services for small entities—for a total of four hours. The estimated ongoing aggregate burden would therefore be 3,208 hours for small
With respect to delivery of the amended account agreements in the event of material changes to the capacity disclosure or disclosure related to type and scope of services, we estimate that this would take place among 20% of a small entity's retail customer accounts annually. We therefore estimate that small entities would incur an aggregate burden of 313.8 hours,
As stated above, we believe that small entities would initially spend five hours to internally create a new fee schedule in consideration of the requirements of Regulation Best Interest. We additionally estimate a one-time external cost of $2,360 for small entities for outside counsel to review the fee schedule.
Similar to delivery of the account disclosure document related to capacity and types and scope of services, we estimate the burden for small entities 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 hour to deliver to each retail customer.
We also assume that small entities would review and amend the fee schedule, on average, once a year. We estimate that each small entity would require approximately two hours per year to review and update the fee schedule. Based on this estimate, we project the recurring, aggregate, annualized burden to be approximately 1,604 hours for small entities.
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 small entity's retail customer accounts annually. We therefore estimate that small entities would incur a total annual aggregate burden of 62.76 hours, or 0.07 hour per small entity.
For purposes of this analysis, we assume that small entities would use in-house counsel and outside counsel to develop a standardized conflict disclosure a document for delivery to retail customers. We estimate it would take in-house counsel for small entities, on average, 5 burden hours to create the standardized disclosure document, and that outside counsel would require 5 hours to review and revise the standardized disclosure document. The initial aggregate burden for the development of a standardized disclosure document, based on an estimated 802 small entities, would be approximately 4,010 burden hours.
We assume that small entities would initially 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 small entities would require approximately 0.02 hours to deliver the standardized conflict disclosure document to each retail customer.
On an ongoing basis, we believe that small entities would incur burdens and costs to update the standardized conflict disclosure document to include newly identified conflicts annually. We assume small entities would rely on in-house counsel and in-house compliance personnel to update the disclosure document. We do not anticipate that small entities would incur outside legal, compliance, or consulting costs in connection with updating the disclosure document, since in-house personnel would presumably be more knowledgeable about material conflicts of interest.
We estimate that small entities would require approximately 1 hour per year, for a recurring, aggregate burden of approximately 802 hours per year
With respect to the ongoing costs and burdens of delivering the amended conflict disclosure document, we estimate that this would take place among 40% of a small entity's retail customer accounts annually.
As discussed above in Section V.B.3., we believe that the obligation to exercise reasonable diligence, care, skill and prudence in making a
Small entities' record-making and recordkeeping costs and burdens associated with the proposed amendments to Rule 17a-3(a)(25) and Rule 17a-4(e)(5) are addressed below.
Proposed Rule 17a-3(a)(25) would require a broker-dealer (including small entities) to make a record of all information collected from and provided to the retail customer pursuant to Proposed Regulation Best Interest. We understand that small entities currently make records of relevant customer investment profile information, and we therefore assume that no additional record-making obligations would arise as a result of small entities' collection of information from retail customers.
In addition, the proposed amendment to Rule 17a-3(a)(25) would require a small entity, “for each retail customer to whom a recommendation of any securities transaction or investment strategy involving securities is or will be provided,” to make a record of the “identity of each natural person who is an associated person, if any, responsible for the account.” We understand that small entities likely make such records in the ordinary course of their business pursuant to Exchange Act Rules 17a-3(a)(6) and (7). However, we are assuming, for purposes of compliance with proposed Rule 17a-3(a)(25), that broker-dealers would need to create a record, or modify an existing record, to identify the associated person, if any, responsible for the account in the context of proposed Regulation Best Interest.
We believe that small entities would satisfy the record-making requirement of the proposed amendment to Rule 17a-3(a)(25) by amending an existing account disclosure document to include this information. We believe that the inclusion of this information in the account disclosure document would require, on average, approximately 1 hour per year for outside counsel at small entities, at an average rate of $472/hour, for an annual cost of $472 for each small entity. The projected initial aggregate cost for small entities would be $378,544.
We do not believe that the identity of the associated person responsible for the retail customer's account would change. Accordingly, there are no ongoing costs and burdens associated with this record-making requirement of the proposed amendment to Rule 17a-3(a)(25).
As described in more detail in Section V.B.4., the following records would likely need to be retained for “six years after the earlier of the date the account was closed or the date on which the information was collected, provided, replaced, or updated” pursuant to proposed Rule 17a-3(a)(25): (1) A standardized Relationship Summary document, developed in accordance with the rules and guidance contained in the Relationship Summary Proposal; (2) account disclosure documents; (3) comprehensive fee schedule; and (4) disclosures identifying material conflicts.
We believe that small entities would utilize existing recordkeeping systems in order to retain the records made pursuant to Regulation Best Interest, as required under the Proposed Amendment to Rule 17a-4(e)(5). We believe the initial burden for small entities to add new documents or modified documents to their existing retention systems would be approximately 1,307.5 hours.
We estimate that the approximate ongoing burden associated with the proposed amendment to Rule 17a-4(e)(5) would be 261.5 burden hours per year for small entities.
An analysis under the RFA requires a federal agency to identify, to the extent practicable, all relevant federal rules that may duplicate, overlap or conflict with the proposed rule. As discussed above, the existing regulatory regime for broker-dealers includes the DOL Fiduciary Rule and related PTEs, in particular, the obligations that the BIC Exemption and the Principal Transactions Exemption would impose.
An RFA analysis requires a discussion of alternatives to the proposed rule that would minimize the impact on small entities while accomplishing the stated
The Commission preliminarily does not believe that exempting any subset of broker-dealers, including broker-dealers that are small entities, from proposed Regulation Best Interest and the proposed amendments to Rules 17a-3 and 17a-4(e)(5) would permit us to achieve our stated objectives. We also do not believe it would be desirable to establish different requirements applicable to broker-dealers of different sizes to account for resources available to small entities.
As discussed above, we believe that the proposal would result in multiple investor protection benefits, and these benefits should apply to retail customers of smaller entities as well as retail customers of large broker-dealers. For example, a primary objective of this proposal is to enhance the quality of recommendations provided by broker-dealers to retail customers, by establishing under the Exchange Act a “best interest” obligation. We do not believe that the interest of investors who are retail customers would be served by exempting broker-dealers that are small entities from proposed Regulation Best Interest and the proposed amendments to Rules 17a-3 and 17a-4(e)(5) or subjecting these broker-dealers to different requirements than larger broker-dealers.
Moreover, providing an exemption or different requirements for small entities would be inconsistent with our goal of facilitating more consistent regulation, in recognition of the importance for both investors and broker-dealers of having the applicable standards for brokerage recommendations be clear, understandable, and as consistent as possible across a brokerage relationship (
For the same reasons, we do not believe that the clarification, consolidation, or simplification of compliance and reporting requirements would be appropriate for small entities. We note, however, in crafting proposed Regulation Best Interest, we generally aimed to provide broker-dealers flexibility in determining how to satisfy the component obligations. For example, under proposed Regulation Best Interest, broker-dealers would have the flexibility to establish systems that are tailored to their business models, and to focus on specific areas of their business that pose the greatest risk of violating the Conflict of Interest Obligations. For instance, small entities without conflicting business interests would require much simpler policies and procedures than large broker-dealers that, for example, have multiple potential conflicts as a result of their other lines of business or their affiliations with other financial service firms.
The Commission also considered a number of potential regulatory alternatives to proposed Regulation Best Interest, including: (1) A disclosure-only alternative; (2) a principles-based standard of conduct obligation; (3) a fiduciary standard for broker-dealers; and (4) an enhanced standard akin to conditions of the BIC Exemption. For a more detailed discussion of these regulatory alternatives, see Section IV.E.,
As an alternative, the Commission could have only the Disclosure Obligation, whereby broker-dealers would be obligated to disclose all material facts and conflicts.
For a number of reasons, the Commission preliminarily believes that a rule that only required the disclosure of conflicts of interest would be less effective than the proposed rule because broker-dealers (including small entities) would not be required to act in the best interest of their customers when making recommendations, including by complying with the specific components of the Care Obligation and mitigating material conflicts of interest arising from financial incentives, and it would therefore be less effective at providing retail customer protection and reducing potential investor harm than proposed Regulation Best Interest.
As an alternative, the Commission could rely on a principles-based standard of conduct, which could be developed by each broker-dealer based on their business model without directly requiring conduct standards.
For the reasons described in this Section VI. above and in Section IV.E., the Commission preliminarily believes that any regulatory approach should provide a clear understanding of what a best interest standard would entail to a level set across broker-dealers and that a principles-based standard of conduct approach only, would be less effective from a retail customer protection standpoint than proposed Regulation Best Interest.
The Commission could alternatively propose a fiduciary standard coupled with a series of disclosure and other requirements akin to the full complement of conditions of the DOL's BIC Exemption, which would apply to broker-dealers (including small entities) when making investment recommendations to all types of retail accounts rather than only in connection with services to retirement accounts.
We recognize that there could be reduced economic effects for broker-dealers (including small entities) that may already have established infrastructure for purposes of the DOL's BIC Exemption. However, an alternative that would impose upon broker-dealers a fiduciary standard coupled with a set of requirements akin to the BIC Exemption conditions could drive up costs to retail customers of obtaining investment advice from broker-dealers, and could cause some retail customers to forgo advisory services through broker-dealers if they were priced out of the market.
As a result, and for a number of other reasons described above, the Commission preliminarily believes that requiring broker-dealers to comply with a fiduciary standard coupled with a set of requirements akin to the full complement of conditions under the BIC Exemption could impose costs to broker-dealers (including small entities) and impact retail customers and the market for investment advice, and would not be entirely consistent with the regulatory approach of the Commission.
For the foregoing reasons, the Commission preliminarily believes that Regulation Best Interest might have a significant economic impact on a substantial number of small entities for purposes of the RFA. The Commission encourages written comments regarding this initial regulatory flexibility analysis. The Commission specifically solicits comment on the number of small entities that may be affected by Regulation Best Interest, and whether Regulation Best Interest would have an effect on small entities that has not been considered. The Commission requests that commenters describe the nature of any impact on small entities and provide empirical data to support the extent of such impact. We also request comment on the proposed compliance burdens and the effects these burdens would have on smaller entities.
Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act Section 913(f), Public Law 111-203, 124 Stat. 1376, 1827 (2010), and Exchange Act sections 3, 10, 15, 17, 23 and 36 thereof, 15 U.S.C. 78c, 78j, 78o, 78q, 78w and 78mm, the Commission is proposing to adopt § 240.15
Brokers, Reporting and recordkeeping requirements, Securities.
In accordance with the foregoing, Title 17, Chapter II of the Code of Federal Regulations is proposed to be amended as follows:
15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201
Section 240.15
(a)
(2) The best interest obligation in paragraph (a)(1) shall be satisfied if:
(i)
(ii)
(A) Understand the potential risks and rewards associated with the recommendation, and have a reasonable basis to believe that the recommendation could be in the best interest of at least some retail customers;
(B) Have a reasonable basis to believe that the recommendation is in the best interest of a particular retail customer based on that retail customer's investment profile and the potential risks and rewards associated with the recommendation; and
(C) Have a reasonable basis to believe that a series of recommended transactions, even if in the retail
(iii)
(A) The broker or dealer establishes, maintains, and enforces written policies and procedures reasonably designed to identify and at a minimum disclose, or eliminate, all material conflicts of interest that are associated with such recommendations.
(B) The broker or dealer establishes, maintains, and enforces 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.
(b)
(1)
(B) Uses the recommendation primarily for personal, family, or household purposes.
(2)
(a) * * *
(25) For each retail customer to whom a recommendation of any securities transaction or investment strategy involving securities is or will be provided:
(i) A record of all information collected from and provided to the retail customer pursuant to § 240.15
(ii) For purposes of this paragraph (a)(25), the neglect, refusal, or inability of the retail customer to provide or update any information required under paragraph (a)(25)(i) of this section shall excuse the broker, dealer, or associated person from obtaining that required information.
(e) * * *
(5) All account record information required pursuant to § 240.17a-3(a)(17) and all records required pursuant to § 240.17a-3(a)(25), in each case until at least six years after the earlier of the date the account was closed or the date on which the information was collected, provided, replaced, or updated.
By the Commission.
Office of the Secretary (OST), U.S. Department of Transportation (DOT).
Notice of Proposed Rulemaking (NPRM).
The Department is proposing to amend various provisions regarding its aviation economic regulations to eliminate any further remaining obsolete provisions and correct outdated statutory references. This rulemaking aligns with the Department's retrospective regulatory review initiatives to modify, streamline, or repeal regulations that are obsolete or out-of-date.
Comments must be received on or before July 9, 2018. Comments received after this date will be considered to the extent practicable.
You may file comments identified by docket number DOT-OST-2014-0140 by any of the following methods:
•
•
•
•
Jill Laptosky or Jennifer Abdul-Wali, Office of Regulation, U.S. Department of Transportation, 1200 New Jersey Avenue SE, Washington, DC 20590; (202) 366-4723; fax: (202) 366-9313; email:
In 1994, the Federal Aviation Act was revised and codified within Subtitle VII of Title 49 of the United States Code (Pub. L. 103-272, July 5, 1994). Since the codification, the Department has made numerous amendments to make the CFR consistent with the provisions of the current statute (49 U.S.C., Subtitle VII). Some provisions, however, remained unchanged, due in part to the complexity of certain issues, such as antitrust immunity, agreements, and waivers. This rule proposes to update the economic regulations by modifying language to reflect current statutory provisions related to these remaining issues. The proposed language is not intended to diminish any existing Civil Aeronautics Board (CAB) provisions or precedent still in effect. Thus, the Department is seeking comment on whether any of the references to CAB or other referenced terms, which are proposed for removal in this rulemaking, are still relevant and, therefore, should be retained for precedential or other useful purposes. We are also seeking comment on whether additional proposed changes and updates to the Aviation Economic Rules (14 CFR parts 200 through 399) should be adopted.
More specifically, this rule proposes updating the regulatory language throughout 14 CFR parts 200-399 in the following ways: (1) Where references to the CAB are no longer relevant, replacing the term “Board” or “CAB”, where appropriate, with “Department”, “DOT” or “Predecessor”; (2) removing citations to the “Federal Aviation Act” or “Act” and adding citations to the appropriate sections of Title 49 of the United States Code; (3) inserting current names of forms in place of outdated references to CAB forms; (4) adding up-to-date titles for offices within the Department; and (5) updating the authority citations, where needed.
Additional changes are as follows:
Part 204 describes the data the Department uses to support carrier fitness determinations. Section 204.4 discusses carrier obligations for proposing to provide essential air service. The section is no longer in use and is obsolete. As such, the section would be removed in its entirety.
Parts 207 and 208 address U.S. scheduled and charter air carrier requirements with respect to charter trips. Both parts refer to 14 CFR part 212 in describing carrier obligations on charter air transportation and contain no independent obligations of their own. As such, the parts are obsolete and would be removed.
Part 221 describes carrier obligations with respect to tariffs. This rule proposes to revise part 221 by broadening the language used to refer to international treaties. The current regulation refers to the Warsaw Convention, which is no longer the relevant international treaty applicable to travelers on many itineraries. The rule would update and simplify existing passenger notification requirements and consolidate such requirements into a single section. Specifically, the rule would consolidate separate notice requirements for liability from death or injury and liability from damage to baggage into a single notice requirement that better reflects the current international landscape, including references to the 1999 Montreal Convention, which governs many international itineraries originating or terminating in the United States. As of 2017, a carrier's liability could be limited under the 1999 Montreal Convention to 113,100 Special Drawing Rights (SDR) for damages from death or injury, 4,694 SDR for damages caused by the delay of passengers, and 1,131 SDR for damages resulting from the destruction, loss, damage, or delay of baggage. The proposed rule would also remove + references to agreements approved by CAB order. Carriers will be provided until December 31, 2019, to comply with the signage requirements of this part.
Part 223 sets forth rules regarding free and reduced-rate transportation. This
Part 232 established procedures for a party aggrieved by an order of the Postmaster General to request a review by DOT. In 2008, amendments to 49 U.S.C. 41902 removed from the statute the authority for the Secretary of Transportation to amend, modify, suspend, or cancel an order of the Postal Service (Pub. L. 110-405, Jan. 4, 2008). Accordingly, the statutory basis for Part 232 regulations no longer exists and Part 232 would be removed.
Part 234 describes the requirements for filing airline service quality performance reports. The existing citation of authorities for this part contains an error. This rule corrects the error.
Part 241 describes a uniform system of accounts and reports for large carriers. This rule proposes to remove section 01 of part 241. The section restates outdated statutory text and may lead to confusion if retained.
Part 272 established essential air service procedures for the Freely Associated States comprising the Federated States of Micronesia (Ponape, Truk and Yap), the Marshall Islands (Majuro and Kwajalein), and Koror in Palau. The procedures include requirements for airlines to file notice before suspending service, an obligation to continue to provide service when subsidy is available, and carrier-selection criteria. Section 272.12 states, “These provisions shall terminate on October 1, 1998, unless the essential air service program to the Federated States of Micronesia, the Marshall Islands and Palau is specifically extended by Congress.” Congress did not extend the program (Pub. L. 101-219, Sec. 110(b), (Dec.12,1989)). Thus, the statutory basis for the regulation no longer exists and part 272 would be removed.
Part 300 sets forth the rules of conduct in DOT proceedings involving aviation economic and enforcement matters. Many of these rules set forth standards of ethical conduct applicable to DOT employees with respect to aviation economic matters. DOT employees are also subject to the ethics requirements of 49 CFR 99.735-1. In order to reduce the duplicative nature of both sets of ethics requirements and to minimize the potential for confusion over such requirements, several sections of part 300 would be removed under this rule. The resulting regulations will ensure consistent ethical standards across all employees of the agency.
Part 302 sets forth the Rules of Practice in Proceedings before the DOT. Part 305 describes the Rules of Practice for Informal Nonpublic Investigations undertaken by the Office of Aviation Enforcement and Proceedings. Part 385 sets forth the authorities and functions of various DOT officials. On August 17, 2012, the Department issued an extensive revision to 49 CFR part 1 (Organization and Delegation of Powers and Duties) [77 FR 49965]. The Department proposes to revise parts 302, 305, and 385 to reflect the changes set forth in the revision to part 1.
Part 330 established procedures implementing the airline compensation section of the Air Transportation Safety and System Stabilization Act, which was enacted following the terrorist attacks of September 11, 2001, Public Law 107-42, (Sept. 22, 2001) (the Stabilization Act). Section 103 of the Stabilization Act appropriated up to $5 billion, to be administered by the Department of Transportation, to compensate air carriers for losses they incurred due to the attacks. Part 330 set out carrier eligibility criteria; forms for applying for the compensation payments; details on types of losses that would and would not be eligible for compensation; audit procedures; and details on a set-aside program for certain air taxis, commuter carriers, and other small carriers. Of the 427 applications processed, 407 applicants were deemed eligible under part 330. These carriers received payments in a total amount of $4.6 billion. All eligible appropriations have been completed and payments have now been processed and paid, and all functions and responsibilities under this section have been fulfilled. As a result, part 330 serves no further purpose and would be removed.
Part 374 specifies the Department's responsibility for enforcing air carrier and foreign air carrier compliance with the applicable requirements of the Consumer Credit Protection Act. This rule proposes revising part 374 by updating the language in § 374.3 regarding references to Regulation B, 12 CFR part 202, and Regulation Z, 12 CFR part 226. Enforcement responsibility for parts 202 and 226 has been divided and reassigned among Federal government agencies. Accordingly, the language in § 374.3 will be revised to reference the current applicable regulations, 12 CFR part 1026.
Part 380 is applicable to public charter air transportation in interstate or foreign air transportation. This rule proposes revising part 380 by updating Appendix A and B. part 380 sets forth the Department's rules governing Public Charter air transportation of passengers whether furnished by direct air carriers or Public Charter Operators. Appendix A and B to part 380, respectively, contain the format for the Public Charter Operator's Surety Bond and the Public Charter Surety Trust Agreement. Since the existing Appendix A and B to part 380 were published in 1998, various changes have been made to both documents. Therefore, Appendix A and B would be updated to provide the most current format for the Public Charter Operator's Surety Bond and the Public Charter Surety Trust Agreement.
In part 385, the Secretary of Transportation delegates certain continuing assignments of authority to Secretarial Officers regarding the Department's functions of issuing orders or other determinations pursuant to 49 U.S.C. 322 and 49 CFR part 1. The Secretary has determined that several of the items currently prepared for decision at the Assistant Secretary level could be handled more efficiently at the Office Director level, thereby providing more time for the Assistant Secretary and immediate secretarial staff to concentrate on controversial and policy-sensitive issues. This action would ensure that routine items are processed in a much more timely and efficient manner. Thus, this rulemaking proposes to amend sections 385.12 and 385.13 to reflect the expanded assignments of authority to the Director of the Office of Aviation Analysis and the Director of the Office of International Aviation, both in the Office of the Assistant Secretary for Aviation and International Affairs.
Section 385.12 defines the authority of the Director of the Office of Aviation Analysis. This rule proposes to authorize the Director to issue Essential Air Service (EAS) Requests for Proposals and certain final EAS selection orders. This expanded delegation alone would relieve the Assistant Secretary for Aviation and International Affairs of reviewing nearly sixty orders per year, saving over three hundred (300) hours of senior management time and approximately one hundred twenty (120) hours of staff
Section 385.13 defines the authority of the Director of the Office of International Aviation. This rule proposes to amend subsection (a) of section 385.13 to grant the Director the authority to issue final orders on uncontested tariff exemptions. This rulemaking also proposes to amend subsection (b) to authorize the Director to issue final orders on uncontested applications for U.S. carrier certificate and foreign air carrier permit authority. Further, this action proposes to add two new subsections regarding fares and tariffs and amend subsection 385.13(r)(1) to give the Director the authority to exempt IATA
Sections 385.14 and 385.15 define the authority of the General Counsel and Deputy General Counsel, respectively. Consistent with the delegation of duties assigned in 49 CFR part 1, as revised on August 16, 2012, by 77 FR 49964, the Secretary has assigned several duties to the General Counsel. Sections 385.14 and 385.15 would be revised to reflect this assignment of duties. This rule would remove section 385.15 and transfer its functions to section 385.14.
Part 389 describes fees and charges for special services. This rule proposes to amend part 389 by (1) removing references to organizations and position titles that no longer exist and replacing them with references to appropriate organizations and positions, (2) correcting the filing fees charged for special services to reflect a recent rulemaking action, (3) allowing for payment of filing fees using the internet, and (4) revising the descriptions of licenses for which the Department charges filing fees.
Part 398 establishes guidelines for the determination of basic essential air service. The Department proposes to amend part 398 by removing an outdated provision for funding reductions in § 398.11. Section 398.11 was superseded by Public Law 106-69, Title III, § 332, October 9, 1999, 113 Stat. 1022.
Part 399, subpart C sets forth the Department's policies related to rates and tariffs. This rulemaking action proposes removing fourteen sections from this subpart (§§ 399.30, 399.31, 399.32, 399.33, 399.34, 399.37, 399.40, 399.41, 399.42, 399.43, 399.44, 399.63, 399.101, and 399.111). These sections are obsolete because of the Airline Deregulation Act of 1978 and the Civil Aeronautics Board Sunset Act of 1984.
This NPRM is not a significant regulatory action under Executive Order 12866 and the Department's Regulatory Policies and Procedures. Its provisions involve technical amendments to update statutory references and to update the titles and addresses of offices. The rule also proposes to remove certain appendices, sections, and forms that are no longer relevant. This rule does not propose any major policy changes or impose significant new costs or burdens.
This proposed rule is not expected to be an E.O. 13771 regulatory action because this proposed rule is not significant under E.O. 12866.
Pursuant to section 605 of the Regulatory Flexibility Act (RFA), 5 U.S.C. 605(b), as amended by the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA), I hereby certify that this rulemaking would not have a significant impact on a substantial number of small entities. The NPRM would impose no duties or obligations on small entities.
A rule has implications for federalism under Executive Order 13132, Federalism, if it has a substantial direct effect on State or local governments and would either preempt State law or impose a substantial direct cost of compliance on them. We have analyzed this NPRM in accordance with the principles and criteria contained in the Order and have determined that it does not have implications for federalism, since it merely makes technical amendments to the existing regulations. This NPRM does not have a substantial direct effect on, or sufficient federalism implications for, the States, nor would it limit the policymaking discretion of the States.
This NPRM has been analyzed in accordance with the principles and criteria contained in Executive Order 13175 (“Consultation and Coordination with Indian Tribal Governments”). Because this NPRM does not significantly or uniquely affect the communities of the Indian tribal governments or impose substantial direct compliance costs on them, the funding and consultation requirements of Executive Order 13175 do not apply.
The Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501
The agency has analyzed the environmental impacts of this proposed action pursuant to the National Environmental Policy Act of 1969 (NEPA) (42 U.S.C. 4321
Air transportation.
Air carriers, Reporting and recordkeeping requirements.
Air carriers, Air transportation, Foreign relations, Insurance, Reporting and recordkeeping requirements.
Air carriers, Reporting and recordkeeping requirements.
Air carriers, Freight, Insurance, Reporting and recordkeeping requirements.
Air carriers, Charter flights.
Air carriers, Charter flights.
Administrative practice and procedure, Air carriers, Pacific Islands Trust Territory, Reporting and recordkeeping requirements.
Charter flights, Confidential business information, Reporting and recordkeeping requirements, Surety bonds.
Air carriers, Charter flights.
Air carriers, Reporting and recordkeeping requirements, Trade names.
Air carriers.
Air carriers, Reporting and recordkeeping requirements.
Air carriers, Aircraft, Airmen.
Air rates and fares, Freight, Reporting and recordkeeping requirements.
Air carriers, Freight, Intermodal transportation, Reporting and recordkeeping requirements.
Air rates and fares, Government employees, Reporting and recordkeeping requirements.
Administrative practice and procedure, Air carriers, Postal Service.
Air carriers, Consumer protection, Reporting and recordkeeping requirements.
Air carriers, Uniform System of Accounts.
Air carriers, Reporting and recordkeeping requirements, Uniform System of Accounts.
Air carriers, Aircraft, Charter flights, Reporting and recordkeeping requirements.
Air carriers, Airports.
Air carriers, Reporting and recordkeeping requirements, Uniform System of Accounts.
Air carriers, Reporting and recordkeeping requirements, Truth in lending, Uniform System of Accounts.
Air carriers, Consumer protection.
Air carriers, Air rates and fares, Consumer protection, Reporting and recordkeeping requirements.
Air carriers, Consumer protection, Reporting and recordkeeping requirements.
Air carriers, Grant programs—transportation.
Air carriers, Grant programs—transportation, Pacific Islands Trust Territory.
Administrative practice and procedure, Air carriers, Freight, Reporting and recordkeeping requirements.
Air taxis, Canada, Charter flights, Reporting and recordkeeping requirements.
Air carriers, Freight forwarders, Research.
Air carriers, Freight forwarders.
Air taxis, Reporting and recordkeeping requirements.
Administrative practice and procedure, Conflict of interests.
Administrative practice and procedure, Air carriers, Airports, Postal Service.
Administrative practice and procedure, Air carriers, Antitrust, Reporting and recordkeeping requirements.
Administrative practice and procedure, Air carriers, Investigations.
Administrative practice and procedure, Air carriers, Reporting and recordkeeping requirements
Administrative practice and procedure, Air transportation, Intergovernmental relations, Reporting and recordkeeping requirements.
Administrative practice and procedure, Air carriers, Grant programs—transportation, Reporting and recordkeeping requirements.
Charter flights, Military air transportation, Reporting and recordkeeping requirements, Surety bonds.
Air carriers, Consumer protection, Credit.
Air carriers, Credit, Political candidates, Reporting and recordkeeping requirements.
Administrative practice and procedure, Aircraft, Foreign relations, Reporting and recordkeeping requirements.
Administrative practice and procedure, Air carriers.
Charter flights, Reporting and recordkeeping requirements, Surety bonds.
Organization and functions (Government agencies).
Administrative practice and procedure, Reporting and recordkeeping requirements.
Air transportation.
Administrative practice and procedure, Air carriers, Air rates and fares, Air taxis, Consumer protection, Small businesses.
In consideration of the foregoing, and under the authority of 49 U.S.C. 322, the Department proposes to amend Title 14, Chapter II of the Code of Federal Regulations as follows:
49 U.S.C. Chapters 401, 411, 413, 415, 417, and 461.
Unless otherwise specifically stated, words and phrases other than those listed in this section have the meaning defined in 49 U.S.C. Subtitle VII.
(a)
(b)
(c)
(d)
(e)
(f)
(g)
5 U.S.C. 1008; 49 U.S.C. Chapters 401, 411, 413, 415, and 417.
49 U.S.C. Chapters 401, 411, 413, 415, and 417.
All direct U.S. and foreign air carriers shall have and maintain in effect and on file in the Department's Docket Operations Office (DOT-OST-1995-236) on OST Form 4523 a signed counterpart to Agreement 18900, an agreement relating to liability limitations of the Warsaw Convention and Hague Protocol, (the Montreal Agreement), dated May 13, 1966, and/or a signed counterpart of any amendment or replacement to such Agreement that may be approved by the Department and to which the air carrier or foreign air carrier becomes a party. U.S. air taxi operators registering under part 298 of this chapter and Canadian charter air taxi operators registering under part 294 of this chapter may comply with this requirement by filing completed OST Forms 4507 and 4523, respectively, in accordance with the provisions of those parts.
49 U.S.C. Chapters 401, 411, and 417.
(b)
(e)
49 U.S.C. Chapters 401, 411, 413, and 417.
(b) * * *
(2) Liability assumed by the carrier under an agreement to raise the liability limitations of the Warsaw Convention by signing a counterpart to an agreement of carriers (such as the Montreal Agreement, 18900, signed May 13, 1966, agreeing to a limit on the carrier's liability for injury or death of passengers of $75,000 per passenger), or any amendment to such agreement that may be approved by the Department and to which the carrier becomes a party.
49 U.S.C. 40101, 40102, 41101, 41301, and 41703.
49 U.S.C. 40101, 40102, 40109, 40113, 41101, 41103, 41702, 41708, 41712, and 46101.
49 U.S.C. 40101, 40102, 40109, 40113, 41504, 41708, 41712, and 46101.
49 U.S.C. Chapters 401, 411, 413, 417.
This part applies to all certificated air carriers, commuter air carriers, and foreign direct air carriers and to initial and amended applications for authority, applications for certificate or permit transfers or reissuances, and registration of business names.
49 U.S.C. Chapters 401, 413, and 417.
49 U.S.C. 329, 41102, 41301, 41708, and 41709.
49 U.S.C. 40113, and 41301.
49 U.S.C. 40101, 40109, 40113, 46101, 46102, chapter 411, chapter 413, chapter 415 and chapter 417, subchapter I.
(a)(1) In addition to the other requirements of this subpart, each air carrier and foreign air carrier which, to any extent, avails itself of the limitation on liability to passengers provided by an international treaty, shall, at the time of delivery of the ticket, furnish to each passenger whose transportation is governed by the international treaty and whose place of departure or place of destination is in the United States, the following statement in writing:
Passengers embarking upon a journey involving an ultimate destination or a stop in a country other than the country of departure are advised that the provisions of an international treaty (the Warsaw Convention, the 1999 Montreal Convention, or other treaty), as well as a carrier's own contract of carriage or tariff provisions, may be applicable to their entire journey, including any portion entirely within the countries of departure and destination. The applicable treaty governs and may limit the liability of carriers to passengers for death or personal injury, destruction or loss of, or damage to, baggage, and for delay of passengers and baggage.
Additional protection can usually be obtained by purchasing insurance from a private company. Such insurance is not affected by any limitation of the carrier's liability under an international treaty. For further information please consult your airline or insurance company representative.
(2) The statement prescribed herein shall be printed or displayed in type at least as large as 10-point modern type and in ink contrasting with the stock on:
(i) Each ticket, including electronic tickets;
(ii) A piece of paper either placed in the ticket envelope with the ticket or attached to the ticket; or
(iii) The ticket envelope.
(3) When a carrier is a signatory of a Department-approved intercarrier agreement implementing an international treaty, and such agreement contains specific text a carrier may use as a notice to international passengers regarding carrier liability, the carrier may substitute the exact text contained in the intercarrier agreement in lieu of the required text of the notice quoted in paragraph (a)(1) of this section.
(b) By December 31, 2019, each air carrier and foreign air carrier which, to any extent, avails itself of the limitation on liability to passengers provided by an international treaty, shall also cause to be displayed continuously in a conspicuous public place at each desk, station, and position in the United States which is in the charge of a person employed exclusively by it or by it jointly with another person, or by any agent employed by such air carrier or foreign air carrier to sell tickets to passengers whose transportation may be governed by an international treaty and whose place of departure or destination may be in the United States, a sign which shall have printed thereon the statement prescribed in paragraph (a)(1) of this section.
(c) It shall be the responsibility of each carrier to insure that travel agents authorized to sell air transportation for such carrier comply with the notice provisions of paragraphs (a) and (b) of this section.
(d) Any air carrier or foreign air carrier subject to the provisions of this section which wishes to use a notice of limited liability of its own wording, but containing the substance of the language prescribed in paragraphs (a) and (b) of this section, may substitute a notice of its own wording upon approval by the Department.
(e) The requirements as to time and method of delivery of the notice (including the size of type) specified in paragraphs (a) and (b) of this section and the requirement with respect to travel agents specified in paragraph (c) of this section may be waived by the Department upon application and showing by the carrier that special and unusual circumstances render the enforcement of the regulations impractical and unduly burdensome and that adequate alternative means of giving notice are employed.
(f) Applications for relief under paragraphs (d) and (e) of this section shall be filed with the Department's Office of International Aviation not later than 15 days before the date on which such relief is requested to become effective.
(g) Notwithstanding any other provisions of this section, no air taxi operator subject to part 298 of this subchapter shall be required to give the notices prescribed in this section, either in its capacity as an air carrier or in its capacity as an agent for an air carrier or foreign air carrier.
49 U.S.C. 40113 and 41301.
(a) Application for a Statement of Authorization shall be filed with the Department's Foreign Air Carrier Licensing Division, Office of International Aviation, in duplicate, on OST Form 4500. In most cases, the Department will act upon applications for Statements of Authorization within 60 days.
(b) Persons objecting to an application for a Statement of Authorization shall file their objections with the Foreign Air Carrier Licensing Division, Office of International Aviation, within 28 days
49 U.S.C. 40113, 40114, and 41711.
As used in this part, unless the context otherwise requires:
An
(a) Who controls that carrier, or is controlled by that carrier or by another person who controls or is controlled by that carrier; and
(b) Whose principal business in purpose or in fact is:
(1) The holding of stock in one or more carriers;
(2) Transportation by air or the sale of tickets therefor;
(3) The operation of one or more airports, one or more of which are used by that carrier or by another carrier who controls or is controlled by that carrier or that is under common control with that carrier by another person; or
(4) Activities related to the transportation by air conducted by that carrier or by another carrier that controls or is controlled by that carrier or which is under common control with that carrier by another person.
(a) An air carrier;
(b) An all-cargo air carrier operating under 49 U.S.C. 41102, 41103.
(c) A foreign air carrier;
(d) An intrastate carrier;
(e) An air taxi (including a commuter air carrier) operating under parts 294 or 298 of this chapter; and
(f) Any person operating as a common carrier by air, or in the carriage of mail by air, or conducting transportation by air, in a foreign country.
(a) With respect to carrier directors, officers, and employees, persons receiving retirement benefits from any carrier;
(b) With respect to the general public, persons not regularly working at a full-time paying job, and not intending to do so in the future.
49 U.S.C. 329, 41708, and 41709.
49 U.S.C. 40113, 40114, 41711, 41708, and 41709.
(a) In the exercise of the authority granted by 49 U.S.C. 41709, the authority of any special agent or auditor to inspect and examine lands, buildings,
(b) The term “special agent” and “auditor” are construed to mean any employee of the Office of Aviation Enforcement and Proceedings and any other employee of the Department specifically designated by it or by the Director, Office of Security.
(c) The issuance in the form set forth below of an identification card and credentials to any such employee shall be construed to be an order and direction of the Department to such individual to inspect and examine lands, buildings, equipment, accounts, records, and memorandums in accordance with the authority conferred on the Department by 49 U.S.C. Subtitle VII.
The bearer of this credential whose name and photograph appear hereon is authorized to enter upon, to inspect, and examine lands, buildings (including airport facilities), and equipment (including aircraft) of air carriers and foreign air carriers, and to inspect and copy records and papers of air carriers, foreign air carriers and ticket agents, in performance of his/her duties under 49 U.S.C. 41709, related acts, and regulations of the Department.
49 U.S.C. 329, 41101, 41708, and 41709.
49 U.S.C. 40101, 40101nt., 40105, 40113, 40114, 41708, 41709, 41711, 41501, 41702, 41712, 44909, 46301, 46310, 46316; section 203 of Pub. L. 101-604, 104 Stat. 3066 (22 U.S.C. 5501-5513), Title VII of Pub. L. 104-264, 110 Stat. 3213 (22 U.S.C. 5501-5513) and Pub. L. 105-148, 111 Stat. 2681 (49 U.S.C. 41313).
49 U.S.C. chapter 401.
49 U.S.C. 329, 41102, 41708, and 41709.
49 U.S.C. 329 and chapters 401, 411, 413, and 417.
49 U.S.C. 40113, 40114, 41501, 41504, 41506, 41509, 41510, 41511, 41702, and 41711.
49 U.S.C. 40113(a), and 41712.
49 U.S.C. 40113(a) and 41712.
49 U.S.C. Chapters 401 and 417.
49 U.S.C. 329, 41103, 41708, and 41709.
49 U.S.C. Chapters 401 and 417.
49 U.S.C. Chapters 401 and 417.
49 U.S.C. Chapters 401 and 417.
49 U.S.C. 329, 41102, 41708, and 41709.
(a) Each commuter air carrier and each small certificated air carrier shall file with the Department's Bureau of Transportation Statistics (BTS) the applicable schedules of BTS Form 298-C, “A Report of Financial and Operating Statistics for Small Aircraft Operators”, and Schedule T-100, “U.S. Air Carrier Traffic and Capacity Data by Nonstop Segment and On-Flight Market”, as required by this section.
49 U.S.C. subtitle I and chapters 401, 411, 413, 415, 417, 419, 421, 449, 461, 463, and 465.
(d) In enforcement cases, the Office of the Assistant General Counsel for Aviation Enforcement and Proceedings, under the supervision of the career Deputy General Counsel and the General Counsel, will conduct all enforcement proceedings and related investigative functions, while the non-career Deputy General Counsel will advise the DOT decisionmaker in the course of the decisional process. The Office of the Assistant General Counsel for Aviation Enforcement and Proceedings will report to the career Deputy General Counsel and the General Counsel. To ensure the independence of these functions, this Office and the General Counsel, for the purpose of this section, shall be considered an “office” as that term is used in paragraph (b), separate from the non-career Deputy General Counsel and the rest of the Office of the General Counsel.
39 U.S.C. 5402; 42 U.S.C. 4321, 49 U.S.C. Subtitle I and Chapters 401, 411, 413, 415, 417, 419, 461, 463, and 471.
(g) * * *
(1) * * *
(iii) Reports of Traffic and Financial Data of all U.S. Air Carriers issued by the Department or by its predecessor.
(iv) Airline Traffic Surveys and Passenger Origin-Destination Surveys, Domestic or International, compiled by the Department or its predecessor and published and/or made available either to the public or to parties in proceedings.
(v) Compilations of data relating to competition in the airline industry and made available to the public by the Department or its predecessor.
(vi) Passenger, mail, express, and freight data submitted to the Department and its predecessor as part of ER-586 Service Segment Data by U.S. carriers, or similar data submitted to the Department by U.S. air carriers (T-100) or (T-100F) that are not confidential.
(vii) * * *
(viii) Service Mail Pay and Subsidy for U.S. Certificated Air Carriers published by the Department or its predecessor, including any supplemental data and subsequent issues published by the Department or its predecessor.
(xii) Chart Supplements, issued by the FAA.
(xiii) * * *
(xiv) Monthly, quarterly and annual reports of the Immigration and Naturalization Service, U.S. Department of Justice.
(xv) All forms and reports required by the U.S. Postal Service to be filed by air carriers authorized to transport mail.
(xvi) All orders of the Postmaster General designating schedules for the transportation of mail.
(xvii) Publications of the Bureau of the Census of the U.S. Department of Commerce (DOC) relating, but not necessarily limited, to population, manufacturing, business, statistics, and any yearbooks, abstracts, or similar publications published by DOC.
(xviii) All Official Airline Guides, including the North American, Worldwide, All-Cargo and quick reference editions, including electronic versions.
(xix) Official Railways Guide and Russell's Official National Motor Coach Guide.
(xx) The Rand McNally Commercial Atlas and Marketing Guide, and the Rand McNally Road Atlas, United States, Canada, and Mexico.
(2) Any fact contained in a document belonging to a category enumerated in paragraph (g)(1) of this section shall be deemed to have been physically incorporated into and made part of the record in such proceedings. However, such taking of official notice shall be subject to the rights granted to any party or intervener to the proceeding under section 7(d) of the Administrative Procedure Act (5 U.S.C. 557(d)).
(3) The decisions of the Department and its administrative law judges may officially notice any appropriate matter without regard to whether or not such items are contained in a document belonging to the categories enumerated in paragraph (g)(1) of this section. However, where the decision rests on official notice of a material fact or facts, it will set forth such items with sufficient particularity to advise interested persons of the matters that have been noticed.
(b) All exhibits and briefs prepared on electronic spreadsheet or word processing programs should be accompanied by standard-format electronic media containing those submissions. Parties should submit three copies the electronic media to Department of Transportation Dockets Operations Office: One copy for the docket, one copy for the Office of Hearings, and one copy for the Office of Aviation Analysis. Filers should ensure that files on the electronic media are unalterably locked.
49 U.S.C. chapters 401, 413, and 417.
These regulations set forth the procedures by which applications may be made to the Department of Transportation under 49 U.S.C. 41308 and 41309 and procedures governing proceedings to enforce these provisions. These regulations and procedures supplement the rules described in part 302 of this chapter, which also apply to the review of air carrier agreements.
(a) The term
(b) The term
(c) The term
(d)-(g) [Reserved]
(h) The term
(i) [Reserved]
A person who seeks approval of a section 41309 transaction must file the application with the Docket Operations Office, M-30, U.S. Department of Transportation, 1200 New Jersey
(i) The person submitting the application to the Department shall send a complete copy of the application to the Chief, Transportation Section, Antitrust Division of the Department of Justice, at the same time as it is filed with the Docket Operations Office.
(a) Each application must state explicitly whether or not the applicant seeks antitrust immunity under the provisions of 49 U.S.C. 41308. If antitrust immunity is requested, the application should specify whether the applicant seeks full immunity or immunity only from the provisions of sections 4, 4a and 4c of the Clayton Act, 15 U.S.C. 15, 15a, 15c. Each application seeking antitrust immunity shall contain a statement explaining why the applicant believes immunity is in the public interest and necessary in order for the transaction to proceed.
The Assistant Secretary may initiate a proceeding to review any antitrust immunity previously conferred by the Department's predecessor or the Department in any section 41309 transaction. The Assistant Secretary may terminate or modify such immunity if the Assistant Secretary finds after notice and hearing that the previously conferred immunity is not consistent with the provisions of section 41308. In any proceeding to review such immunity, the proponents of the immunity shall have the burden of justifying the continuation of previously conferred immunity under the provisions of section 41308.
If a section 41309 application or a request for antitrust immunity under section 41308 is pending on the date this part is amended, such application or request shall be deemed made pursuant to the provisions of this part, as amended.
A Section 41309 application shall contain the following general information:
(c) If the contract, agreement or request for authority to discuss a cooperative working arrangement is evidenced by a resolution or other action of an air carrier association, the application shall contain the resolution or other action and a certification by an authorized employee of the association that the resolution or other action was duly adopted on a certain date. The authorized employee shall also specify in such certification the name of each air carrier that concurred in such resolution or other action and the name of each air carrier member that did not concur.
A section 41309 application shall explain the nature and purpose of the contract, agreement or request to discuss a cooperative working arrangement and describe how it changes any price, rule, or practice existing under a previously approved application. The application also, consistent with Department of Transportation and the precedent of DOT's predecessor, shall contain factual material, documentation, and argument in support of the application. Economic analyses, when required, shall include full explanatory details, including data sources and allocation methods. If the applicants intend to rely upon market data sources, other than those available to the public by the Department, the complete market data shall be included with the application at the time of filing. If the applicants intend to rely on public benefits to justify approval, they shall describe these benefits, including foreign policy and comity considerations.
(a) Unless a different comment period is specified by notice or order, or in a notice of filing published in the
49 U.S.C. chapters 401, 417, 461; 5 U.S.C. 555, 556.
(b) Witnesses subpoenaed to appear shall be paid the fees and mileage prescribed in § 302.27(c) of the Rules of Practice (14 CFR 302.27(c)). Service of such subpoenas shall be made in accordance with the provisions of (§ 302.7) of the Rules of Practice (14 CFR 302.7).
49 U.S.C. Chapters 401, 411, and 417.
49 U.S.C. Chapters 401 and 417.
This part applies to essential air service determinations for communities designated as eligible under 49 U.S.C. 41731 and to eligible place designations and essential air service determinations for communities that qualify under 49 U.S.C. 41732 and 41733. It applies to the gathering of data by the Department, and to the participation of State, local, and other officials and other interested persons in the designation and determination processes.
As used in this part,
DOT will issue a determination of the essential level of air service for a place within 6 months after each of the following events:
(a) A notice is received that service to an eligible place will be reduced to only one carrier that holds a section 41102 certificate;
(b) A point is designated as an eligible place under 49 U.S.C. 41731 and either paragraph (c) of this section, paragraph (d) of this section, or § 325.7(e); or
(c) A review was conducted of essential air service of that place under § 325.6.
49 U.S.C. Chapters 401, 411, 413, and 417.
Know all persons by these presents, that we __ (name of charter operator) of __ (address) as Principal (hereinafter called “Principal”), and __ (name of surety) a corporation created and existing under the laws of the State of __ (State) as Surety (hereinafter called “Surety”) are held and firmly bound unto the United States of America in the sum of __ (see § 372.24(a), 14 CFR part 372) for which payment, well and truly to be made, we bind ourselves and our heirs, executors, administrators, successors, and assigns, jointly and severally firmly by these presents.
Whereas Principal is an overseas military personnel charter operator pursuant to the provisions of Part 372 of the Department's regulations and other rules and regulations of the Department relating to security for the protection of charter participants, and has elected to file with the Department of Transportation such a bond as will insure financial responsibility with respect to all monies received from charter participants for services in connection with overseas military personnel charters to be operated subject to Part 372 of the Department's Special Regulations in accordance with contracts, agreements, or arrangements therefor, and
Whereas this bond is written to assure compliance by Principal as an authorized charter operator with Part 372 of the Department's regulations, and other rules and regulations of the Department relating to security for the protection of charter participants, and shall inure to the benefit of any and all charter participants to whom Principal may be held legally liable for any damages herein described.
Now, therefore, the condition of this obligation is such that if Principal shall pay or cause to be paid to charter participants any sum or sums for which Principal may be held legally liable by reason of Principal's failure faithfully to perform, fulfill and carry out all contracts, agreements, and arrangements made by Principal while this bond is in effect with respect to the receipt of moneys from charter participants, and proper disbursement thereof pursuant to and in accordance with the provisions of Part 372 of the Department's regulations, then this obligation shall be void, otherwise to remain in full force and effect.
The liability of Surety with respect to any charter participant shall not exceed the charter price paid by or on behalf of such participant.
The liability of Surety shall not be discharged by any payment or succession of payments hereunder, unless and until such payment or payments shall amount in the aggregate to the penalty (face amount) of the bond, but in no event shall Surety's obligation hereunder exceed the amount of said penalty.
Surety agrees to furnish written notice to the Office of International Aviation, Department of Transportation, forthwith of all suits or claims made and judgments rendered, and payments made by Surety under this bond.
This bond shall cover the following Charters:
This bond is effective on the __ day of __, 12:01 a.m., standard time at the address of Principal as stated herein and as hereinafter provided. Principal or Surety may at any time terminate this bond by written notice to: U.S. Air Carrier Licensing/Special Authorities Division, Office of International Aviation, U.S. Department of Transportation, 1200 New Jersey Avenue SE, Washington, DC 20590, such termination to become effective thirty (30) days after the actual receipt of said notice by the Department. Surety shall not be liable hereunder for the payment of any damages hereinbefore described which arise as a result of any contracts, agreements, undertakings, or arrangements for the supplying of transportation and other services made by Principal after the termination of this bond as herein provided, but such termination shall not affect the liability of the bond hereunder for the payment of any damages arising as a result of contracts, agreements, or arrangements for the supplying of transportation and other services made by Principal prior to the date that such termination becomes effective. Liability of Surety under this bond shall in all events be limited only to a charter participant or charter participants who shall within sixty (60) days after the termination of the particular charter described herein give written notice of claim to the charter operator or, if it is unavailable, to Surety, and all liability on this bond shall automatically terminate sixty (60) days after the termination date of each particular charter covered by this bond except for claims made in the time provided herein.
In witness whereof, the said Principal and Surety have executed this instrument on the ___day of __ 20__.
Only corporations may qualify to act as surety and they must meet the requirements set forth in § 372.24(c) of Part 372.
15 U.S.C. 1601-1693r; 49 U.S.C., Subtitle VIII; and 12 CFR 202 and 1026.
49 U.S.C. chapters 401, 411, 415, and 417.
The purpose of this part is to issue rules pursuant to the Federal Election Campaign Act of 1971, as amended, in accordance with the Department's responsibility thereunder.
Air carriers are exempt from the following provisions of Subtitle VII of Title 49 of the United States Code: (a) Section 41510, (b) Section 41310, and any and all other provisions of 49 U.S.C. Subtitle VII, to the extent necessary to enable air carriers to comply with the provisions of this part.
49 U.S.C. 40102, 40103, and 41703.
(a) Applications for foreign aircraft permits shall be submitted on OST Form 4509 (Appendix A), in duplicate, addressed to the Chief, Foreign Air Carrier Licensing Division, X-45, Office of International Aviation. Applications should be submitted by email; see “Application Procedures under Part 375” at
The operation of a foreign aircraft within the United States or over adjacent territorial waters in violation of the provisions of this part constitutes a violation of 49 U.S.C. Subtitle VII and of this chapter, and may, in addition, constitute a violation of the rules of the Federal Aviation Administration. Such operation makes the person or persons responsible for the violation or violations subject to a civil penalty as provided in 49 U.S.C. 46301, and to the alteration, amendment, modification, suspension or revocation of any permit issued under this part and of any U.S. certificate involved as provided in 49 U.S.C. 44709. Engaging in air transportation as defined in 49 U.S.C Subtitle VII by a foreign aircraft without a foreign air carrier permit issued pursuant to 49 U.S.C. 41301 or an exemption, or in violation of the terms of such authority constitutes not only a violation of this part but of Title 49, subtitle VII, as well, which entails a criminal penalty as set forth in 49 U.S.C. 46316.
49 U.S.C. Chapters 401 and 461; 5 U.S.C. 558 and 559.
49 U.S.C. 40101, 40102, 40109, 40113, 41101, 41103, 41301, 41504, 41702, 41708, 41712, and 46101.
Know all persons by these presents, that we __(name of charter operator) of __ (city) __ (state) as Principal (hereinafter called Principal), and __ (name of surety) a corporation created and existing under the laws of the State of __ (State) as Surety (hereinafter called Surety) are held and firmly bound unto the United States of America in the sum of $__ (see 14 CFR 380.34) for which payment, well and truly to be made, we bind ourselves and our heirs, executors, administrators, successors, and assigns, jointly and severally, firmly by these presents.
Whereas Principal intends to become a Public Charter operator pursuant to the provisions of 14 CFR part 380 and other rules and regulations of the Department relating to insurance or other security for the protection of charter participants, and has elected to file with the Department of Transportation such a bond as will insure financial responsibility with respect to all moneys received from charter participants for services in connection with a Public Charter to be operated subject to Part 380 of the Department's regulations in accordance with contracts, agreements, or arrangements therefore, and
Whereas this bond is written to assure compliance by Principal as an authorized charter operator with 14 CFR part 380 and other rules and regulations of the Department relating to insurance and other security for the protection of charter participants, and shall inure to the benefit of any and all charter participants to whom Principal may be held legally liable for any damages herein described.
Now, therefore, the condition of this obligation is such that if Principal shall pay or cause to be paid to charter participants any sum or sums for which Principal may be held legally liable by reason of Principal's failure faithfully to perform, fulfill and carry out all contracts, agreements, and arrangements made by Principal while this bond is in effect with respect to the receipt of moneys from charter participants, and proper disbursement thereof pursuant to and in accordance with the provisions of 14 CFR part 380, then this obligation shall be void, otherwise to remain in full force and effect.
The liability of Surety with respect to any charter participant shall not exceed the
The liability of Surety shall not be discharged by any payment or succession of payments hereunder, unless and until such payment or payments shall amount in the aggregate to the penalty of the bond, but in no event shall Surety's obligation hereunder exceed the amount of said penalty.
Surety agrees to furnish written notice to the U.S. Air Carrier Licensing/Special Authorities Division, X-44, Office of International Aviation, Department of Transportation, forthwith of all suits or claims filed and judgments rendered, and payments made by Surety under this bond.
The bond shall cover the following charters
This bond is effective on the __ day of __, 12:01 a.m., standard time at the address of Principal as stated herein and as hereinafter provided. Principal or Surety may at any time terminate this bond by written notice to: “U.S. Air Carrier Licensing/Special Authorities Division (X-44), Office of International Aviation, U.S. Department of Transportation, 1200 New Jersey Avenue SE, W-86-445, Washington, DC 20590,” such termination to become effective thirty (30) days after the actual receipt of said notice by the Department. Surety shall not be liable hereunder for the payment of any damages hereinbefore described which arise as a result of any contracts, agreements, undertakings, or arrangements for the supplying of transportation and other services made by Principal after the termination of this bond as herein provided, but such termination shall not affect the liability of the bond hereunder for the payment of any damages arising as a result of contracts, agreements, or arrangements for the supplying of transportation and other services made by Principal prior to the date that such termination becomes effective. Liability of Surety under this bond shall in all events be limited only to a charter participant or charter participants who shall within sixty (60) days after the termination of the particular charter described herein give written notice of claim to the charter operator or, if it is unavailable, to Surety, and all liability on this bond shall automatically terminate sixty (60) days after the termination date of each particular charter covered by this bond except for claims made in the time provided herein.
In witness whereof, the said Principal and Surety have executed this instrument on the __ day of __, 20__.
Bonding or surety company must be listed in Best's Insurance Reports (Fire and Casualty) with a general policyholders' rating of “A” or better or in the Department of the Treasury listing of companies holding certificates of authority as acceptable sureties on Federal bonds. In addition, the bonding or surety company shall be one legally authorized to issue bonds of that type in the State(s) in which the charter flight(s) originate. Agents must provide satisfactory proof that they have the requisite authority to issue this bond.
This Trust Agreement is entered into between __ (charter operator) incorporated under the laws of __ with its principal place of business being __ (hereinafter called “Operator”), and __ (Bank) with its principal place of business being __ (hereinafter called “Trustee”), for the purpose of creating a trust to become effective as of the __ day of __, 20 __, which trust shall continue until terminated as hereinafter provided.
Operator intends to become a Public Charter operator pursuant to the provisions of Part 380 of the Department's regulations and other rules and regulations of the Department relating to insurance or other security for the protection of charter participants, and has elected to file with the Department of Transportation such a Surety Trust Agreement as will insure financial responsibility with respect to all monies received from charter participants for services in connection with a Public Charter to be operated subject to Part 380 of the Department's regulations in accordance with contracts, agreements, or arrangements therefore.
This Surety Trust Agreement is written to assure compliance by Operator with the provisions of Part 380 of the Department's regulations and other rules and regulations of the Department relating to insurance or other security for the protection of charter participants. It shall inure to the benefit of any and all charter participants to whom Operator may be held legally liable for any of the damages herein described.
It is mutually agreed by and between Operator and Trustee that Trustee shall manage the corpus of the trust and carry out the purposes of the trust as hereinafter set forth during the term of the trust for the benefit of charter participants (who are hereinafter referred to as “Beneficiaries.”)
Beneficiaries of the trust created by this Agreement shall be limited to those charter participants who meet the following requirements:
1. Those for whom Operator or Operator's agent has received payment toward participation in one or more charters operated by or proposed to be operated by Operator.
2. Who have legal claim or claims for money damages against Operator by reason of Operator's failure faithfully to perform, fulfill, and carry out all contracts, agreements, and arrangements made by Operator while this trust is in effect with respect to the receipt of monies and proper disbursement thereof pursuant to Part 380 of the Department's regulations; and
3. Who have given notice of such claim or claims in accordance with this Trust Agreement, but who have not been paid by Operator.
The operator shall convey to Trustee legal title to the trust corpus, which has a value of $__ by the time of the execution of this Agreement.
Trustee shall assume the responsibilities of Trustee over the said trust corpus and shall distribute from the trust corpus to any and all Beneficiaries to whom Operator, in its capacity as a Public Charter operator, may be held legally liable by reason of Operator's failure faithfully to perform, fulfill, and carry out all contracts, agreements, and arrangements made by Operator, while this trust is in effect with respect to the receipt of monies and proper disbursement thereof pursuant to Part 380 of the Department's regulations in connection with said charters, such damages as will discharge such liability while this trust is in effect;
Trustee agrees to furnish written notice to the U.S. Air Carrier Licensing/Special Authorities Division, X-44, Office of International Aviation, Department of Transportation, forthwith of all suits or claims filed and judgments rendered (of which it has knowledge), and of payments made by Trustee under the terms of this trust.
The trust shall not be liable hereunder for the payment of any damages hereinbefore described which arise as a result of any contracts, agreements, undertakings, or arrangements for the supplying of transportation and other services made by Operator after the termination of this trust as herein provided, but such termination shall not affect the liability of the trust hereunder for the payment of any damages arising as a result of contracts, agreements, or arrangements for the supplying of transportation and other services made by Operator prior to the date that such termination becomes effective.
Liability of the trust shall in all events be limited only to a Beneficiary or Beneficiaries who shall within sixty days after the termination of the particular charter give written notice of claim to Operator or, if it is unavailable, to Trustee, and all liability of
Sixty-one days after the completion of the last charter covered by this Trust Agreement, the trust shall automatically terminate except for claims of any Beneficiary or Beneficiaries previously made in accordance with this Agreement still pending on and after said sixty-first day. To the extent of such claims, the trust shall continue until those claims are discharged, dismissed, dropped, or otherwise terminated. After all remaining claims which are covered by this Trust Agreement pending on and after the said sixty-first day have been discharged, dismissed, dropped, or otherwise terminated; Trustee shall convey forthwith the remainder of the trust corpus, if any, to Operator.
Either Operator or Trustee may at any time terminate this trust by written notice to: “U.S. Air Carrier Licensing/Special Authorities Division, X-44, Office of International Aviation, U.S. Department of Transportation, 1200 New Jersey Avenue SE, W-86-445, Washington, DC 20590,” such termination to become effective thirty days after the actual receipt of said notice by the Department.
In the event of any controversy or claim arising hereunder, Trustee shall not be required to determine same or take any other action with respect thereto, but may await the settlement of such controversy or claim by final appropriate legal proceedings, and in such event shall not be liable for interest or damages of any kind.
Any Successor to Trustee by merger, consolidation, or otherwise, shall succeed to this trusteeship and shall have the powers and obligations set forth in this Agreement.
The trust created under this Agreement shall be operated and administered under the laws of the State of __.
IN WITNESS WHEREOF, Operator and Trustee have executed this instrument on the date(s) shown below.
49 U.S.C. 329, 40101, 41101, 41301, and 41701.
(f) To approve certificates of insurance filed with the Department on behalf of U.S. and foreign air carriers in accordance with the provisions of part 205 of this chapter.
(g) With respect to mail rates:
(1) To issue show-cause orders proposing to make modifications of a technical nature in the mail rate formula applicable to temporary or final service mail rate orders.
(2) To issue final orders establishing temporary and final service mail rates:
(i) In those cases where no objection has been filed following release of the show-cause order, and where the rates established are the same as those proposed in the show-cause order; and
(ii) In those cases where it is necessary to make modifications of a technical nature in the rates proposed in the show-cause order.
(3) To issue final orders amending mail rate orders of air carriers to reflect changes in the names of the carriers subject to the orders.
(4) To issue a letter, in the case of air mail contracts filed with the Department under part 302 of this chapter against which no complaints have been filed, stating that the contract will not be disapproved by the Department and may become effective immediately.
(5) To issue final orders making quarterly fuel rate adjustments to Alaska bush and mainline mail rates set by the Department under 49 U.S.C. §§ 41901, 41902, and 41903.
(h) With respect to essential air service proceedings:
(1) To establish procedural dates.
(2) To issue orders setting interim rates of compensation for carriers required to provide essential air service.
(3) To issue orders approving a carrier's alternate service pattern if:
(i) The resulting level of service at the eligible place would be equal to or greater than the level of service earlier determined to be essential for that place;
(ii) The community concerned does not object to the carrier's implementation of the alternate service pattern; and
(iii) The carrier is not receiving a subsidy for the service or implementation of the alternate service pattern would not increase the carrier's subsidy.
(4) To issue orders adjusting the operational and/or financial unit rates of the payout formula for a carrier receiving subsidy under section 41732 of the Statute where the adjustment will not increase the total amount of compensation that the carrier will receive.
(5) To renew, up to five times in succession, an order under section 41734 of the Statute to an air carrier to continue providing essential air service while the Department attempts to find a replacement carrier.
(6) To request service and subsidy proposals from carriers interested in providing essential air service to an eligible place.
(7) To issue final orders establishing interim or final subsidy rates under section 41732 or final adjustments of compensation for continued service under section 41732 in those cases where no objection has been filed to a show-cause order, and where the rates established are the same as or less than those proposed in the approved show-cause order.
(8) With respect to provisions for terminations, suspensions, or reductions of service under part 323 of this chapter:
(i) To require any person who files a notice, objection, or answer to supply additional information.
(ii) To require service of a notice, objection, or answer upon any person.
(iii) To accept late-filed objections or answers, upon motion, for good cause shown.
(iv) To extend the time for filing objections for answers, when the initial notice has been filed earlier than required under § 323.5.
(9) To issue final air carrier selection orders establishing final subsidy rates for EAS provided under 49 U.S.C. 41733:
(i) Where the compensation to be paid is the same as or less than the existing rate, and where the community does not object to the selected option;
(ii) For EAS eligible Alaska communities, when the subsidy rate to be paid is less than $125,000, and where the community does not object to the selected option;
(iii) In cases where only one air carrier submitted one service or subsidy option.
(10) With respect to provisions for terminations, suspensions, or reductions of service under part 323 of this chapter:
(i) To require any person who files a notice, objection, or answer to supply additional information.
(ii) To require service of a notice, objection, or answer upon any person.
(iii) To accept late-filed objections or answers, upon motion, for good cause shown.
(iv) To extend the time for filing objections for answers, when the initial notice has been filed earlier than required under § 323.5.
(11) To issue procedural orders or notices in antitrust immunity cases filed under 14 CFR part 303 with respect to:
(i) Granting or denying requests for adjustments to procedural deadlines where there is no objection;
(ii) Making other adjustments to a procedural schedule where the policy is clear and consistent with precedent;
(iii) Granting parties to a proceeding access to confidential documents filed under a request for public non-disclosure pursuant to 14 CFR 302.12, where providing such access is consistent under current policy and precedent; and
(iv) In uncontested proceedings, ordering the filing of additional documents deemed relevant to the Department's consideration of the application, including the filing of documents for in-camera review, where doing so is consistent with past policy and precedent.
(b) * * *
(2) For general tariff exemptions that apply to all U.S. and foreign air carriers pursuant to 14 CFR part 293.
(5) Issue orders granting uncontested applications by U.S. carriers to provide foreign air transportation where the carrier has already been found fit, willing, and able to provide service of the same basic scope or character; and
(6) Issue orders granting uncontested applications by foreign air carriers to provide foreign air transportation where the course of action is clear under current policy or precedent.
(r) With respect to International Air Transport Association (IATA) agreements filed with the Department pursuant to sections 41309 and 41308 of the Statute, or agreements filed pursuant to previous statutory authority of the Department's predecessor:
(1) Issue orders approving, disapproving, or exempting IATA agreements relating to fare and rate matters under section 41309, and granting or denying antitrust immunity under section 41308, where the course of action is clear under current policy and precedent.
(z) Issue orders and notices adjusting the Standard Foreign Fare Level to reflect percentage changes in actual operating costs per available seat mile.
(aa) Issue notices updating the list of country-pair markets.
(bb) With respect to Canadian charter air taxi operations:
(1) To approve applications for registration, or require that a registrant submit additional information, or reject an application for registration for failure to comply with part 294 of this chapter.
(2) To cancel, revoke, or suspend the registration of any Canadian charter air taxi operator using small aircraft registered under part 294 of this chapter that:
(i) Filed with the Department a written notice that it is discontinuing operations;
(ii) Is no longer designated by its home government to operate the services contemplated by its registration;
(iii) Holds a foreign air carrier permit under section 41302 to operate large aircraft charters between the United States and Canada;
(iv) Fails to keep its filed certificate of insurance current;
(v) No longer is substantially owned or effectively controlled by persons who are:
(A) Citizens of Canada;
(B) The Government of Canada; or
(C) A combination of both; or
(vi) No longer holds current effective Operations Specifications issued by the FAA.
(3) To grant or deny requests for a waiver of part 294 of this chapter, where grant or denial of the request is in accordance with current policy or precedent.
(cc) With respect to foreign air freight forwarders:
(1) To approve applications for registration, or require that a registrant submit additional information, or reject an application for registration for failure to comply with part 297 of this chapter.
(2) To cancel the registration of any foreign air freight forwarder or foreign cooperative shippers association that files a written notice with the Department indicating the discontinuance of common carrier activities.
(3) To exempt the registrant from the requirement contained in § 297.20 of this chapter that substantial ownership and effective control reside in citizens of the country that the applicant claims as its country of citizenship, where the course of action is clear under current precedent or policies.
(dd) With respect to charter operations:
(1) To grant or deny requests for waiver of parts 212, 372, and 380 of this chapter, where grant or denial of the request is in accordance with established precedent.
(2) To approve or disapprove direct air carrier escrow agreements filed pursuant to part 212 of this chapter.
(3) To reject or accept Public Charter prospectuses filed under part 380 of this chapter.
(4) With respect to the procedures for the registration of foreign charter operators under subpart E of part 380 of this chapter:
(i) To approve applications for registration, or require that a registrant submit additional information, or reject an application for registration for failure to comply with part 380 of this chapter.
(ii) To notify the applicant that its application will require further analysis or procedures, or is being referred to the Assistant Secretary for Aviation and International Affairs for formal action.
(iii) To cancel the registration of a foreign charter operator if it files a written notice with the Department that it is discontinuing its charter operations.
(iv) To waive provisions of subpart E of part 380 of this chapter.
The General Counsel has authority to:
(a) Issue proposed or final regulations for the purpose of making editorial changes or corrections to the Department's rules and regulations to carry out Subparts I, II and IV of Part A of Subtitle VII of the Transportation Code at 49 U.S.C. 40101
(b) Where a petition for review is duly filed, reverse any rulemaking action taken pursuant to paragraph (a) of this section by withdrawing a proposed or final regulation issued thereunder. Any action taken by the General Counsel, pursuant to the authority of this section, shall not be subject to the review procedures of this part.
(c) Issue orders deferring action until after oral argument on motions submitted by parties subsequent to the issuance of an Administrative Law Judge's initial or recommended decision.
(d) Reissue existing regulations for the purpose of incorporating prior amendments adopted by the Department.
(e) Compromise any civil penalties being imposed in enforcement cases.
(f) Issue orders initiating and terminating informal nonpublic investigations under part 305 of this chapter (Procedural Regulations).
(g) Issue orders requiring air carriers to prepare and submit within a specified reasonable period, special reports, copies of agreements, records, accounts, papers, documents, and specific answers to questions upon which information is deemed necessary. Special reports shall be under oath whenever the General Counsel so requires.
(h) Institute and prosecute in the proper court, as agent of the Department, all necessary proceedings for the enforcement of the provisions of the act or any rule, regulation, requirement, or order thereunder, or any term, condition, or limitation of any certificate or permit, and for the punishment of all violations thereof. Any action taken by the General Counsel, pursuant to the authority of this section, shall not be subject to the review procedures of this part.
(i) Make findings regarding the reasonable necessity for the application of the Department's authority to obtain access to lands, buildings, and equipment, and to inspect, examine, and make notes and copies of accounts, records, memorandums, documents, papers, and correspondence of persons having control over, or affiliated with, any person subject to regulation under Subparts I, II, and IV of Part A of Subtitle VII of the Transportation Code at 49 U.S.C. 40101
(j) Issue orders denying or granting conditional or complete confidential treatment of information supplied by any person to the Office of Aviation Enforcement and Proceedings. Confidential treatment may only be granted upon a finding that, if the information were in the Department's possession and a Freedom of Information Act (FOIA) request were made for the information:
(1) At the time of the confidentiality request, the FOIA request would be denied on the basis of one or more of the FOIA exemptions; and
(2) At any later time, the FOIA request would also be denied, absent a material change in circumstances (which may include a demonstration that the asserted exemption does not apply).
49 U.S.C. 40113, 40114, 41711; 31 U.S.C. 9701; and 5 U.S.C. 552.
Pursuant to the provisions of 31 U.S.C. 9701, Fees and charges for Government services and things of value, and as implemented by the Office of Management and Budget's Circular A-25, dated July 8, 1993, the Department sets forth in this regulation fees and charges to be paid for the use of certain services and resources of the Department as prescribed below.
This subpart describes certain services and resources made available by the Department and prescribes the fees and charges for those services and resources.
Upon request and payment of fees as provided in subsequent sections, there are available, with respect to documents subject to inspection, services as follows:
(a) Locating and copying records and documents;
(b) Certification of copies of documents under seal of the Department; and
(c) Transcripts of hearings and proceedings.
The fees charged for services and resources shall be paid for electronically at
Fees for services and resources described in subparts B and C of this part are pursuant to those fees set forth in 49 CFR part 7, subpart F, §§ 7.41—7.43, 7.45 and 7.46.
(a) This subpart applies to the filing of certain documents and records with the Department by non-government parties, and prescribes fees for their processing.
(b) For the purpose of this subpart, record means an electronic tariff record submitted to the Department under
(a) Except as provided in paragraph (b), any document for which a filing fee is required by § 389.25 shall be paid for electronically at
(b) Registration for all air taxi operators shall be accompanied by an 8 dollar ($8) registration filing fee in the form of a check, draft, or postal money order payable to the U.S. Department of Transportation.
(c) Where a document seeks authority or relief in the alternative and therefore would otherwise be subject to more than one filing fee, only the highest fee shall be required.
(d) Where a document relating to a single transaction or matter seeks multiple authorities or relief and therefore would otherwise be subject to more than one filing fee, only the highest fee shall be required. Where a document relating to more than one transaction or matter seeks multiple authorities or relief, the required filing fee shall be determined by combining the highest fees for each transaction or matter. For purposes of this paragraph, a specific number of charters or inclusive tours described in one application will be regarded as a single transaction or matter.
(e) No fee shall be returned after the document has been filed with the Department, except as provided in §§ 389.23 and 389.27.
In accordance with 49 CFR part 7, subpart F § 7.42, the Department will assess interest on unpaid fees on the 31st day following the day on which a notice of the amount due is first mailed to the requestor, unless the Department has granted an application for waiver or modification of the fees.
(a) Applications may be filed asking for waiver or modification of any fee paid under this subpart. Each applicant shall set forth the reasons why a waiver or modification should be granted, and by what legal authority.
(b) Applications asking for a waiver or modification of fees shall be sent to the Director, Office of Aviation Analysis, U.S. Department of Transportation, 1200 New Jersey Avenue SE, Washington, DC 20590. This provision is in accordance § 385.30 of this chapter. When no petition for review is filed with the Department, or when the Department reviews the Director's decision, if the amount found due is not paid within 10 days after receipt of notification of the final determination, the document shall be returned to the filing party.
A foreign air carrier, or such carriers, if from the same country, acting jointly, may apply for a waiver of the requirements of this part based on reciprocity for U.S. air carriers contained in the requirement of their home governments, or as provided in a treaty or agreement with the United States. To apply for a waiver under this section, foreign air carriers shall send waiver requests to the Director, Office of International Aviation. The request should include applicable official government rules, decisions, statements of policy, or comparable evidence concerning filing fees for U.S. air carriers, or for all carriers serving that country. Once a waiver has been granted for a specific country, no further waiver applications need be filed for that country.
(a)
(b)
(a)
(b)
(1) If the tariff is issued for one or more air carriers exclusively, the fee will be charged for each page.
(2) If the tariff is issued for one or more air carriers and one or more foreign air carriers, the fee will be charged for each page, except for those pages that the issuing agent states contain only:
(i) Matters pertaining exclusively to foreign air carriers that have been granted a waiver; or
(ii) Changes in matters pertaining to foreign air carriers that have been granted a waiver and that are included on the same page with other matters that are reissued without change.
(3) The fee will not be charged for a blank looseleaf page unless it cancels matters in the preceding page.
(4) No fee will be charged when two pages are published back-to-back, one page is not subject to the fee under paragraph (b)(2), and the page on the reverse is issued without substantive change.
(5) The fee will be charged for two looseleaf pages containing a correction number check sheet unless all other pages of the tariff are exempt from the fee.
Any fee charged under this part may be refunded in full or in part upon request if the document for which it is
49 U.S.C. Chapters 401 and 417; Airport and Airway Safety and Capacity Expansion Act of 1987 (Pub. L. 100-223, Dec. 30, 1987).
49 U.S.C. 41712.
The Secretary of Transportation may approve, under such terms as the Secretary may require, a carrier's application for Special Tariff Permission to file a tariff for foreign air transportation required under Part 293 on less than the notice required by Section 41504 (b) of Title 49.
(a) Applicability. This policy shall apply to proceedings under 49 U.S.C. 41309 in which the Department is required to make any determination as to the public interest or consistency with 49 U.S.C. Subtitle VII of any agreement or relationship sought to be entered into by an air carrier, or officer or director thereof, with a foreign airline in connection with the performance of some activity pursuant to a technical assistance contract financed by an agency of the U.S. Government.
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration |